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Gavekal

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  • 01/01/14--19:48: The Sun Hasn't Set On Asia
  • People in markets, nervous folks, always need something to worry about. In 2012 the big anxiety was whether Europe would fall apart; in 2013 it was whether the Federal Reserve would start cutting back on its asset purchases. Now that Europe has crept from despair to stagnation and the Fed has anchored expectations that it will steadily reduce its asset buying while holding rates near zero, the anxiety-vane is likely to spin towards Asia....

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    Our latest bi-weekly review of global economics and investment....

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    At the level of fact, it is hard to construct a causal line running from China's economy to the recent performance of EM stock markets...

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    Dear readers: Today we are launching a new look for our research. The substance of what we do is not changing, but we hope that our new style will help us communicate our ideas more clearly. The major change is that we are adopting a unified name for our research: Gavekal Dragonomics. This reflects the reality that over the past three years, we have fully integrated the old GaveKal and Dragonomics research operations into a single team offering sharp insights into global economics and market issues, as well as deep-dive analysis of China. We continue to offer two distinct research products: the Global Service (formerly GK Research), and the China Service (formerly GK Dragonomics). The names of these two products are changing but the contents and pricing remain the same. Along with these changes, we have redesigned our documents to make them sharper and easier to read. We will continue to make additional small changes to the website in the coming weeks, to maintain consistency with the new docume...

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    Once the dust settles-which could well be a few months from now-the RMB will resume its upward course against the dollar, although the pace could well be slower as Beijing implements a structural economic reform program...

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  • 04/04/14--02:12: London Seminar April 2014
  • At our spring seminar in London on April 2 Anatole Kaletsky embraced his inner Churchill and asked whether we are at the 'beginning of the end or the end of the beginning.' Arthur Kroeber outlined how a powerful new Chinese government is charting a new course. Louis Gave described the challenges for emerging markets in a potentially deflationary world. Francois Chauchat explained why investors should continue to overweight Europe. We invite those who missed the event to listen to the audio files uploaded onto our website. Presentation slides are also available. Investors can find these items on the multi-media section of our website, or by clicking the link above....

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  • 04/14/14--22:14: Breaking The Bad News Cycle
  • Alarm bells have been ringing over China for a while, and there have been plenty of Quasimodos to sound them. With a poorly-understood "shadow financing" system that accounts for 20% of total credit, an overbuilt real estate market, deficit-ridden local governments and under-capitalized banks, China's financial system has been looking shaky. Financial stress, along with the relative tightness of central bank policy since last May, helps explain why most Chinese banks now trade below book value, and why Shanghai is the only stock market still close to its 2008 lows....

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  • 04/30/14--04:29: Five Corners (30 April 2014)
  • Five Corners (30 April 2014)...

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    For the past nine years one of the few certainties of global markets was that the Chinese currency would end the year stronger (or at least no weaker) than it began. That certainty has now been demolished by the renminbi's fall over the last two months-which indeed was the goal of the central bank when it engineered the depreciation. In this piece, we reassess the principles of Beijing's exchange-rate policy to answer two questions. First, how much further might the renminbi fall in the coming months? And second, what are the new "rules of the game" for the renminbi now that the old certainty of steady appreciation is gone?...

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  • 05/28/14--02:31: Five Corners (28 May 2014)
  • Overview: Arthur Kroeber on why some imagined Sino-Russian concert does not pose an existential threat to American hegemony in the international system. US: Will Denyer and Tan Kai Xian wonder whether they should be loading up on bell bottoms and facial hair as some soothsayers predict a return to stagflation. For the moment they do not contemplate an immediate return to the 1970s. Europe: Nick Andrews looks at the downward trend in narrow money aggregates in the eurozone and draws some less than bullish conclusions. China: Chen Long argues that a bold plan to reshape the way that local governments raise money could end up making the problem worse. Asia: Joyce Poon worries that the Bank of Japan may prematurely be declaring 'Mission Accomplished' now that inflation is ticking up toward its 2% target....

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    China's economy is inexorably slowing, and we expect government stimulus to be tepid at best. By the end of this year the run rate of GDP growth will be below 7%, and a fall to as low as 6% in 2015 is a possibility. We see little risk of a property collapse or financial crisis, but two critical questions remain. The first is how quickly Xi Jinping's reform agenda builds steam. The achievements of the past year were substantial-a much tighter monetary policy, reform of the exchange rate, and a good start on fiscal system improvements?-but much more is needed, especially in streamlining inefficient state enterprises. The second question is how much the draconian anti-corruption campaign is defeating its own purposes by sapping the government's ability to get anything done, and undermining business confidence. Today's note is excerpted from the forthcoming issue of China Economic Quarterly, which will be available in full to China Service subscribers tomorrow....

