The Chinese economy is like a European weather forecast — fine with patchy clouds and a chance of rain. The national economic figures provide a very broad brush picture of the economy that hides the opportunities it presents. It is individual business reports that help provide better detail on China’s economy.
This detail matters for existing businesses which are struggling with their China exposure. The detail is also important to new businesses thinking of breaking into the China market.
Food consumption and changing expenditure patterns are perhaps the most significant guides to economic health, more so than expenditure on luxury goods, which have always been the domain of just a small segment of the population and economy.
Joey Wat, chief executive of Yum China Holdings, was upbeat with investors last week after the operator of Pizza Hut and KFC in China reported better-than-expected first-half results. Net income rose 8% to US$212 million ($279.12 million).
At current growth rates, China still accounts for almost one-third of the world’s annual growth. She noted that there had been a ‘‘shift of growth’’ into the country’s ‘‘lower-tier’’ cities. This is an important observation about the shifting locus of economic growth.
In the last year, China opened 400 new shopping malls, mostly in Tier 2 cities or below. Pause for thought for a moment. How many other countries in the world these days have opened 400 new shopping malls?
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Economic growth is shifting to cities and regions with more room for growth. That should inform the decision-making of any business looking to expand into China.
Discretionary expenditure also provides a guide to the health of the economy. Luxury goods are one form of discretionary expenditure, but tourism and travel have greater appeal. This is a better measure of the appetite to spend disposable discretionary income.
About 423 million railway passenger trips were made across China last month, a 4% increase from the same period last year. July and August are the peak of the country’s summer travel season. China Railway anticipates an estimated 860 million trips will be made during the two-month summer travel rush.
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Although the economy is not all doom and gloom, it remains a difficult economy to navigate for foreign brands. There is greater competition from homegrown Chinese brands. Singapore businesses looking to expand in China or enter the market can expect to face strong competition from domestic brands.
These brands have emerged from the pandemic leaner and sharper in their focus. They are also eyeing Tier 2 markets as the next location of growth.
Several months ago, I spoke with the marketing and development manager of JD.Com. He was clear that the new growth would come from Tier 2 and Tier 3 cities as they were the areas with the most potential for catch-up development.
Despite the national figures, there are clear bright spots in the Chinese economy. These can be found by watching where discretionary spending is increasing.
Technical outlook of the Shanghai market
The Shanghai index reacted away from trend line D and has edged lower, falling below support near 2,900. This bearish environment offers few sustainable rallies.
Any rally activity is capped first by the value of the downtrend line D, currently near 2,895. This is below historical support near 2,900. This level is another resistance feature. Above that, resistance comes from the value of the long-term Guppy Multiple Moving Averages (GMMA). This is currently between 2,930 and 2,960.
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These are formidable resistance features that limit any rally behaviour. They are also a formidable barrier to any sustainable change in trend direction. It would seem that for the foreseeable future, the Shanghai index will remain locked in a strong downtrend and offer limited rally trading opportunities.
That is not to say that opportunities from the long side are not available. They are certainly less common but can be located using standard searches based on momentum gains.
Shanghai-listed Gen-S Power Group (600753) delivered a 31% return over five days in an otherwise lacklustre week for the Shanghai index. Shenzhen-listed Anker Innovations Technology (300866) received a 4% lift from former US President Donald Trump when he used one of their phone charging power packs in his interview with Elon Musk. On an ordinary day this week, more than 40 stocks returned 9% or more for the day.
If upside is limited, then identifying the potential downside targets become more important because they suggest where the market fall be stop, stabilise and develop a new uptrend. The outlook is depressing.
There is very weak support near 2,820. This is built around a midpoint consolidation at the end of 2023 and early 2024.
Then next stronger support level is near 2,720. This is also not a strong historical support level. At best, they offer the potential for a pause and consolidation. Given the right conditions, they may form a base for a change in trend.
The GMMA shows no early indication of a trend reversal. The long-term group is widely separated, suggesting that any rally will be overwhelmed by investor selling. There is also no indication of an RSI (relative strength index) divergence pattern developing.
That said, the Shanghai index has a habit of moving very quickly in response to policy changes, so traders always remain alert for fast-moving rebound rallies like that seen in February.
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
