Calls forecasting the coming collapse of China have accelerated in recent weeks in the lead-up to the 20th National Congress on Oct 16. It has been suggested that President Xi Jinping is more concerned about exercising control than he is about growing the economy. This will lead to China’s collapse, they say.
Another suggestion is that China’s decline in economic growth will lead to a loss of respect from its Asean and Western neighbours, leading to a decline in China’s status and influence.
Worse, China’s economic slowdown, which is the inevitable consequence of the extended Covid-19 lockdowns, could lead to civil unrest and destabilisation. Ultimately, this could lead to the collapse of China and turn it into a democratic country similar to the US.
Lurking in the shadows is the idea that China’s collapse can be hastened by conflict on two or more fronts. The Western front rests on continued attacks on the Xinjiang economy through sanctions in the hope that this will trigger social unrest. On the Eastern front, it is the constant agitation around the status of Taiwan and challenges on the UN’s OneChina agreement. We can also throw in continued foreign interference in Hong Kong and dark mutterings about the exaggerated significance of border incidents with India.
The very superstitious might even suggest that droughts and earthquakes show that Xi has lost the mandate of Heaven.
Reports of China’s coming demise greatly exaggerated
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However, the idea that China is on the brink of collapse and that businesses should withdraw and run for cover is incorrect.
I agree that not everything is smooth in China but this can be said of any country.
These speculations about the coming collapse of China are a cycle as inevitable as the progress of hands on a clock face. The forecasts of doom gain strength regularly and they attract colourful but inaccurate speculations about China’s future. These have all been spectacularly wrong for at least the last 20 years and there is no valid reason to suggest they will be the right this time round.
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Unfortunately, those doing business with China have to take these wild speculations into account because if taken at face value, they can impact the way we do business or make us think twice about starting a business there.
China’s economy still has lots going for it. For example, China’s digital economy cannot be ignored. The impact is not fully measured in raw GDP figures but it underpins productivity growth. The number of 5G mobile users in China reached 475 million by the end of July compared with 14 million in the US. The software development associated with this is certainly beyond the imagination of those foretelling China’s collapse.
China has installed a renewable energy capacity of 1,020 gigawatts (GW) compared with just 325GW in the US and 147 GW in India. China’s exports to Asean and the EU and US are up 16.6%, 19.1% and 15.8% y-o-y respectively. The average total growth in these three countries is 11% which is an excellent figure for an economy that is allegedly on the verge of collapse.
Lastly, China’s growth is underpinned by a 15.5% public budget expenditure on education from a budget that does not rest on debt financing.
Technical outlook for the Shanghai market
The Shanghai Index remains stalled in sideways consolidation around the 3,220 level. The rapid fall tested the support near 3,220 and dipped below 3,180. The subsequent rebounds signal a resumption of the sideways movement. On balance, the index continues to show downside pressure but this is not strong.
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The Guppy Multiple Moving Average (GMMA) relationships show a resumption of downward selling pressure but this is so weak that it cannot be defined as a significant trend. The slight expansion in the long-term GMMA shows weak selling pressure. An increase in selling pressure is shown when the long-term GMMA expands significantly. The expansion and compression activity of the short-term GMMA show traders are not confident the market can establish a strong trend direction.
The long-term GMMA is moving sideways. The compression shows a high level of agreement about the price of the index and the value of the index. Such periods of agreement about price and value are often followed by periods of significant disagreement. The sudden collapse and the failure of the retest of support near 3,220 confirmed short-term disagreement is on the downside. Traders prepared for a retest of recent lows near 3,160 and were then able to catch the rebound rally.
The short-term GMMA has moved below the long-term GMMA confirming a marginally stronger bearish environment.
The significant feature is the support level B near 3,220. This is not a well-defined level, but this area has acted as a support and resistance feature. The index is oscillating around this level with weak rallies and retreats.
A weak head-and-shoulder trend reversal pattern continues to develop with two right-hand shoulder peaks. These extended developments have become a common feature of this pattern in recent years. The head and shoulder pattern is a bearish pattern with a downside target near 3,100.
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 national board member of the Australia China Business Council. The writer owns China stock and index ETFs