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    Is Xi Jinping's China friendly to private enterprise? The answer seems to be yes, if you are a Chinese private company, and no if you're a foreign one....

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  • 09/02/14--21:06: Europe: A Republic Of Voices
  • Another year, another eurozone crisis. Perhaps crisis is too strong a word, but the economic news from Europe over the summer has been consistently disappointing. In his speech at the Jackson Hole central bank conference a couple of weeks ago, European Central Bank chief Mario Draghi sounded the alarm, demanding that European governments adopt more active fiscal policies to push up aggregate demand and boost growth. His call stoked expectations that the ECB will announce something big when it meets tomorrow: either an asset-backed security purchase program, or full-on quantitative easing. Most likely these expectations will be dashed, but if growth and inflation numbers continue to deteriorate in the coming months then Draghi-until now the master of talking loudly and wielding a very small stick-will be forced into action. It will not surprise long time readers that when it comes to Europe, Gavekal is a republic of voices. We will dive into our views, and their investment consequences, in a Europe-focused Q...

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  • 10/06/14--04:08: The Hong Kong Endgame
  • Today, after a week of excitement, the democracy demonstrations in Hong Kong have largely fizzled out-at least for now. The confrontation may have wound down but the protesters feel they have made a resounding point, and the Hong Kong government has pledged to open a dialogue on constitutional issues with their leaders. Even so, the movement appears to have failed in its two stated aims: forcing the resignation of unpopular Hong Kong chief executive CY Leung, and negotiating a more fully democratic process for the next chief executive election in 2017. That leaves us with two questions: will the itch for greater democracy reassert itself in similarly spectacular form again before that election? And has any lasting damage been done to Hong Kong's unique position as the economic gateway between China and the rest of the world? The short answers respectively are probably yes and not really....

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    Since the turn of the century, China's booming housing market has been one of the most important drivers of the global economy. Between 2000 and 2013, annual housing completions tripled. Largely because of the demand from housing and related infrastructure, Chinese steel use quadrupled. Prices of iron ore and many other commodities soared. In the coming decade, China's housing sector will again be a crucial factor in the global economy, but in the opposite direction....

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  • 11/17/14--20:51: Xi's Long Game
  • Summit meetings of APEC, the Asia-Pacific economic cooperation talking shop, rarely produce much of interest beyond a funny group photo of 21 heads of state struggling to look comfortable in ersatz local dress of the host country. But last week's summit in Beijing, the companion state visit of President Obama, and the subsequent G-20 summit in Australia produced a surprisingly substantial feast of positive news. The deal flow was a testament to Xi Jinping's diplomacy. Xi looks well on his way to reshaping the Asian political-economy equation in China's favor. The announcements fell broadly into two baskets: one set that underscores China's desire to play a bigger, and essentially cooperative, role within existing global governance systems; and a second that makes clear China's intent to build a parallel set of multilateral institutions that it can dominate. The first basket included a surprise agreement to complete negotiations on the Information Technology Agreement (ITA), an international high-tech fr...

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    The 60% rally in China's main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is Arthur's effort to summarize and, we hope, clarify the various opinions across our shop....

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    The 60% rally in China's main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is Arthur's effort to summarize and, we hope, clarify the various opinions across our shop....

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    The 60% rally in China's main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is Arthur's effort to summarize and, we hope, clarify the various opinions across our shop....

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    China is in for a rough year. The economy is in its most fragile state since 1998, at the nadir of the Asian financial crisis. Gross domestic product grew at an annualized rate of just 6.1% in the last quarter of 2014, and most key indicators suggest that the first half of 2015 is unlikely to be much better. Industrial profits are weakening sharply, which is likely to dampen wage growth and consumption-the two bright spots over the last couple of years. Disinflation is now entrenched. The implied GDP deflator last year was just 0.4%, producer prices have been falling for three years, and the steep fall in oil prices, while beneficial in the long run, will only add to the downdraft in industrial pricing power and profits in the short term (see [China] Profits Under Pressure)....

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