By now, many people are familiar with horrifying stories of cost-saving in China. In the latest scandal, a tanker truck drove 1,300km from Ningxia province in western China to the coastal city of Qinghuangdao, just east of Beijing. It delivered thousands of litres of fuel. To save costs, the fuel tanks were refilled with cooking oil for its trip back to Ningxia.
It has echoes of the decades-old “melamine in the milk” saga, or the use of discarded cooking oil, repackaged and sold as a new product. This latest incident raises several issues.
First, let’s be clear, food product substitution is not restricted to China. We assume that what is in the packet is the same as what is said on the label. It is not always the case. Several Australian meat packers were banned from exporting to China because what was in the box did not match what was on the label.
The food quality in several countries in Asia cannot be taken for granted. Poor quality standards are not a uniquely Chinese problem. This leads to a second observation keenly focused on food quality — this issue offers a competitive advantage to those who are able to “prove” the unbroken chain of quality in food products.
The lowest level of guarantee of unadulterated, clean and safe food to eat comes from Australia. The country is proud of its clean and green image and until recently, felt that it had to do very little to support this claim. That, as the British would say, no longer cuts the mustard.
The next level of guarantee is the printed package label that tells you the product and its contents have been certified by a regulatory agency. These compliance labels are easily printed and attached to any packaging. Their veracity relies on the integrity of the food production system. Counterfeiting is easy, so unless it’s a well-known and trusted brand, these labels offer a low level of certainty.
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The problem of substituted contents or counterfeit products in the food sector was seriously tackled in China by using QR codes on packaging. China pioneered this verification process at a time when QR codes were virtually unknown outside of China. With their independent website-tracking, they were much better than the easily counterfeited stick-on labels. However, the link to a website did not carry any proof that substitution had not taken place somewhere along the supply chain.
Now, the solution is blockchain tracking or traceability. There are a number of permutations to this, but they all have one feature in common. The user can track the progress of the product throughout the supply chain. They can be confident that the product has not been substituted with an inferior product. They can know if the bottle or packaging has been tampered with. Blockchain may be a way to check if poor-quality wine has been poured into discarded high-end wine bottles for resale.
The expansion of blockchain certification methods and apps is one of the significant commercial features of the Belt and Road Initiative as it is embraced by the Global South and elsewhere. Blockchain provides a guaranteed provenance for a product. Goods and food that carry blockchain certification offer a level of confidence for the consumer which cannot be matched by any other process.
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Those selling edible products into China gain a substantial competitive advantage if they are able to provide quality guarantees backed by blockchain technology. The melamine scandal changed the food supply landscape in China. The oil tanker scandal will do the same and smart suppliers will turn this into a competitive advantage.
Technical outlook for the Shanghai market
The strong rally in the Shanghai index seems to suggest that support near 2,900 has held, despite the small plunge below this level. This can be seen as a continuation of the fan-reversal pattern but it must be treated with caution.
The failure of support would invalidate the fan-reversal pattern, so traders must decide which of these — the plunge or the rally — is most significant. This fan pattern is built around the pattern of rebound rallies from strong support levels. The pattern captures the increasing strength of a market before it has established a new uptrend.
Earlier in the week, it looked like a low probability that the index would rebound above support and continue to develop the fan pattern. The rally has changed that outlook. However, the pattern has less validity and is less reliable because of the plunge below support.
The Guppy Multiple Moving Average (GMMA) relationships also do not strongly support the development of the trend reversal. The long-term GMMA has resumed its downward movement and has expanded its degree of separation. This shows that investors have again become strong sellers. Their selling activity smothers any rally.
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The key development will come if the index is able to move above the value of the downtrend line D. This would signal a new leg of the fan pattern.
If a new leg of the fan pattern does not develop, then the key question for traders and investors is where the next valid support level is located. The answer is not encouraging. The next support level is near 2,720 and even this level is not well established. It is calculated by taking the width of the trading band and projecting the value downwards. This comes near to the spike low dip in January 2024, but it excludes the extreme lows in February.
The target level near 2,720 is a trade band calculation that has weak verification. That suggests there remains a good probability that the market may dip to the February 2024 lows rather than developing strong support consolidation near 2,720.
The Shanghai index has not delivered clear trend behaviour signals, so traders should remain cautious and ready to cut losses.
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
