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    Gavekal Research

    Video: China's Three Vulnerabilities

    Even if Presidents Donald Trump and Xi Jinping leave the G-20 meeting in Osaka next week with a trade deal in hand, the broader rivalry will continue. In this extensive video interview Louis identifies three ways in which China is vulnerable to US pressure and explains how this may impact investors.

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    Gavekal Research

    Keeping China In Play

    Next week’s big event will be the G-20 leaders’ meeting in Osaka, where presidents Donald Trump and Xi Jinping will sit down to figure out whether their stalled trade negotiations can be re-started. It is quite likely that trade talks will get back on track, but quite unlikely that a deal can actually be struck before the end of the year.

    2
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    Gavekal Research

    Investing For A New Cold War

    Earlier this year, Louis and Charles published a book whose main thesis was that an era of globalization is ending and the world is breaking into three separate economic zones.The question Louis addresses in this piece is how investors should play this macro shift. Those strategies that did best over the last decade are unlikely to outperform in the next period.

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    Gavekal Research

    Rebalancing Won't Rescue China

    As China hunkers down for an extended trade conflict with the US, it is sending reassuring signals about its ability to withstand the pressure. Officials argue the economy has “rebalanced” away from external to domestic demand, so it is less vulnerable. In this piece, Andrew explains how this misreads the role of exports in longer-term growth.

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    Gavekal Dragonomics

    Taking Intellectual Property Seriously

    It is easy to forget that the US trade war with China is founded on the issue of intellectual property—and to miss the fact that, despite the breakdown in trade talks, China is pushing through many legal changes to improve IP protection. But as Dan explains, while the technical improvements are real, so is political pressure on the legal system.

    0
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    Gavekal Dragonomics

    Enduring The Slowdown

    China’s growth momentum faded noticeably in May, and while the government rolled out new supportive measures, they are fairly modest. The data over the next couple of months could be pretty uninspiring. But as Chen Long argues in this report, policymakers still prefer to soften the slowdown rather than try to generate a big cyclical upswing.

    0
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    Gavekal Research

    Video: Bull Markets Don't Die Of Old Age

    The US economic expansion is entering its 11th year, which makes some wonder whether the end of the business cycle is nigh. Anatole thinks that’s asking the wrong question, because bull markets don’t die of old age. They are, however, more susceptible to diseases of old age. He identifies three events that would cause an economy to keel over. Also on the docket is the seemingly contradictory signals sent by bullish US equity markets and bearish...

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    Gavekal Research

    Driving The Bond Bubble—The Sum Of All Fears

    For the past 30 odd years, President Donald Trump has opposed free trade and argued that foreign producers should face tariffs. Yet the market responds with shock each time the US threatens new tariffs. By the same token, almost every central banker today is saying they (i) want to see higher inflation, (ii) will stop at nothing until inflation picks up, and (iii) once inflation duly appears, they will likely let it ramp up. So how does the...

    1
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    Gavekal Research

    The Threat To Hong Kong

    On Sunday, a million Hong Kongers protested a planned law change that will let individuals be extradited to face trial in China, the city’s biggest political protest in more than 15 years. On Monday, the city’s equity benchmark rose 2%. The betting is that this political furor will pass. But the broader context puts the city at risk of becoming collateral damage in the US-China confrontation.

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    Gavekal Dragonomics

    Tourism Falls Victim To The Trade War

    The boom in China’s outbound tourism could go down as another casualty of the trade war. As Ernan explains in this piece, the combination of a weakening currency and rising political tensions is becoming a major drag on international travel by Chinese—just as the structural factors driving outbound tourism growth are shifting into a lower gear.

    2
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    Gavekal Dragonomics

    Navigating The Shocks To Earnings

    Chinese listed companies have lately suffered more than their fair share of shocks to earnings. In this piece, Thomas explains the financial and accounting problems that have squeezed profits in recent quarters. But he argues that, even with the trade war, 2019 is likely to be a normal profits downcycle rather than a disastrous one.

