As Evergrande undergoes liquidation in China’s economy, the market conditions offer more opportunities in 2024. The outlook for the year has eight factors, making China an attractive investment destination and a strong financial market for trading.
This week, I considered the remaining four factors (See story on first four factors in Issue 1122, Jan 29).
The fifth reason for optimism is the expansion of the Exchange Traded Fund (ETF) environment. Investors are seeing a widening of ETF offerings, allowing them to take calculated and calibrated market positions aligned with their views.
The new ETFs go beyond the limited and relatively crude offerings of sector and sub-sector ETFs that are currently available. These limitations have driven interest in “hot” sectors in the belief that trading a “hot” sector ETF will mitigate a broader fall in the market.
This strategy may prove successful, but more sophisticated ETF offerings will provide different ways to focus on developing opportunities. This will include dividend and interest-rate ETFs that span sectors. This diversity also opens up new ETF trading opportunities.
The sixth factor is dear to my heart. The China market is particularly compatible with technical analysis and charting methods. There are some techniques which are unique to the market. Even in a bear market, these trading tools have not failed. As the market recovers, the same techniques and trading methods will yield good results, and opportunities will expand.
See also: Trump's tariffs hurt more than just China
It is exceptionally difficult for independent traders and investors to trade from the short side in China. The regulatory hurdles are substantial, so long-side trading is the only practical option. A recovering market brings many more opportunities for analysis using existing charts and technical analysis methods.
The seventh reason for enthusiasm about the market in China is the continued expansion of the Belt and Road Initiative (BRI). These include investment developments and international expansion by Chinese companies. This diversifies their risk away from the market.
From around 2015 to 2017, China’s exports went primarily to developed markets. China’s leadership realised this model was unsustainable as Western growth stalled, delivering only incremental export gains. The dual-circulation policy was designed to reduce China’s reliance on exports, but it was also designed, along with the BRI, to develop new export markets. In 2023, China’s exports to the Global South exceeded exports to developed markets by nearly 20%.
See also: Buying into China stimulus Is ‘painful trade’, Lombard Odier says
Chinese international air cargo was almost 6% higher than in 2022. The second half of the year grew 22% compared to the second half of 2022. This growth was entirely driven by cross-border e-commerce growth, a major BRI focus.
Western analysts focus on the hard infrastructure aspects of the BRI, but the latter’s digital infrastructure is far more significant. In the 19th century, railroads enabled local products to become world-market commodities. In the 21st century, mobile broadband embedded in the digital economy turns marginalised people in the Global South into actors in the global economy both as consumers and sellers. China’s trillion-dollar investment in the BRI has digitised communications in scores of developing countries, with transformative effects.
The development of the digital economy and all its associated apps and services provide many investment opportunities.
The final reason for my excitement is the technical advances in China, particularly in green energy and solar development. This directly benefits exports and also increases domestic efficiency, which boosts productivity.
Size is always a factor in China, so putting the green economy into perspective is useful. China added more solar panels in 2023 than the US did.
According to the China Electricity Council, China’s cumulative installed capacity of wind and solar energy is expected to surpass coal for the first time in 2024.
China added 217GW of solar and 76GW of wind last year, bringing the total to 610GW. This is far more than the total solar capacity the US (or any other country) has ever installed. The remainder of the world installed 240GW in 2023.
For more stories about where money flows, click here for Capital Section
China installs more solar PV (photovoltaics) in a month than most countries do in a year, and investment in low-carbon generation continues to grow staggeringly. This brings down the cost of living, putting more money in pockets for consumer spending. It reduces the costs of production, leading to higher profitability and efficiency.
The advances made by China’s homegrown companies are also varied.
Automaker Geely Holding Group has launched 11 satellites to boost its capacity to provide more accurate navigation for autonomous vehicles, while start-up Betavolt recently unveiled a new battery that can generate electricity for 50 years without charging or maintenance.
This tiny nuclear battery is the first in the world to place 63 nuclear isotopes into a module smaller than a coin.
“Betavolt atomic energy batteries can meet the needs of long-lasting power supply in multiple scenarios, such as aerospace, AI equipment, medical equipment, microprocessors, advanced sensors, small drones and micro-robots,” Betavolt said in a press release.
The start of 2024 might still be tough, but these eight factors provide reasons to be optimistic about the Chinese economy and markets this year.
Technical outlook of the Shanghai market
The most important feature of the Shanghai Index is the confirmation of the divergence pattern of the RSI or Relative Strength Indicator.
Despite the new lows on the index, which has required a new plot of the downtrend line, the RSI divergence remains intact.
This is not entirely unexpected regarding the potential market rebound after the Spring Festival Holiday.
In poorly performing years, the Shanghai Index typically has a significant selloff before the Lunar New Year as bad luck (in the form of losing positions) is swept out of the door in preparation for the new year.
This is how the RSI divergence pattern works. A trend line connects at least two low points on the Shanghai Index.
On the RSI display, a trend line is also placed connecting the low points on the RSI indicator. The low points should correspond with the low points on the Index chart.
A weak divergence pattern occurs when the trend line on the RSI indicator is flat, and the trendline on the index chart slows downwards.
This is a good indicator of a trend development change, but the new uptrend breakout is weaker.
Rather than a strong uptrend, the new uptrend includes rally and retreat behaviour before a new stable uptrend is established.
This is the current RSI pattern. The rapid dip and rebound from 2,666 is potentially an exhaustion move. An exhaustion move is where the candle has a long tail followed by a strong intraday rebound.
This is often a sign that extreme selling has ended, and consolidation may develop.
RSI divergence and exhaustion moves are key indicators of a trend reversal.
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
