Hard-nosed economic pragmatist, Chinese Premier Li Keqiang, will retire later this year. As head of the powerful National Development and Reform Commission, he has played a leading role in shaping the modern Chinese economy. He leaves a legacy of five ongoing priorities for 2022. They will shape the business environment for the next 12 months.
The first of these is reforms that stimulate the market participants and companies. They are part of the three years of state-owned enterprise reforms designed to enhance the allocation of SOEs’ resources and deliver structural adjustment in the national economy. This is in parallel with private corporate reforms. The objective is to achieve high-quality growth by supporting world-class companies through entrepreneurship.
The second is reforms that break down the barriers to market competition and help build a market-based system. These are key reforms that impact land, labour, capital, technology and the emerging data. The last two areas offer many opportunities to develop new business and investment. The results of the reforms in these areas will also impact the way all businesses interact with China, so it is important to follow these developments carefully.
These reforms also include developing a nationwide unified electricity market and an LNG (liquefied natural gas) market.
The third area of reform aims to stabilise growth and expand domestic consumption. These reforms are consistent with the dual-circulation economy policy objectives. They are part of the move to reduce China's dependence on exports for its economic prosperity.
Growing domestic companies, which are direct competitors to foreign business, requires improved access to capital for companies and the ability to leverage private capital to invest in strategic projects. Li made it clear that foreign capital is welcome as part of this process.
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These reforms are designed to help China avoid the middle-income trap that stagnates growth. Key to avoiding this trap is enhancing the income level for the middle class in society.
The fourth cluster of reforms continues the process of high-level opening-up. These are particularly important for foreign investment and business activity. The reforms encourage equal treatment for foreign companies alongside their domestic counterparts. This develops a level playing field and will enable wider market access for foreign investors and business. Li also flagged the more effective use of a negative list for cross-border services. This will clarify areas of acceptable business activity and develop a more stable and consistent investment environment.
The Hainan Free Trade Port construction received priority status. This will alter supply chain efficiencies for some business activities.
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The final reforms area promotes the low-carbon energy transition. This is the area that received most coverage in Western media. It is a cautious approach that avoids a radical decarbonisation strategy. The current focus is the design of a mechanism for decarbonisation efforts that includes both incentives and penalties. Parallel to this is the development of an electricity futures market and a green energy transaction market pilot scheme. This seems to be different from carbon credit trading, so investors will watch this area for future developments.
Technical outlook for the Shanghai market
The Shanghai Index’s collapse has continued dramatically with a fall below support near 3,220. A weekly chart puts these developments into context. The fall is driven by external news developments that have impacted all global markets. However, the market continues to move between well-defined chart features.
The chart has five significant support and resistance levels. These levels help to identify where the market is likely to pause and how the rebound rally may develop.
We start with the broad trading band shown by lines A and B. There is resistance near 3,700 and support near 3,350. This trading band defined the market activity for most of 2021. The width of the trading band is calculated and this value is projected downwards from support near 3,350.
This gives a downside target near 3,000 shown as line D. This level was a resistance feature for much of 2019.
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The 2021 trading band was preceded by a narrow six-month consolidation band between support at 3,220 and resistance near 3,350. These are shown as lines B and C. The support near 3,220 failed completely this week with the market plunging towards the 3,000 support level. This is more than just a momentum overshoot. This large fall indicates a full-scale market retreat.
The first support level near 3,000 is calculated by taking the width of the trading band between lines A and B. However, a second downside target is established by taking the width of the support and resistance levels between lines A and C. When this value is projected downwards from line C, it gives a downside target near 2,730 as shown by line D.
Historically, this matches the low rebound levels created by the lows between 2019 and 2020. This represents an extreme downside target for the current market retreat.
Investors and traders are watching for the historical resistance level near 3,000 to now act as a support level. On the daily chart, there may be some overshoot dips below this level. The important feature is the development of consolidation around this level because this can act as a base for a market 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 national board member of the Australia China Business Council. The writer owns China stock and index ETFs.
