How do you measure the performance of a digital economy? This is not an idle question because the answer sits at the core of our understanding or misunderstanding of the Chinese economy.
The digital economy stretches way beyond our ability to use WePay or Alipay at the checkout counters in supermarkets. The digital economy helps to raise productivity levels, which is key to future economic development.
But how do we measure the impact of making same-minute bill payments via a bank transaction? Here’s a hint: It improves business cash flow but deprives the banks of overnight interest income earned on suspense accounts waiting for funds to clear.
How do we measure the elimination of counterparty risk by using blockchain to complete cross-border trade settlement in seconds instead of minutes, days or weeks?
How do we measure the impact of rapid digital customs clearance which involves the completion of complex paperwork by AI and guaranteed by blockchain verification?
This is not an argument for ditching traditional measures of economic activity which are rooted in 19th-century concepts of what entails economic growth.
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However, it is an argument for saying that we need to develop effective measurement tools to evaluate the impact of the digital economy across the entire economy. We simply cannot exclude an entire segment of the economy from our measurements of economic development and progress. It is similar to ignoring the economic impact of the US$1 trillion ($1.3 trillion) of credit card debt held by US consumers.
The digital economy is growing in importance in the US but is still minuscule compared to the growth of the digital economy in China. The combined Cyber Monday and Black Friday e-commerce sales in the US pale in comparison to the sales turnover on Singles’ Day in China. Given the US still issues credit cards that rely on magnetic strips instead of embedded chips, its digital economy still has a long way to go before it becomes a significant player in its economy.
In comparison, China’s digital economy stands at the centre of two significant policies — the dual circulation policy and the common prosperity policy. The first aims to boost domestic demand and reduce economic reliance on exports. This results in a decline in export income which is seen as a negative by Western economists who still measure the Chinese economy using the traditional metrics of economic analysis.
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The second policy impact is making corruption more difficult by moving away from cash which has the effect of increasing consumer spending power. The second policy also aims to boost domestic wages and includes measures to help those who have escaped from poverty move up the levels to moderate prosperity. This requires significant restructuring of economic activity and growth in the services sector.
China has a population that is literate (often bilingual), well-fed, tech-skilled, capable and increasingly productive. The new economy sees an acceleration of growth in areas including electric vehicles, renewables, nuclear energy and digital tech. Unfortunately, these factors are not properly acknowledged or measured using traditional economic analysis. The poor analysis gives the misleading impression that investment and business opportunities are shrinking in China.
Technical outlook of the Shanghai market
The Shanghai Stock Exchange Composite Index failed to hold above the 3,280 level. Instead, it oscillated wildly around this level with a bias towards the downside. This suggests that the index may return to the sideways trading pattern that has hampered much of the index activity in the first six months of the year.
There has been extensive index activity between support near 3,220 and resistance near 3,280. This is the main trading band that has dominated the market activity. The upside and downside breakouts have reached their trading band projection targets before returning to trade inside the main trading band.
The trading bands help to identify the structure of the market but they do not describe the behaviour of the market. The index may move rapidly in rally and retreat behaviour inside or between each trading band. Or the index may simply slouch along in a sideways pattern with slow moves in a slow-moving sideways trend.
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The Guppy Multiple Moving Average (GMMA) indicator helps to identify this behaviour. Currently, the long-term GMMA has compressed and turned upwards. This is often associated with a change in the trend. It shows a shift in the balance of probabilities. The current GMMA relationships are very different to those seen in areas A or B when the index was last moving around 3,220.
In area A, the long-term GMMA showed a strong and steady bullish bias. In area B, it was the reverse, moving quickly into a steady downtrend. Note that in area B, the long-term GMMA is compressed, turned down, and then expanded rapidly to confirm the new trend.
This is the activity investors are on the lookout for in the current situation. They want the GMMA to compress, turn up, and then expand to support a new developing trend — in this case, to the upside.
The initial evaluation of the failed rally suggests that uptrend support is fading. This will be confirmed if the long-term GMMA fails to expand. This would indicate that investors are not buyers and they will not support the new trend.
An expansion of the long-term GMMA suggests investors have become buyers and that they are buying in index retreats because they believe this gives a good entry point into an emerging uptrend.
The behaviour of the long-term GMMA is critical to understanding how the Shanghai Index will develop in the coming days and weeks.
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
