Like most major city railway stations, the Guangzhou station is a vast, modern, efficient but crowded space, more like an airport than a railway station. It has the same type of large-scale advertising. This week, I couldn’t help but notice the giant banner advert featuring CATL, the world’s premium electric vehicle (EV) battery company. It read: “Charge for 10 mins, travel for 400 kilometres.”
This typifies the advances in EV technology that China has already made. It is the reason why US and European car manufacturers are so worried. China knew it could never really compete with advanced internal combustion engines, so for decades it turned its attention to developing effective and efficient EVs while the rest of the automotive world ignored this need. The result is a manufacturing, technical and development efficiency that leaves the West staggering to catch up.
The Chinese technological lead is so great that it will take a technological generation for Western manufacturers to catch up. Accordingly, they rely on tariffs, chip sanctions and other trade prohibition methods to hinder China’s development.
CATL is around the 17th largest company in China. We may know its name only because of its threat to US and European competitors. Without too much trouble, most investors here could name the top 20 US companies, and the top 10 in Singapore. Perhaps not so with China.
The top seven may easily spring to mind. Their market cap is each in billions of US dollars at the end of the first quarter 2024. They are Tencent (US$328 billion [around $442 billion]), Alibaba (US$180 billion), ICBC Bank (US$245 billion), Bank of China (US$167 billion), PetroChina (US$221 billion), China Construction Bank (US$159 billion), and Sinopec (US$99 billion).
Naming the next seven is a more difficult task. This group includes Moutai (US$292 billion) — actually a larger cap than Alibaba; Agricultural Bank of China (US$203 billion); CNOCC (US$110 billion); Pingan Insurance (US$98 billion); China Merchant Bank (US$109 billion); and China Mobile (US$190 billion). Surprisingly, capitalisation minnow BYD at HK$772 billion ($133 billion) rounds out this group.
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The remaining five in the top 20 list are virtually unknown to many investors. They are Wuliangye Yibin (US$75 billion) — responsible for five-grain baijiu, a type of liquor; China Shenhua Energy (US$106 billion); China Life Insurance (US$93 billion); China Yangtze Power (US$88 billion); and online marketplace Pinduoduo (US$156 billion).
These are all dual-listed on the Hong Kong Exchange.
Many investors do not know the names of these companies, let alone what they do or their national and international activity. These companies are not also-rans in the global corporate world, but they remain largely unknown. Even in a falling market, 12-month returns include 25.8% for Pinduoduo. The same weak market saw a 42% rise for CNOOC, and 37.11% rise for Petrochina. These are not the same returns achieved by so-called Magnificent Seven in the US, but neither are they returns to sneeze at.
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China’s most valuable stock, Tencent, fell 18% from March 2023 to January before developing a 50% rally that is largely continuing. Astute investors are asking if it is time to buy into other fallen stocks in China’s top 20.
The CATL advertising in Guangzhou railway station is a good reminder of just how much we need to learn about investment opportunities in China.
Technical outlook for the Shanghai market
The rate of fall in the Shanghai Index has slowed as the index approaches the 2,920 support level. The 3,000 level may provide a temporary pause point in the downtrend, but it has no strong historical significance.
The chart shows minor support near 3,000. It is minor because although it acted as a support level in March and April, it did not act as a significant support or resistance feature in the previous 12 months. The index may pause around this level, but this is most likely to be coincidental rather than correlated to any past index activity.
The market could rebound from this level, but it is a low probability outcome.
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The index is clustering along the lower edge of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This is usually associated with strong bearish activity. The short-term GMMA has also moved completely below the lower edge of the long-term GMMA, confirming a significant bearish trend.
The long-term GMMA has turned down and compressed. It has not yet begun to expand, which would indicate strong investor selling. Investors are nervous, but they have not yet joined strong selling.
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.
Currently, the RSI just confirms the downtrend and this is not particularly useful. However, traders will watch for a downside RSI divergence as an early warning signal of a trend reversal into a new uptrend.
For the RSI signal to be completely valid, the RSI valley bottoms must appear below the 30% line. A divergence occurs when the trend on the index remains down while the trend on the RSI valley bottoms is upwards.
The next support feature is the potential downside target level. This is near 2,920. This is the lower edge of a long-term trading band. It has acted as support in October 2023 and as resistance in January. Historically, this has also been an important support and resistance level.
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
