Six years ago — a lifetime in terms of China’s rate of development — when I flew into Urumqi in Xinjiang, the landscape was dominated by vast fields of wind turbines.
The transmission lines snaked their way south, delivering cheap renewable power to the rest of China thousands of kilometres away. The turbines were supplemented by the giant towers in Gansu province, which used mirrors to focus the sun’s power and generate electricity.
Today, things are different. Look out the window as you fly into any city in China and you will see hectares of solar panels covering lakes and mountainsides. A Sydney-based think tank Climate Energy Finance report said China installed renewables so rapidly it would meet its 2030 target by the end of this month — or 6.5 years early. The country installs at least 10 gigawatts (GW) of wind and solar generation capacity every fortnight.
It is not just the physical structure of this renewable energy that is significant. Perhaps even more significant is how this energy feed — variable because of the impact of clouds, snow, dust and nighttime — is integrated and managed to maintain the stable base power feed. This is a major problem when integrating intermittent renewable feeds into a system that requires constant demand and the ability to ramp up supply when demand peaks at various times during the day.
China uses a mix of pumped hydro and battery storage to stabilise the power supply from its renewable energy zones. They are installing 1GW of pumped hydro storage per month.
These features, coupled with a gradual slowing of growth rates towards the international norm for advanced economies, have implications for various investment avenues designed to benefit from the Chinese economy.
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The largest of these impacts will fall on coal, natural gas and, to a lesser extent, oil. Gas and coal demand will fall as energy sources are rapidly replaced with renewables. This particularly impacts third-party investment in resource companies relying on coal and gas exports to China. These are often Australian companies and currently comprise a significant portion of any balanced international portfolio focusing on China.
Investments once considered secure in China’s economic growth, driven by its consistent gas and coal-fired energy demand, are now faltering. The substantial upfront costs of expanding renewable energy infrastructure play a pivotal role in this shift.
As these costs are spread over future years, the initial sunk investment becomes less critical in shaping energy prices. This leads to more affordable electricity, which in turn reduces production costs. This shift is pivotal in positioning China as a competitive producer of high-end goods, moving away from a model reliant solely on cheap labour.
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The car industry is already seeing this disruption, with China able to produce efficient, low-cost electric vehicles. This brings together Chinese intellectual expertise, production line efficiency and the decreasing energy cost required to power the production lines. This has ‘disrupted’ the electric vehicle market, leaving other countries less competitive.
As renewable energy costs decrease, disruption will spread to various industries and manufacturing sectors. Investors should evaluate which industries will face disruption and which will thrive. Direct investments in technology providers, predominantly based in China, may offer significant opportunities compared to those in the US or Europe.
Technical outlook for the Shanghai market
The Shanghai Index’s rebound from support near 2,920 has slowed. It has been a steady move rather than a rapid rally with large up days. This signal of steady support suggests a higher potential to develop a steady uptrend breakout.
The index is hugging the upper edge of the short-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator. This bullish signal suggests the move can continue until the next resistance feature, which is the lower edge of the long-term GMMA group of averages.
The development in the past week allows the placement of two downtrend lines, shown as A and B. This is developing the characteristics associated with a fan pattern trend breakout. This is a slowly developing and powerful breakout pattern. Three to five downtrend lines characterise it, each acting as a resistance feature.
The market breaks the downtrend line, retests,and uses it as a support feature before a new rally develops. This includes regular tests of support.
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Usually, this support level is at a previous historical low. However, this is not the case with the Shanghai Index, so the developing pattern is treated as a guide rather than a definitive trend reversal.
This is the same situation as the one applied to the Relative Strength Index (RSI) divergence signal. As previously noted, this is a weak RSI divergence pattern because the second dip low in the RSI is above the 30 level.
The pattern of low valleys on the Shanghai Index shows a downtrend. The pattern of valley lows on the RSI shows an upsloping trend line. A classic RSI divergence signal has both valley lows below 30 points. In this case, we use the RSI as a smaller part of a suite of behaviours, suggesting this breakout may continue.
The rebound is the beginning of a trend change. The first and weakest resistance feature is the value of the upper level of the short-term group of averages in the GMMA indicator. The index is clustered along this value.
The first significant resistance feature is the value of the long-term group of averages. These are turned down, but they are not expanding. The expansion would require increased selling pressure as investors sell into the breakout-up move.
This has not developed and suggests no strong selling pressure, making it easier for the slow-up move to overcome this resistance feature. The most significant resistance feature is the upper edge of the trading band, near 3,080. Traders and investors will watch carefully to see if this rebound can sustain momentum and develop into a trend change.
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