    0
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    Gavekal Dragonomics

    How Multinationals Are Managing The Trade War

    The collapse of US-China trade talks and the ratcheting up of tariffs has intensified the challenges faced by global companies with operations that span both countries. In this piece, Lance reports on their range of responses to the trade war: some are shifting out of China, some are investing more in China, and some are not doing anything yet.

    1
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    Gavekal Research

    EMs Hit The Trade Wall

    It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

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    Gavekal Research

    Strategy Monthly: Who Suffers Most In A Long Trade War?

    Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

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    Gavekal Research

    Yes, We Are In A Bear Market

    In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.

    0
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    Gavekal Dragonomics

    The Central Bank's Reform Agenda

    The escalation of the trade war with the US likely means that the People’s Bank of China will keep easing monetary policy. But as Chen Long explains, the PBOC will also be pursuing a structural reform agenda. It wants to boost lending to the private sector and move to market-based interest rates—while still preserving overall financial stability.

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    Gavekal Research

    Audio & Transcript — The US-China Trade And Technology Mess

    In yesterday's special Gavekal Research Conference call Gavekal's Arthur Kroeber and Dan Wang, along with Fathom China's Matt Forney, considered what the breakdown of the US-China trade talks means for the trajectory of the trade war, and what the blacklisting of Huawei means for the tech cold war.

    0
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    Gavekal Dragonomics

    Who Wants A New Long March?

    Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.

    4
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    Gavekal Research

    A Change In The Market Mood

    Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?

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    Gavekal Research

    Trade War: Back From The Dead

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    Gavekal Dragonomics

    The Household Debt Service Burden

    The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.

    0
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    Gavekal Dragonomics

    The Fate Of Huawei

    The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.

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    Gavekal Research

    Trump's Trade War Calculus

    Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.

    10
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    Gavekal Dragonomics

    Video: How Much Downside For The Renminbi?

    Since the US slapped fresh tariffs on Chinese exports a week ago, the renminbi has fallen, but by less than when the first round of tariffs were imposed last year. In this video interview, Chen Long discusses why that is, and how far China’s currency is likely to fall if things get worse.

    0
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    Gavekal Dragonomics

    Stabilization At Risk

    China’s economic data for April came in rather worse than the too-good-to-be-true indicators for March. As Andrew explains in this report, the April figures do not actually show a serious deterioration, and property is still holding up. But the stabilization in growth is now under threat from a more protracted trade conflict with the US.

    0
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    Gavekal Research

    The Case Of The Missing Inflation: The Changing Demographic Picture

    Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.

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    Gavekal Research

    Beijing's Most Effective Trade Tool

    In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.

    4
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    Gavekal Research

    The Trade War Story Lines Harden

    The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.

    0
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    Gavekal Research

    Goldilocks And The Ten Bears (2019)

    Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.

    4
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call May 2019

    Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.

    0
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    Gavekal Dragonomics

    Where Can Industrial Policy Work?

    The Trump administration’s trade war has targeted China’s ambitious industrial policy, which China clearly has no intention to abandon. But will that industrial policy work? In this report, Lance explains his eight-point system for evaluating industrial policy’s odds of success, and tests it on electric vehicles, airplanes and pharmaceuticals.

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    Gavekal Research

    Gauging The EM Collateral Damage

    After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.

    3
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    Gavekal Research

    The Case Of The Missing Inflation: Chinese Foreign Exchange Policy

    As the US-China trade talks enter a critical phase, all eyes are on a new meeting of officials and whether it can can break the log jam. Louis, however, wonders if investors may be missing a trick by purely focusing on issues of market access, enforcement and tariffs. Adjustments in the value of the renminbi may yet be the real story of any deal.

    2
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    Gavekal Research

    Series: The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...

    0
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    Gavekal Dragonomics

    Xi's Pivot To The Private Sector

    The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.

    0
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    Gavekal Research

    Trade Deal Delayed, Not Yet Denied

    Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.

    2
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    Gavekal Research

    Q&A On The Hong Kong Dollar Peg

    The recent publication of a letter on the future of the Hong Kong dollar peg by Gavekal’s good friend Kyle Bass has triggered a flood of questions on the topic from clients. Now, Louis admits that there may be some home bias to this conviction that the Hong Kong dollar peg is not under threat. But in this paper, he sets out his answers.

