The structure of China’s economy is changing and this impacts investment strategies and portfolio allocation. In some ways, it is helpful to think of China as being in the same position as Detroit in the 1960s. Detroit was the home of General Motors and the capital of automobile manufacturing.
However, the industry’s economics changed and in the 1980s, Detroit became a dangerous, dirty, rundown city because it failed to adapt.
China is adapting and developing a new economic structure built around the digital economy. Investment opportunities in this new economy abound, but there are fewer for investors who want arm’s length exposure.
Arm’s length investing in China is where investors become involved with companies outside China that depend on China for their business. For many in Singapore, this becomes a double arm’s length investment into industries based in other countries like Australia that rode the China boom.
The Australian resource industry is the most commonly recognised of these arm’s length investments, particularly iron ore producers and steel suppliers. The contraction of infrastructure-heavy development has lowered the demand and price for iron ore. Australian iron ore producer Fortescue has fallen more than 40% since January.
There is also an indirect downstream impact from Chinese steel exports. Steel is not required for a digital economy, so excess Chinese steel is depressing prices. This year, profit for steel supplier BlueScope Steel fell 20% and the outlook for 1HFY2025 is about 25% below consensus.
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Lower birth rates characterise advanced economies. China is no exception. Birth rates fell 6% in 2023, following falls of 10%, 12% and 18% in the previous three years. Despite becoming one of the top five infant formula brands in China for 2023, the stock of a2 Milk Company crashed 17.8% after the estimated value of the total market plunged more than 10% due to tumbling birth rates.
Changing demographics in China show a bulge in older citizens, which offers opportunities in the aged care sector. The ageing population should provide good opportunities for healthcare and aged care providers. Several Singapore-listed companies fill this arm’s length criteria, but the outlook is not as rosy as anticipated.
Lendlease Australia is trying to sell an aged-care project in China. An auction process is underway, but the depressed state of the Chinese market is not making it easy to complete the deal.
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It is an open question whether this reflects a broader economic malaise or a temporary tightening of capital as the Chinese economy slowly changes direction and emphasis. What is clear is that previously profitable arm’s length investment exposure may not dodge the fallout from this economic change.
Putting aside all the additional complications of the geopolitical trade environment, the structural changes in the Chinese economy are changing the investment landscape. The China at arm’s length investment strategy is no longer entirely fit for purpose as the nature and structure of the Chinese economy changes.
The first adjustment step is re-examining the portfolio and the industry allocation in these investments. The second step is to identify the slowly emerging arm’s length China investment opportunities.
Technical outlook of the Shanghai market
Do we have a turning point in the Shanghai index? Several indications suggest a longer-term turning point may be developing. However, some strong obstacles prevent a rapid change in the trend.
The fan pattern trend reversal failed because the support level near 2,900 was unsuccessful.
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The strong rebound from 2,850 is an encouraging sign. However, the rally is capped by resistance created by the value of downtrend line D. The location of trend lines C and D creates an expanding wedge. The wedge means the index behaviour is trapped between a widening gap, increasing the rally activity range.
The current rally is limited by the value of the downtrend line and the resistance level near 2,900. These are significant resistance features.
The short-term averages in the Guppy Multiple Moving Average (GMMA) have compressed and turned upward, which is behaviour expected in response to a rally. However, the degree of separation in the long-term GMMA has remained unchanged. They stay well separated. The separation shows investors remain sellers in this market. They will sell into any rally.
A developing trend change is confirmed with the long-term GMMA, which shows signs of compression in response to the rally. This change suggests that investors have stopped selling. Further compression in the long-term group shows investors are joining the rally as buyers.
There is a high probability this rally will collapse, and again, the value of trend line C will be tested as a support feature. The next strong support level is near 2,720. Trend lines C and D continue to diverge. This divergence increases the room for each rally rebound, offering greater short-term trading possibilities.
Currently, a trend reversal remains a low-probability outcome.
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
