Stepping into the Lunar New Year provides an opportunity to look into how 2023 may impact the Chinese economy and what opportunities may develop.
China’s reopening will influence the global supply chain and impose short-term strains. It will take time to recover from the shift to near-shoring, but the appeal of China supply chains is both irresistible and irrefutable. It will take time to restore trust in supply chain security, but there will be a steady return to China. Covid-19 showed the importance of China, and that cannot be replaced. Covid-19 lockdowns accelerated the low labour cost shift to Vietnam and other countries. In China, the result is the development of higher-value industries. Poverty is not eliminated by paying low wages.
The unknown factor is the impact of US tariffs on supply chain demand. In 2021 and 2022, a significant level of dollar-based capital flew from China to the US due to the US Federal Reserve’s (Fed) aggressive rate hikes.
A key question for economic development is whether this capital will return to China.
Capital chases yield, and as rate hikes slow in the US, other capital markets become more attractive. A return of direct US capital flows may be limited by sanctions and other politically motivated trade barriers — which means China may see an increase in capital flows from Asia as it turns away from US debt markets because of unsustainable US debt levels and political risk.
The Bloomberg index of dollar-denominated junk bonds in China is brimming with developer debt. The index is up 6.5% this month and more than 32% in the past three months. That beats every other primary bond benchmark in the world.
See also: China resumes multiple-entry visas for Shenzhen to Hong Kong
Foreign fund managers are increasingly interested in opportunities in the digital economy and its impact on banking. This is a priority area for the government, so many opportunities are underwritten. Consumer discretionary that expands as the economy recovers, including tourism, are areas of interest. New energy vehicles, the green economy and their supply chains provide investment opportunities. Software high-tech spurred by the reactions to sanctions and the carbon-neutral economy is of interest. The expansion and upgrade of the health expansion are also high on the list of investment opportunities.
Morgan Stanley predicts that the MSCI China index will rise 13% in 2023. This is a reasonable but cautious estimate. The Index has already risen 10% since the October low. A 13% from the current Index value has a target near 3600. This is the 2021 high. The double bottom price pattern projection gives a higher target, near 4,000.
China’s P/E and venture capital (VC) firms had a hard time in 2022 due to a shortage of capital. The recent capital market reforms are designed to address these issues and continue to drive structural changes in capital flows in China. Cross-border collaborations between China’s stock exchanges and several others worldwide via equity, technology and harmonisation of regulatory standards are creating global channels for the flow of Chinese institutional and retail capital into global projects, which will include expanding Belt and Road Initiative (BRI) related opportunities.
See also: Trump's tariffs hurt more than just China
Technical outlook for the Shanghai market
The Shanghai Index continues progressing towards a second retest of the first resistance target, near 3,220. The index has rebounded strongly from two support features.
The 3,220-level target is the lower edge of a narrow resistance band. The upper edge of the band is near 3,280. The best bullish development is a continuation of the move towards 3280, followed by consolidation within the resistance band. The current breakout above 3,220 is a very bullish move in the lead-up to the Spring Festival holiday.
The index chart has three features that suggest uptrend breakout activity will continue to develop into a new longer-term uptrend after the Spring Festival holiday.
The first feature is that the index activity is part of a long-term trend reversal double bottom rebound pattern. The first target for the pattern is the top of the previous pattern peak near 3,415. The path to achieving this price target could be smoother, but current index activity shows assertive trend behaviour.
The second feature is the way the rebound action continues to be defined by a fan pattern. The fan pattern signals a long-term trend change. The fan starts from a single point, shown as point 1. It consists of a series of trend lines, shown as lines A, B, C and D. The fan pattern is often associated with long-term breakout patterns that develop over many months.
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The third feature is trend line D. This trend line forms a new support feature for the recent market retreat. This support feature is combined with a recent support level near 3,030, shown as line E. These two support features provided a base for the move above resistance near 3,220, a strong base supporting a continuation of the current move.
The behaviour of the Guppy Multiple Moving Average (GMMA) indicators shows that investors are increasingly bullish. The long-term GMMA is compressed and moving up. This shows cautious investor buying. It shows that investors have stopped selling, so it is easier for the rally to move above the long-term GMMA. The short-term averages have moved completely above the long-term group and did not compress significantly in the recent pullback. It also shows trader support for the breakout trend is strong.
The index has used two support features as a base for the continued development of an uptrend and a substantial jump into the Year of the Rabbit.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. 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 ETFsDaryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. 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