    3
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    Gavekal Dragonomics

    Struggling To Reform The Belt And Road

    China’s much-criticized Belt and Road Initiative will become “open, green and clean,” Xi Jinping pledged last week. Do these new promises mean an end to the debt traps, kickbacks and white elephants that the infrastructure spree has been accused of fostering? In this piece, Tom argues Beijing will struggle to fundamentally reform the initiative.

    0
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    Gavekal Research

    The World's Biggest Bull Loses Steam

    China’s equity bull market has lost steam in the last 10 days after the Politburo adopted a less supportive tone following stronger than expected economic data in March. Even before the announcement, market ebullience had moderated. This is positive for China's stock market development, since it reduces the risk of an over-muscular regulatory reaction.

    0
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    Gavekal Research

    The Least Ugly Duckling

    In a year marked by unexpected US dollar strength, the renminbi is one of the few major currencies to be up against the dollar. The reason is simple enough: the resumption of trade talks between the US and China. Yet although a trade pact is now substantially priced in, there are reasons to believe the renminbi has further upside potential.

    0
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    Gavekal Dragonomics

    Video: Is The Worst Behind Us?

    At our seminar in Shanghai, Chen Long presented the outlook for China’s economy and markets. Crucially, the credit cycle appears to have bottomed out, and credit growth should accelerate towards the end of the year. He expects the overall economy to follow suit. He also covered the outlook for capital markets, equities and the renminbi.

    0
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    Gavekal Research

    The Case Of The Missing Inflation: Chinese Monetary Policy

    China’s response to the Fed’s QEII program in 2010 was to tighten monetary policy, as it feared a spill-over effect into inflation. Since that point China has seen credit growth progressively slow, making it an inhibitor to any global rebound in inflation. This orientation by China is changing as the focus of policy shifts away from crimping the shadow finance sector.

    4
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    Gavekal Research

    Why The Bulls Are Back In Charge

    Now that the S&P 500 has hit a new all-time high and other stock markets have recovered most of the steep losses they suffered last summer, it seems a lifetime since the financial panics of 2018. Investors who bought the dip have enjoyed Wall Street’s strongest quarterly performance in this bull market. After being so well rewarded, how should bullish investors who kept the faith now respond?

    1
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    Gavekal Dragonomics

    The Property Cycle Perks Up

    China’s property market data has been surprising on the upside. Thanks to easier credit and looser administrative restrictions, sales volumes picked up in March and prices rose. In this paper, Rosealea examines whether the upturn can last, and assesses what it means for land sales, construction activity, materials prices and the broader economy.

    0
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    Gavekal Research

    The Case Of The Missing Inflation: Energy’s Impact

    When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices. Yet, with oil prices again rising, he asks whether the market has grown complacent in its analysis of the relationship between oil and inflation.

    3
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    Gavekal Research

    The Case Of The Missing Inflation

    As the Federal Reserve launched the second round of its quantitative easing, the fear was that the unorthodox monetary policy would ignite a new round of inflation—even hyper-inflation—throughout the world, with dramatic effects on asset prices. But inflation failed to materialize, and now nobody seems to be worried about it anymore.

    5
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    Gavekal Dragonomics

    Stabilization Confirmed

    The raft of economic data released by China on Wednesday morning suggests the world’s second largest economy is proving more responsive than expected to the authorities’ supportive policy measures. The question is no longer whether the government will hit its 2019 growth target, but whether the apparent success will make Beijing halt its easing.

    12
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    Gavekal Dragonomics

    An Epidemic That Can No Longer Be Denied

    The world’s deadliest pig disease is now established in the world’s largest pork market. The spread of African swine fever in China has been more severe than the government has admitted, and as a result pork prices are spiking and imports are surging. But as Ernan argues in this report, the impact of this epidemic is still only in its early stages.

    0
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    Gavekal Research

    Video: Where Now For EU-China Relations?

