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    Gavekal Dragonomics

    CEQ Q1 2016 - Excess Capacity, Zombie Companies, And Debt Deflation

    The story goes that excess capacity and debt-ridden ‘zombie companies’ will drag down China’s economy. But the problems are mainly confined to steel, coal, and other construction-related industries—and are less dire than in the 1990s. A long, slow restructuring is possible, though perhaps not ideal.

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    Gavekal Dragonomics

    CEQ Q1 2016 - What We Learned From The Stock Market Crash

    The mess that are China’s stock markets cost securities regulator Xiao Gang his job in early 2016. Sacking him was the easy task. The real work remains to be done if the country’s financial markets are ever to fulfil a real role as an allocator of capital.

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    Gavekal Dragonomics

    CEQ Q1 2016 - The End Of Non-Interference

    China’s Strong Arm: Protecting Citizens and Assets Abroad by Jonas Parello-Plesner and Mathieu Duchâtel (International Institute for Strategic Studies, 2015)

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    Gavekal Dragonomics

    CEQ: Avoiding The Japan Trap

    Growth is slowing, debt is rising, and the government is openly talking about "zombie companies" in key industries. This is China today, but there are also echoes of 1990s Japan. This issue of the CEQ examines the similarities and differences, and handicaps China’s chances of dodging a Japanese scenario of low-growth, high-debt stagnation.

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    Gavekal Research

    The Case For Sterling

    What was the weakest major currency in the world in the first quarter? It was not the Brazilian real nor the Australian dollar nor any of the other usual suspects among the emerging market and commodity currencies. That accolade went to the British pound, which managed to depreciate by -4%, from US$1.48 to US$1.42, even while the dollar itself fell another -5% on its trade-weighted index.

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    Gavekal Research

    Marginal Analysis In Capital Markets

    At the end of the 19th century, a revolution hit economics with the arrival of what is called “marginal analysis”. The idea was simple: prices were not determined by average demand meeting average supply, but by the marginal demand meeting the marginal supply; and the resulting price was used to determine the value of all the products or assets concerned. As long as nobody interfered with this price, it guaranteed a proper allocation of scarce...

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  • Gavekal Research

    Things Fall Apart

    Over the past century periods of social breakdown have swung the pendulum of power from markets to governments and back. Each crisis ended with a transformation in economic and political thinking. Today, voter anger is a response to the 2008 breakdown of deregulated capitalism. This time, argues Anatole, politicians must reconsider the market fundamentalism that has prevailed in recent decades and design a new system of checks and balances to...

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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

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    Gavekal Dragonomics

    How Big Is The Zombie Army?

    China’s economy is reportedly being dragged down by an army of “zombie” companies—unprofitable firms clinging to life through subsidies. In fact, the data show only about 10% of Chinese firms are truly financially troubled. “Zombies” look less like a huge systemic problem and more like a normal effect of the downturn in housing and heavy industry.

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    Gavekal Research

    The Beef In Japan’s Budget Bowl

    At ¥97trn, the 2016/17 budget passed by the Japanese parliament on Tuesday was the country’s biggest ever, with accelerating spending increases for welfare, pensions, healthcare, and defense. Yet no one expects Tuesday’s budget to be the end of this year’s fiscal story. Greater than expected increases in tax revenues both from corporations and individuals mean the budget’s reliance on funding from Japanese government bond issuance fell to 35.6...

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    Gavekal Research

    The China Factor In The Fed’s Equation

    Janet Yellen yesterday confirmed that uncertainty over the global outlook was why the Federal Reserve scaled back expected interest rate hikes. But just what happened in the world to change her mind? Rather than slightly weaker global growth prospects, market turbulence is the more likely culprit—in particular the stress over China’s currency.

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    Gavekal Research

    Bridging India’s Financing Gap

    India’s shoddy infrastructure is the stuff of legend. Ranked 87th in the World Economic Forum’s infrastructure quality index, much of it would not look out of place in sub-Saharan Africa. Mumbai’s rickety old airport, famous for its frequent delays and scuttling rats, once told visitors everything they needed to know. Yet the city’s sleek and airy new terminal presents a fresh image: five times bigger than the old airport, it is clean, efficient...

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    Gavekal Research

    Returns On Capital Are Deteriorating

    The rate of return on capital invested in the US has taken another step down. While not terribly surprising, this does bring the world’s largest economy one step closer to the next recession and a full-scale bear market. Nevertheless, the day of reckoning remains some way off; the current cycle is not about to reach the end of its road just yet.

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    Gavekal Dragonomics

    Macro Update: Of Stimulus And Stability

    Our quarterly overview of China’s economy reviews the eventful start to 2016 and reassesses the outlook. The renminbi has returned to relative stability, property is picking up again, and stimulus is continuing. But growth is still reliant on state spending, national leverage is still rising, and services and consumption are set to weaken.

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    Gavekal Dragonomics

    No Worries From China's Rebalancing?

    For a country that gained so much from China’s commodity boom, Australia seems quite sanguine about the bust. Mining investment may be falling, but optimism on tourism is rising. So has Australia already switched from the old commodity-driven to the new consumer-driven China? And will this rebalancing also be painless for the rest of the world?

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    Gavekal Research

    US Housing: From Great To Good

    The US housing recovery properly kickedoff in 2011 as a confluence of benign factors converged to favor the sector. Yet while housing continues to provide a much-needed positive contribution to US economic growth, recent data points to reduced momentum. After a weak January, homes sales for February, released yesterday, ticked a little higher. Yet over the last year, sales have been choppy and generally flat. The NAHB index also shows...

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    Gavekal Research

    Europe’s Reflation Trade

    Yesterday’s awful events in Brussels offer a stark reminder of our personal vulnerability in an unstable world and our hearts go out to the victims. They also reinforce liberal Europe’s vulnerability to hate-based ideology and highly motivated terrorists. However, we at Gavekal are economic analysts rather than geopolitical experts, and today want to focus on a more constructive view of Europe—namely, its equity market. After a knee-jerk sell-...

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    Gavekal Research

    The Fed’s Price Keeping Operation

    The US equity market is a constant source of surprise, but what really amazes Charles is any suggestion that it is “trying to tell us something”. Between algorithms, indexation, regulations, exchange traded funds, structured products, trackers, negative interest rates and of course massive central bank intervention, “Mr. Market” probably has little to say, save that he is hopelessly lost.

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    Gavekal Dragonomics

    Five Trends From The Five-Year Plan

    What to make of China’s five-year plan? The 13th and most recent plan has lost some uniqueness: it is now just one of Xi Jinping’s many long-term plans, strategies and initiatives. So figuring out what is new and important can be even more challenging. To cut through the clutter, we highlight five important trends for next five years.

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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

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