Singapore inflation is officially at 3.3%, but my $4 chicken rice was difficult to find, reflecting the 12% food price rise over the past two years. While we desire a lower inflation rate, deflation is China’s largest economic threat, surpassing even the Evergrande collapse.
The economic textbooks tell us that deflation is bad because falling prices lead to lower consumer spending, a major component of economic growth. Companies respond to falling prices by slowing production, leading to layoffs and salary reductions. This further lowers demand and prices.
Conversely, inflation diminishes consumers’ purchasing power, reducing spending, a significant driver of economic growth. The relationship between my $4.50 plate of chicken rice and the official inflation figures reflects the tenuous connection between deflation and China’s economic downturn. My experience in four major cities in China in December certainly did not support the deflation narrative. Everybody was complaining about rising prices.
A good place to start is the construction of the Chinese CPI figures, which are used to gauge inflation. Like Western data, China’s data is distorted by one-off shocks like fuel and grain prices due to the Ukraine conflict. There are two important statistical bumps in the China data.
First is the price of pork. This time last year, the price of pork was sky-high as China battled a significant swine flu outbreak. This was a major contribution to the high food inflation figures for January 2023.
This year, the same period saw a drop of around 20% in pork prices, and this deflationary impact is reflected in the CPI figures.
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Combined with this is the change in the date of the Spring Festival. In 2023, the festival fell in January. The inflationary surge in premium food and other items that usually precede the Spring Festival break does not occur until February. Anyone who has purchased airfares for Lunar New Year travel understands this price surge effect.
Spring Festival-driven inflation was absent in January figures, suggesting deflation. Lower consumer spending is not a problem during the festival.
Notable highlights include Macau’s reception of over one million visitors in the holiday’s first six days, the highest since 2017. Meituan, a major Chinese e-commerce platform, noted a 36% y-o-y surge in average daily consumer spending on their online platforms, exceeding pre-Covid-19 levels in 2019. Moreover, restaurant spending has experienced substantial growth, with group order volume rising by 161% compared to last year.
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China’s New Year consumption expenditure also increased by 9% compared to pre-pandemic levels. It’s important to note that this spending surge occurs amid falling prices, amplifying the actual increase more than the raw figures indicate.
Lower prices have spurred consumer spending and consumption in a way not covered in the economics textbooks.
Technical outlook for the Shanghai market
The Shanghai index has staged a strong, but not unexpected, rally that has surged towards three significant resistance features.
The rally is not unexpected because it’s a common feature of the Shanghai index around the Spring Festival period. Even in the bullish years, many investors will sell poorly performing stocks before the Spring Festival, sweeping losers out the door. After the Spring Festival, they return to the market.
The current rally is consistent with this behaviour. More importantly, the current rally is consistent with the Relative Strength Index (RSI) divergence pattern developed weeks before the Spring Festival break.
The RSI divergence pattern works like this. A trend line connects at least two low points on the Shanghai Index. On the RSI display, a trend line is also placed connecting the low points on the RSI indicator. The low points should correspond with the low points on the Index chart.
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The Shanghai Index shows a weak divergence pattern because the trend line on the RSI indicator is flat, and the trendline on the index chart is sloping downwards. The two trend lines move in opposite directions.
The rally faces three obstacles to a new uptrend developing. The first of these obstacles is the value of the upper edge of the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) Indicator. In particular, it’s the GMMA relationship that is significant. A wide separation in this group of averages shows that investors are committed sellers. Compression in this group indicates that investors have stopped selling, and as the group again expands, it indicates investors have become buyers in the emerging uptrend.
There are some early signs of compression in this long-term group. The second obstacle is the historical support and resistance level, which is near 2,920. This has acted as a blocking feature in the past, so a move above this level is bullish. This level is a short-term influence on the market.
The third and most significant obstacle is the value of the long-term downtrend line. This line started in May 2023 and has defined the downtrend ever since. A sustained break above this level is confirmation that the rally rebound can develop into a longer-term uptrend. The current value of the downtrend line is near 2,965.
A breakout above the downtrend line does not mean a new rally. The first breakout attempt may fail. Most likely, the breakout will retreat and use the value of the downtrend line as a new support level before developing a more secure uptrend move.
The RSI divergence gave early warning of this potential change in trend. How the index behaves around the value of the downtrend line will confirm if the RSI signal is correct.
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. The writer owns China stock and index ETFs