    The annual EU-China summit concluded this week with usual diplomatic platitudes about deepening partnerships and strengthening cooperation. But the meeting took place against a backdrop of heightened tensions, after the EU declared China a “systemic rival” and with many European politicians highly critical of China’s economic nationalism.

    0
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    Gavekal Research

    The End Of The Smartphone S-Curve

    Smartphones are a maturing industry. Sales in China, the US, Europe and Japan are declining, and demand growth in India and Africa is not fast enough to drive a new surge in global sales. The industry is hoping that 5G and foldable phones will trigger a fresh upgrade cycle. But neither will drive a significant increase of sales in the near term.

    0
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    Gavekal Dragonomics

    Market Access Widens, On China's Terms

    Over the last two years, China has announced a series of steps intended to open market access for foreign businesses and ease its inward investment restrictions. In this paper, Lance examines these reforms and assess just how far they go towards leveling the playing field for foreign companies operating and investing in China.

    0
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    Gavekal Research

    Hong Kong Seminar — April 2019

    Louis Gave examined the reasons for equity markets' good performance amid a global trade slowdown; Thomas Gatley assessed the state of the Chinese economy and whether the current Chinese equity bull market still has legs; Udith Sikand reckoned it is time to be positive on emerging markets, especially EM Asia.

    0
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    Gavekal Research

    Europe's China Syndrome

    Chinese premier Li Keqiang is in Brussels on Tuesday for the 21st EU-China summit, and the talks are likely to be testy. After much dithering and in response to much pressure from Washington, the EU has begun to take a more hardline posture towards China. The core EU countries share many of the concerns that motivate the US trade war with China.

    0
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    Gavekal Dragonomics

    Don't Believe The 5G Hype

    5G mobile is the technology of the future, and the US and China are now in a life-or-death struggle to dominate it. That anyway is the story used to justify the US government’s campaign against Huawei—but as Dan argues in this piece, this is mostly alarmism disconnected from reality. It’s best not to get caught up in the politicized hype about 5G.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2019

    In yesterday’s Gavekal Research Conference Call, Will Denyer and Udith Sikand addressed the changing US dollar liquidity environment, and its impact on markets.

    0
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    Gavekal Dragonomics

    Video: Chinese Property Is Slowing, Not Collapsing

    Home sales in China fell by 3.6% in the first two months of 2019. This, however, was better than expected considering that this upcycle is now four years old. Lower mortgage rates and supportive policies by local governments should prop up demand, and Rosealea expects overall housing sales to decline a modest 2% for the year.

    0
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    Gavekal Research

    Europe's Export Problem

    Europe is the world’s most export-dependent big economic region. In such a precious position, the effect of external weakness can be debilitating, as shown by the eurozone manufacturing PMI having just fallen to its lowest in nearly six years at 47.5. The question is whether any respite can be found in overseas markets.

    0
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    Gavekal Research

    Last Lap For China's Bond Rally

    Starting from April, Chinese government and policy bank bonds are included in the Bloomberg Barclays Global Aggregate bond index. But index inclusion, while an important landmark, may not be the best guide to market timing. After a bull run that has lasted since the beginning of 2018, China’s bond market rally looks to be nearing an end.

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    Gavekal Research

    London Seminar — March 2019

    Cedric Gemehl examined the possibility of a European rebound; Charles Gave argued the world is splitting into three distinct monetary zones; Tom Miller presented on the state of the US-China trade talks and the health of the Chinese economy; Anatole Kaletsky examined the risks to the bull market, and arrived at a bullish conclusion.

    0
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    Gavekal Dragonomics

    A User's Guide To The Chinese Stock Market

    China’s onshore equity markets are now large and accessible enough that they can no longer be ignored by foreign investors—but idiosyncratic enough that they are hard to understand. This in-depth DeepChina report explains the fundamentals: What is there to invest in? Who owns the market? How can foreigners invest? How is the market regulated?

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    Beyond The Yield Curve Inversion

    The current yield curve inversion and softness in growth data are curious developments, given that the four prices that matter most for the global economy—long bond yields, corporate credit spreads, the oil price, and the value of the US dollar—are all relatively favorable. Louis and Charles weigh five different explanations for what may be going on—from bullish to highly bearish—and examine the investment implications.

