There are several questions to answer when it comes to China’s economy.
The first is about whether the economy is recovering. The best guide is not found in industrial statistics, manufacturing output or PMI figures.
Former President Li Keqiang once said he used electricity consumption figures as a more accurate measure of economic activity than official statistics. Using a similar approach, it is useful to track the level of discretionary expenditure as a guide to the health of China’s economy.
This is spending on things that are not necessary. These include holidays, movie theatres, leisure activities and high-end goods that go well beyond the basic essentials of life. It does not include expenditure on eating out as this is a way of life for many, rather than a discretionary spend.
Most importantly, this expenditure shows faith in the future. You do not spend spare cash on these services if you are worried about the future and a potential economic slowdown.
The increase in expenditure during the Spring Festival was the first hint of economic optimism. China bears suggested this was a temporary phenomenon — sort of a last hurrah before economic contraction overwhelmed the market.
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The next major holiday festival is Qing Ming or the Tomb Sweeping Festival. During this period, the Chinese traditionally honour their ancestors by visiting tombs usually located in their hometowns. On a more contemporary basis, the holiday break is used for leisure travel and entertainment. In a struggling economy, it would be reasonable to expect that expenditure would decline as the leisure component was stripped out, leaving just the traditional aspects of the festival.
Instead per capita spending increased by about 101.1% of the spending recorded during the holiday five years ago, according to Sinolink Securities. Reuters reported that the Chinese spent more per capita during this long weekend than they spent in any other holiday period since China lifted Covid-19 restrictions in late 2022.
“The recovery of per capita spending is better than expectations,” Sinolink Securities said in a research note. The average tourism spend during the 2024 New Year holiday and Spring Festival in February are respectively 96.5% and 90.5% of 2019 levels.
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The Qing Ming Festival was a litmus test for the sustainability of confidence in Chinese economic growth. The festival continued the momentum of spending seen during the Spring Festival. This suggests that the spending increase during the Spring Festival was not a flash in the pan, but rather early evidence of a return in confidence in economic growth.
This sustained increase in on-the-ground cash spend runs counter to the common narrative in Western media that China teeters on the edge of collapse. The key questions for those doing business with China revolve around changes in consumer habits, tastes and preferences.
Companies already doing business in China will benefit by becoming more responsive to these changing consumer preferences. There is a heavier emphasis on localisation and less premium attached to foreign brands. There is greater trust in the quality of domestic brands and this increases competition with foreign brands. Adjusting product and service offerings to meet these changing expectations will allow businesses to capture a new slice of this Chinese discretionary spend.
The second question is about how the nature of consumer demand is changing. We will examine this next week.
Technical outlook of the Shanghai market
The Shanghai Index was “knock, knock, knocking on heaven’s door” but the door remains closed. The index has again retreated from the strong resistance near 3,080. This is a powerful resistance level so it would be unusual for a breakout to occur on the first or second attempts. However, should the third attempt fail then it would cast a more bearish outlook for the index.
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This pessimistic outlook is tempered by the Guppy Multiple Moving Average (GMMA) indicator relationships. The behaviour of the long-term GMMA is critical in determining if this is a sustainable uptrend. The lack of compression in the long-term GMMA during the first retreat and the current retreat shows investors remain bullish. The consistent separation in the long-term group of averages shows investors are actively buying because they believe the retreats are temporary blips in an otherwise strong uptrend.
Compression in the long-term GMMA in reaction to an index retreat is the confirmation signal of a developing trend change.
Although these dips look substantial, they are still consistent with consolidation behaviour as the market gathers strength for a breakout above resistance. The failure of these two tests of resistance shows this level is quite strong.
This is good news because the eventual breakout above strong resistance is often very powerful. This happens because strong resistance becomes an embedded feature in the market. Many investors are basing their decisions on this level and when they have all succumbed to buying pressure then it means the market is dominated by new investors. They have bought because they have expectations the market will move higher. It is this belief that allows the market to move quickly upwards when all the old shackles have been removed.
This would allow the market to move quickly towards the next target level set at 3,240.
The behaviour of the index around the 3,080 level is critical in understanding how the index trend breakout will develop. The balance of probability continues to favour a renewed breakout above 3,080 with an upside target near 3,240. This target is calculated by taking the width of the trading band and projecting this upwards. This trading band calculation was successful in projecting the index recovery target at 2,920 and again at 3,080.
This bullish confidence is confirmed if the index stays above the 3,080 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
