Who gives a plenum? Few in business understand the importance of these meetings by the Chinese Communist Party (CCP) and the role they play in setting the broader economic and business environment. Understanding this role is made more difficult because each of the seven plenums have a different purpose.
The first plenum elects the party’s new leadership. Changes made here often take many months to work through the system as new policies. Decision-making at a local level is sometimes stalled.
The second plenum discusses local issues and has little influence on business development.
The third and fourth plenums make major decisions on economic reform and national policies.
These are important for businesses because they set the development priorities. If your business can align itself with these priorities then there are multiple advantages. These range from faster investment approvals to more efficient regulations.
The fifth session puts forward suggestions for the next five-year plan. This is useful from a strategic perspective as it helps to identify the priority areas for investment.
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The sixth and seventh plenums usually focus on party building and preparation for the next CPC National Congress. Machinations in these plenums are keenly watched by China analysts, but they have limited value for business.
What is more important is the final decisions which are not confirmed until the first plenum is held again.
The third plenum takes place this year from July 15 to 18. China media describes this as a key policy meeting where the country’s leaders will set out a reform agenda.
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The Politburo said that the main goal of deepening reform is to continue to improve the socialist system with Chinese characteristics and modernise the country’s governance system and capacity, as China aims to establish a high-level socialist market economy and “basically achieve socialist modernisation” by 2035.
Unpacking this jargon yields some interesting clues as to what may develop in the business environment as China seeks to boost economic development after a slower-than-expected recovery from the Covid lockdowns.
Deepening reform is code for economic change. It suggests a continuation of moves to curb the power and influence of large business groups.
China does not want to see the likes of Zuckerberg and Musk emerging where profit and influence outweigh social responsibility. This ties in with the aim to improve the socialist system with Chinese characteristics.
The emphasis here is on social responsibility and obligations. In Western markets, these are part of environmental, social and governance (ESG) requirements.
From the Chinese perspective, it is a focus on the social responsibility of business to add to common prosperity rather than provide advantages to elite groups. The restrictions on expensive after-school tutoring is one aspect of this policy approach. Businesses that can demonstrate their social contribution will be favoured.
Achieving a high-level socialist market economy and socialist modernisation is code for ensuring that nobody is left behind by economic development. The first objective, lifting people out of absolute poverty has been achieved.
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The new objective is common and moderate prosperity. Businesses that can demonstrate how they contribute to this objective will find easier access to investment approvals and encounter fewer regulatory hurdles.
Technical outlook for the Shanghai market
The Shanghai Index has rebounded from just above the 2,920 support level. The 3,000 level provided a temporary pause point in the downtrend and may again provide a temporary pause in the rally rebound.
However, the significant resistance target is near 3,080. How strong is the rebound? This is the key question.
The first resistance feature is the value of the upper level of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This is not a strong resistance feature and good trading activity will quickly carry the index above this level.
The first significant resistance barrier is the value of the long-term group of averages. These are turned down, but they are tightly grouped. This suggests that there is not strong selling pressure. This makes it easier for the rally to continue after a minor retreat.
The most significant resistance feature is the upper edge of the trading band near 3,080. The Relative Strength Indicator (RSI) provides an important guide to market turns with the Shanghai Index.
When RSI divergence appears, it is an accurate and timely signal of market changes. The RSI divergence indicator is a powerful confirmation of a trend change.
Currently, there is no indication of an RSI divergence. For this to develop, the index would need to retreat to 2,920. That is, dip to at least the level of the previous low at 2,933 or below. If these two falling lows were then matched by a rising set of lows on the RSI, then there would be an RSI divergence signal.
This is a low probability outcome. The more probable outcome is for a minor retreat and then a continuation of the rally towards 3,080. The difference is important because it means that this is a recovery rally rather than the development of a new and sustainable uptrend.
With RSI divergence confirmation of a trend change, the index needs to move above the value of the previous uptrend line before a new uptrend is confirmed. Currently, that value is near 3,115.
There is good profit to be made from the current rally, but in terms of longer-term trend behaviour, it is a long wait for full confirmation that this is a trend and not just a rally rebound.
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