    2
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    Gavekal Research

    A Week Is A Long Time

    Harold Wilson, the former British prime minister’s, quip that “a week is a long time in politics” has become an over-used cliche. Still, in the last week, there has been good reason to dust it off.

    1
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    Gavekal Research

    Among EMs, Favor North Asia

    With their high beta to global growth, emerging markets seldom outperform when investors begin to get nervous about the health of the global economy. So it is no surprise that the risk-off move of the last week has seen the Brazilian real and Argentinian peso each sold off by more than -5% against the US dollar, while the Turkish lira has been propped up only by a regulatory squeeze on liquidity. But the jitters have not affected all emerging...

    0
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    Gavekal Dragonomics

    Macro Update: Is The Worst Over?

    China has gotten off to a good start in 2019, with a stock market rally and some encouraging datapoints. In this chartbook, Chen Long surveys the economic and market outlook to determine if the worst is really over. Credit growth and infrastructure are picking up, but property, consumption and industrial profits have not bottomed just yet.

    0
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    Gavekal Research

    Video: Europe's Response To China

    Europe has an ambivalent relationship with China that is increasingly under scrutiny. The European Commission recently labelled China a “systemic rival” and France and Germany want to create corporate champions to compete against Chinese state owned enterprises. Europe, however, is not singing from the same hymn sheet.

    0
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    Gavekal Dragonomics

    The New Internet Regime

    For the freewheeling Chinese internet sector, regulatory risk arrived with a vengeance in 2018. Government actions hurt companies including Tencent in gaming, Didi Chuxing in ride-hailing, ByteDance in online media, and others. In this piece, Dan and Yanmei explain what drove these moves and how the new online regulatory environment will work.

    0
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    Gavekal Research

    Video: Intervention To Support The HKD Signals Strength, Not Weakness

    In the last two weeks, the Hong Kong Monetary Authority has been forced to sell US dollars in the foreign exchange market to maintain the Hong Kong Dollar's peg to the US dollar. Yet far from signaling a crisis, the interventions are a symptom of confidence in Hong Kong’s financial system, which is swimming with liquidity.

    0
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    Gavekal Dragonomics

    The Industrial Policy That Dare Not Speak Its Name

    The Made In China 2025 initiative was omnipresent after its launch in 2015, but it has now become officially invisible, a casualty of the vocal concerns expressed by the US and others. In this piece, Lance explains how China will pursue industrial policy in the aftermath: with less transparency, but also, perhaps, with less discrimination.

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    Gavekal Dragonomics

    The End Of China's ODI Party

    Beijing’s decision to use foreign acquisitions as a tool of state industrial policy has badly backfired. With advanced economies stiffening their resistance to Chinese investment, China’s decade-long outward direct investment spree looks spent. In this piece, Tom explains how the boom ended and where funds will flow in the future.

    0
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    Gavekal Research

    Video: The Fed's Potential Paradigm Shift

    The Federal Reserve is debating a fundamental shift in its inflation targeting. Right now it's targeting 2% inflation no matter what it has been in the past, a so-called "bygones" policy. In this video interview Will discusses the consequences of switching to price-level targeting, where the aim is to keep average inflation over time at 2%.

    0
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    Gavekal Dragonomics

    That Wasn't So Bad, Actually

    China watchers have been bracing themselves for some ugly economic indicators in January and February. Yet the first official data for 2019 were not actually that bad. As Andrew explains, the economy is clearly slowing, but it’s not going into an uncontrolled dive. The government’s moderate policy response is thus still on track to steady growth.

    0
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    Gavekal Dragonomics

    Springtime For Steel

    It’s looking like a good spring for China’s steel industry. In this piece, Rosealea reports on her findings from a recent visit to the steelmaking capital of Tangshan. Steel and iron ore prices are being supported by a combination of stable demand from property, recovering demand from infrastructure and supply constraints from scrap shortages.

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    Audio & Transcript — Gavekal Research Call March 2019

    In this research conference call, Andrew Batson and Chen Long discussed the improving outlook for the Chinese economy in 2019 and the implications for financial markets. Confirmation that the government is both willing and able to support growth has ignited an equity rally, while expectations of further easing measures still support bonds.

