This week, I met with the vice-mayor of Haikou and later listened to the Shanghai-based trade commissioner of one of Australia’s largest states. And, of course, there was the People’s Bank of China (PBOC) announcements that triggered an immediate 1.5% jump in the Shanghai Composite Index.
Two main messages emerged from my meetings. The first was that the Chinese economy is flat but stable. That is significant. The vice-mayor was on a mission to attract investment into an economy with opportunities. The trade commissioner’s mission was to encourage exports to fill gaps in the consumer market.
Neither of these approaches signalled a declining economy. Both took the line that this was a good time to participate in a stable economy that had significant opportunities for future growth.
The trade commissioner offered further insights into changing consumer behaviour. This is a sophisticated market craving new things. One of Australia’s notable exports to China is what is described as “gutsy” red wine — bold in flavour. It has long been assumed that there was no real interest in China in white wines and lighter red wines.
A recent series of promotional wine expos has identified a significant change in wine preferences. There is a strong demand for Australian white wines and less robust red wines. It is confirmation of the changes in consumer preferences in the post-Covid period.
China endured the longest and harshest global Covid lockdowns, and the impact is perhaps more dramatic than in other economies where Covid remains a less powerful and distant memory. China remains a lucrative market with new consumer fads becoming entrenched as mainstream consumer patterns. These range from the unusual to the strange.
See also: China’s stock rally faces risk as retail enthusiasm seen cooling
There has been an increase in the demand for pet-related products. This includes all the usual items, from pet food to grooming equipment. However, it also extends beyond the usual. Shopping malls do not allow pets on a leash, but they allow pets carried in re-purposed baby prams. Of course, these were rapidly supplanted by purpose-built dog prams, opening up a new consumer niche.
This is a rapidly evolving market with new products and changes to how existing products are used. Key to marketing and sales is the effective use of the digital space. Live streaming is a powerful brand development and selling tool that has moved beyond its early hard-sell iteration.
Solid market research lies at the heart of success in these new market conditions. The trade commissioner suggested there is no substitute for on-the-ground quality market research. If you cannot do it yourself, then there are dedicated on-the-ground companies that produce high-quality research.
See also: China keeps policy loan rate unchanged for second month
The China International Import Expo (CIIE) trade expo is a measure of confidence in the strength of China’s economy. This particular Australian state has doubled its exhibition size. The number of CIIE exhibitors has grown substantially this year too, indicating a broader global confidence in the economy.
Although coming from different starting points, the vice-mayor and the trade commissioner both exhibited confidence in the stability and future growth of the Chinese economy.
Shanghai Composite Index closed at 2,896.31 on Sept 25. Photo: Bloomberg
Technical outlook of the Shanghai market
The PBOC changes announced this week are a sensible part of economic management. The impact on the Shanghai market was immediate, but will it be enough to change the market trend?
The answer is found in the key market levels. The broadening spread between down trend lines C and D set up the conditions for increasingly profitable short-lived rally trades. Trend line C provides support and trend line D provides resistance.
The leap in response to the interest rate moves pushed the Shanghai Composite above the value of trend line D. The index moved temporarily well above the resistance level near 2,900 before closing near 2,900. This type of rally has happened before, although not to the same extent. Trading on Aug 29 started above trend line D and then retreated. The spike was temporary.
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The first spike reaction closed well above trend line D and is just above the next major resistance feature provided by the value of the upper edge of the long term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator. The gap up spike moved above 2,900.
That is a substantial achievement, particularly given the wide separation in the long term GMMA. Not surprisingly, the market has shown some modification of the surge over the following days.
Should the surge continue after next weeks’ Golden Week holiday then it will hold above the next historical resistance level near 2,900. This is a strong historical feature in the market so it is not until a clear and sustained break above this level takes place that we can call a trend change rather than a rally. That does not mean there are not profitable trades to be made, but they remain features of an extended rally.
The confirmation of a trend change comes with compression in the long-term GMMA followed by these averages turning upwards. In the Shanghai market, this can happen quite quickly.
It is important to note that this rally is not supported by other technical indicators which tends towards treating it as a rally rather than a trend change. Sustainable trend changes with the Shanghai Composite are usually accompanied by an Relative Strength Index (RSI) divergence pattern. This relationship is not currently present on the chart.
This suggests there is a higher probability that the market will retreat from these resistance features and use the value of downtrend line D as a support feature.
The current activity suggests a slowing of the downtrend pressure but it does not yet support a sustained trend change.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council
