One of China’s greatest contributions to Western economic growth over the past 30 years has been deflation that has driven massive increases in productivity. That is correct. Read it again and then cast your eyes around your office.
Thirty years ago, I purchased an LCD projector. It cost nearly US$8,000, but now something of the same quality costs less than US$300. My “nothing special” laptop was in the US$3,000 range and can now be replaced with a machine costing less than US$1,000. My Blackberry cost an arm and a leg, and delivered horse and-cart technology. The price may not have dropped as much as those of other products, but the functionality is probably 10 times greater.
All of these factors are deflationary. They enable both an increase in productivity and a decrease in price. The competitive pressure has spurred innovation in products and service support. It is this relationship that has powered global economic growth for a generation.
Classic economic theory tells us that deflation means consumers defer spending because things will be cheaper in the future. This theory suggests that economies collapse in a deflationary environment, and by extension, China’s economy is collapsing because it is in a mild deflationary environment.
Clearly, the conclusion of theoretical economic models do not match reality. If the theory was correct, then I would still be using my 1990 laptop because I would be forever deferring my buying decisions as I waited for cheaper machines.
In the modern economic environment, deflation enables productivity. Making things less expensive is a good thing because it enables growth. Understanding this relationship means we can reject the narrative that “China is collapsing because of deflation” and make more informed decisions about the health of China’s economy.
See also: China home prices fall at slower pace as stimulus takes hold
In 2024, China generated twice as much electricity as the US, produced nearly 13 times as much steel and around 22 times as much cement. This is an economy that some want us to believe is heading towards collapse.
China’s shipyards accounted for over 50% of the world’s output while US production was less than 5% of world total. In 2023, China produced 30.2 million vehicles, which was almost three times more than the 10.6 million made in the US.
In this apparently “failing” economy, 26 million vehicles were sold in China, or 68% more than the 15.5 million sold in the US. Chinese consumers bought 434 million smartphones, which is three times the number sold in the US. Chinese shoppers spent twice as much on luxury goods as American shoppers.
See also: China’s 2024 growth meets official 5% target on stimulus bump
The desperate imposition of sanctions and tariffs is not designed to tackle the quantity of Chinese exports. These measures are designed to tackle the problem posed by the quality of Chinese exports.
Using EVs as an example, the US and European automakers simply cannot match the quality of digital innovation found in Chinese EVs. Nor can they match the combination of price and quality. Rather than encourage innovation through a competitive market, they attempt to constrict the market using tariffs. Instead of using the cheaper products as a starting point for their own advances in innovation and productivity, they prefer to block these products and force consumers to buy more expensive and less efficient substitutes.
Deflation, either in terms of price or in terms of increased functionality for the same price, is what underpins the sustained growth in economic productivity.
Technical outlook for the Shanghai market
The Shanghai Index has found support near 3,160. It is too early to know if this is temporary support or a genuine support level that will act as a base for a new rebound rally. Traders will need to prepare for both outcomes by watching for key points to confirm the rally, or to confirm a further retreat.
There is a marginal balance supporting the case for a rebound rally. It starts with the relationships shown in the Guppy Multiple Moving Average (GMMA) indicator. The index dropped below the lower edge of the long-term group of averages in the GMMA and dragged this group down. However, the degree of compression is relatively slow, suggesting that there is not a complete switch to overwhelming selling pressure. There is currently no crossover in the longterm GMMA.
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A wide separation in the longterm GMMA would show very strong selling by investors and this makes it difficult to arrest the market fall and reverse the trend.
There is a turn-down and some compression in this group, which shows nervous investors are selling. It does not yet suggest a general selloff by investors.
The most optimistic outcome is for the market to pause and consolidate near the historical support and resistance level near 3,160. This is not an exact level, but this area has acted as a resistance or support point several times in 2024. A rebound from near this level faces several resistance features.
The first resistance feature is the projected value of the uptrend line. Currently, this is around 3,370. The second resistance feature is the historical level near 3,440.
Failure of support near 3,160 has a downside target near 2,980. This level has been a significant support feature for several years. A fall to this level is a serious adjustment to the behaviour of the Shanghai Index.
In the longer run, a fall of this degree suggests that the index would return to trading between support near 2,980 and resistance near 3,160.
Although these levels provide an easy to measure point for potential trend changes, it is the GMMA relationships that help confirm the sustainability of any trend reaction.
The key measure is the long-term group of averages because they provide an indication of how investors are thinking. The key feature to watch is the behaviour of the index around the support level near 3,160 and the way the long-term GMMA develops. This market is further complicated by the upcoming Lunar New Year, which often sees a sell-off as poorly performing stocks are sold off in preparation for the new year.
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