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    Video: Shifting Sands At The Fed

    The US Federal Reserve has said it is likely to end its process of balance sheet “normalization” sooner than previously planned. This sounds like an obscure monetary technicality, but it has important implications for investors. In this video interview Will explains why.

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    Towards A New Triple Merit Scenario

    Emerging market equities have benefited handsomely from the global risk-on move so far this year. With the prospect of a US-China tariff truce and the likelihood that China’s growth rate will stabilize in the coming months, EM may be on the cusp of a new “triple merit scenario” that could extend the equity rally through the rest of 2019.

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    Stability, Beijing-Style

    After a decade of rapid growth in debt, China’s government claims to be pursuing a different course. At this year’s legislative session, leaders dialed back growth targets, and pledged to control leverage and instead use fiscal policy to steady growth. Neither pledge can be taken at face value: growth will stabilize this year, but leverage will expand.

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    Gavekal Dragonomics

    Believe In The Chinese Bull Market

    After turning in the world’s worst performance in 2018, Chinese A-shares have bounced back with a vengeance in 2019. The three factors driving sentiment—liquidity conditions, the US-China trade war and Beijing’s policy stance—have all improved markedly. Thomas thinks the bull market has room to run, but exuberance creates its own set of risks.

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    Strategy Monthly: China After The Trade War

    The prospect of a US-China deal on tariffs has already boosted China’s stock market and currency. But it won’t reverse China’s growth slowdown, which is largely the result of Beijing’s efforts to de-leverage the financial system. The good news is that credit growth is rebounding, which will stabilize growth in 2H18. Chinese bonds will rally a bit more, the renminbi will move up further against the US dollar, and Chinese and EM equities should...

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    Gavekal Dragonomics

    The US Technology Control Toolbox

    The US and China appear to be moving toward a trade deal that will at least halt further hikes in tariffs. But as Dan shows in this piece, the US still wants to constrain China’s technological rise, and has many tools it can use. US-China technology exchanges are becoming politically and legally fraught, causing collateral damage on both sides.

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    Gavekal Dragonomics

    Look Beyond The Budget

    It is now conventional wisdom that China is using fiscal policy more than monetary policy to stabilize economic growth. Chen Long disagrees, and in this piece explains why the official budget, to be announced on March 5, is not that important to the business cycle. What matters more is the direction of total credit growth—which is picking up.

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    What To Expect From Trump-Kim II

    The the eight months since Trump and Kim's historic handshake in Singapore has seen no progress on North Korea’s denuclearization, with the two sides still leagues apart. Although their second meeting this week will do nothing to bridge the gap, Trump’s determination to be seen as a peacemaker will further reduce tensions in North East Asia.

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    After A Trade Deal, Then What?

    So far, so predictable: President Donald Trump’s weekend tweets extending the deadline for US-China trade talks past March 1 made clear his intention to get a deal done, most likely in the second half of March when Xi Jinping pays a visit to Mar-a-Lago. A deal is now almost certain to happen; the live questions are what will be in it and what impact it will have.

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    The Mystery Of The Missing Stimulus

    Since late 2016, the US trade deficit has been widening. Usually, when the US trade deficit expands, the effect is stimulative for the rest of the world. However, this time around there have been no signs that non-US economies are enjoying a resulting pick-up. In this report, KX examines possible explanations for the failure of this longstanding relationship.

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    The Trade Deal Scenarios

    In recent days, news reports have pointed to an impending trade deal between the US and China. A tweet by the US president that seemed to favor Chinese tech firms has added to that expectation. In this piece, Louis considers two possible outcomes to these talks, with one offering markets a short-term fillip, and the other being a likely gamechanger that will impact investors’ performance for years to come.

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    Video: What Kind Of US-China Deal?

    In recent weeks, the US dollar has rallied, emerging markets have been strong and gold seems to be breaking out to the upside. That is an unusual combination, and in this video Louis outlines three possible explanations for the moves. Most provocatively, as the US-China trade talks get critical, he wonders if China is gearing up to accept a one-off revaluation of the renminbi.

