China has an enviable track record of meeting the objectives it lays out in its Five-Year Plans. From a business perspective, each Five-Year Plan lays out a clear map of expanded and new business opportunities. The focus of the Five-Year Plans also signals which areas are most likely to stagnate as it is believed they have reached their targets or potential.
The most recent Five-Year Plan covered eight areas. This week, we consider the first of these.
The first target is to keep major economic indicators within an appropriate range. Foremost among these is a growth rate that is compatible with a move towards common prosperity. The Western media is keen to promote the idea that the Chinese government’s stability rests on continued improvement of living conditions, as if this was something unique to China. It is an objective of all governments, although some major governments have been less successful than others.
The 2021 annual growth for China is 8.1%. This is larger than in previous years, but it comes off a reduced base. It is likely that 2022 growth will return to lower growth rates of around 5% to 6%. Of course, this will be called a China economic slowdown, but the quantum of growth will provide an expanding range of business opportunities.
Inflation will be the major concern in Western economies. It will particularly impact those companies that have to service loans taken in US dollars. Speaking in Davos, President Xi Jinping warned of the consequences of a sharp increase in US interest rates. His warning was dismissed by some as “an unprecedented intervention in global monetary policy”. As the leader of the world’s second largest economy, his concerns on global monetary policy are justified and cannot be ignored.
Those who have borrowed in US dollars are at risk of interest rate rises tied to US inflation. This will ripple through supply chains. However, Chinese monetary and fiscal policy is not as heavily tied to US policy moves as it has been in the past. The yuan is more flexible and this will provide a more stable base for international trade settlement. Those doing business with China may find significant advantages in writing trade contracts in yuan and settling within the digital yuan framework.
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The decoupling of capital supply chains — delisting of China companies from American stock exchanges — has decreased the need for US capital and US dollar investment in Chinese business operations, as these companies attract more Chinese investment. The introduction of the Beijing Stock Exchange reflects this capital transfer.
The result is that China will be less impacted by interest rate shocks emanating from the US. Business can expect less disruption, as China will face less of a challenge to keep the major economic indicators within an appropriate range. This also means less disruption to the implementation of the remaining seven major targets. We will look at some more of these next week.
Technical outlook for the Shanghai market
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The Shanghai Index has fallen below the value of the support and resistance level near 3,590. It has also fallen below support near 3,540. The fall below the value of trendline C and the value of the support level B was a signal of trend weakness. The large fall below this level confirms downtrend behaviour.
The placement of trendline C was not fully confirmed as a new uptrend feature, but in the future it will add a new resistance barrier for any market rebound. The support level B near 3,590 is a long-term support feature, so the fall below this level is significant. This retreat confirms that the uptrend that developed, and that was defined by trendline C, has come to an end. The index is again using line B as a resistance level.
This is a bearish situation. It is confirmed by the relationships in the Guppy Multiple Moving Average indicator. The long-term group of moving averages provides insight into the way investors are thinking. This group of averages is compressing and turning down. This shows that investors have joined the selling. They no longer believe the uptrend can continue.
Expansion in this group of averages shows investors have become strong sellers.
The short-term group of averages indicates the way traders are thinking. This group has rapidly compressed and turned down. They are now completely below the long-term group. Traders are now strong sellers.
The Shanghai Index has a weak support level near 3,540. This is the next target for the downside movement in the trend. This level acted as a resistance feature in August 2021. It acted as a support feature in September 2021 and again as a weak resistance feature in November 2021. However, this support and resistance feature had no influence on the market in the first half of 2021. This confirms that this level is a weak feature in the current market, and it has been easily broken both on the downside and the upside.
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The failure of the 3,540 level to act as a good support level sets the next downside target level near 3,450. This is a long-term support level best seen on a weekly chart.
Currently, 3,590 will also act as a resistance level for any future rebound above 3,540. There is a low probability that the index can develop a strong rally and move above the 3,590 level. This behaviour signals a return to trading within the longterm trading band that has defined index behaviour for much of 2021.
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
Cover photo: Bloomberg