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    Three Odd Things

    Reserves held by foreign central banks at the Fed are shrinking, which implies there aren’t enough US dollars in the system. This would make sense: the Fed has been draining excess US dollars for the past couple of years. So with shrinking central bank reserves and a shrinking US monetary base, the US dollar should be going up, and most risk assets should be hurting. Oddly, this isn’t happening.

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    Gavekal Dragonomics

    The Sunset Of Housing Subsidies

    China’s local governments are cutting back their slum redevelopment plans, which points to lower government subsidies for housing in 2019. As a result, Rosealea argues, housing sales are likely to have a deeper decline this year, although Beijing will manage the phase-out of subsidies with a careful eye on how it affects the market.

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    The Biggest Investment Story Of 2019

    Now that stock markets around the world have recovered from the year-end panic of December 2018, it is worth returning to the question I posed here on the first trading day of 2019: was the disappointing performance of equities and other risk assets in 2018 the prelude to a deep and protracted bear market, or a contrarian opportunity to “buy the dip”?

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    China’s Credit Cycle Turns

    China’s easing of monetary policy is finally showing some results, with total credit growth delivering a surprising rebound in January. This pick-up suggests that the credit cycle has now bottomed out. But, Chen Long argues, the rebound in credit growth is likely to prove moderate, and economic activity will take more time to stabilize.

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    Thirty Years Later: Tiananmen's Long Shadow

    On Monday we published a piece from Louis in which he assessed the three economic fronts where the US and China are doing battle. In this second part of the series, Louis steps back and considers the chief monetary priorities that China has settled on since the tumultuous events at Tiananmen Square almost 30 years ago.

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    Gavekal Dragonomics

    After The Crash In Car Sales

    Is the long boom in China’s car market finally over? In this piece, Ernan takes stock of the prospects for auto sales after 2018’s historic decline. Since that drop was caused by expiring stimulus policies, sales can stabilize and recover. Future growth, however, is likely to be much slower than the industry has become accustomed to.

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    Gavekal Dragonomics

    The Long Arm Of US Export Controls

    While investors eye the progress of US-China talks to avert tariff hikes, the US is mobilizing on another front. In this piece, Dan explains how the US is preparing for more aggressive use of export controls to disentangle the US and Chinese tech sectors. This can certainly hurt Chinese firms, but will also affect US and other tech companies.

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    Three Separate Battlefronts In The Unfolding Cold War

    As the clash between China and the US intensifies, Louis notes the primacy that Mao Zedong’s guerrilla tactics would have had in forming the current Chinese leadership’s political consciousness and setting a template for the way they handle conflict. As such, he sees the struggle between the two superpowers playing out on three distinct fronts.

    19
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    The Global Car Industry Catches Chinese Flu

    If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?

    3
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    Gavekal Dragonomics

    It’s Not 2015 All Over Again

    The profits of China’s industrial sector are turning down—but as Thomas argues in this piece, a repeat of the traumatic downturn of 2014-15 is not in the cards for 2019. Heavy industry will hold up better this time around, but consumer-facing sectors will do worse. This downcycle will be more broad-based, but less severe, than the last one.

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    Gavekal Dragonomics

    The Large Print Giveth, The Small Print Taketh Away

    China’s government has made a cut in personal-income taxes, rushed out in August 2018, a centerpiece of its response to a slowing economy. Additional tax deductions were unveiled in January, but as Ernan explains, the new details are not that bullish for consumer spending. Enforcement is tightening, and some tax breaks will be phased out.

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    Gavekal Dragonomics

    The Long Plateau In Housing Demand

    While many forecasters had expected China’s steel demand to enter long-term decline as housing construction peaks, in fact it has stayed surprisingly strong. In this piece, Rosealea revisits her housing model, and finds it is consistent with recent trends. Construction should peak in 2020-22, so steel demand can stay elevated for a few more years.

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    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

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    A Huawei-Scale Problem

    The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.

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    Favor Local Bonds Over EM Equities

    After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...

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