“What are your plans for expanding your business in China?” This recent inquiry from a client prompts strategic considerations, where the best course of action is not always clear-cut.
The unspoken assumption is that the vastness of the Chinese market ensures space for any product or service. Even slight demand across a population of billions can translate into significant new customers and opportunities.
It is a variation of what was once termed the “Shanghai tailor’s dream”. English cotton merchants in Shanghai during the 19th century calculated that if every person in China added just a few centimetres to the length of their shirt, then the demand would be so great that every cotton merchant could be a millionaire.
Contemporary approaches to understanding this dream emphasise utilising digital platforms like the internet, social media and seamless payment systems to engage with China effectively.
List your product on platforms like WeChat, JD.com or Alibaba to reach customers across China. While this seems logical given China’s numerous specialised online sales channels, be prepared for stiff competition from established rivals akin to physical markets.
Companies often establish their presence in the world’s most competitive markets. They typically start in Guangdong province, sometimes expanding into the Greater Bay Area, including Hong Kong and Macau. They believe they can thrive in this tough environment. Similarly, companies also target Shanghai or Beijing as their primary markets.
A more effective strategy is to estimate the consumer population needed for your business’s success. Do you need to reach at least one, two or four million people? These groups are larger than Singapore’s population.
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In China, 105 cities have over one million residents, with two-thirds of the country’s 1.4 billion people living in urban areas. Guangdong province leads with 17 of these cities, housing 127 million people, about the same as Japan’s population. Guangdong leads with 17 cities with over a million residents, followed by Jiangsu with 12. Despite pollution and overcrowding in directly administered cities like Shanghai and Beijing, their populations exceed 22 million each. Chengdu and Chongqing both have 17 million residents. Consider this when determining your target market size.
Each of these cities holds promise as a potential consumer hub substantial enough to satisfy the aspirations of most companies exploring new markets in China. Cities situated further from the bustling East Coast present even greater opportunities, boasting competitiveness without the hyper-competitive landscape found in Eastern cities. Opting for a single target city and devising an efficient, localised marketing campaign for your product or service makes practical sense.
For example, JD.com’s new strategy targets tier 2 and 3 cities to expand into new markets, a move worth considering for businesses entering the Chinese market for the first time.
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Technical outlook for the Shanghai market
The bears have won the contest between three major support features on the Shanghai Index. The convergence of the three support features offered a point of significant danger and opportunity. The confluence of features is a point where there is an increased probability of a significant change in the market direction, and this has developed rapidly in the last week with a strong downward move.
The support features below often lead to a rapid down move to the next support area.
The chart shows minor support near 3,000. It is minor because although it was a support level in March and April, it did not act as a significant support or resistance feature in the previous 12 months. The index may pause around this level, but this is most likely to be coincidental rather than correlated to any past index activity.
This leaves the next support feature as the potential downside target level. This is near 2,920. This is the lower edge of a long-term trading band. It acted as support in October 2023 and as resistance in January. Historically, this has also been an important support and resistance level.
The Relative Strength Indicator (RSI) provides an important guide to market turns with the Shanghai Index. When RSI divergence appears, it is an accurate and timely signal of market changes.
The Shanghai index shows a recent RSI divergence, although it is not precisely correct. The index high at point A was not matched by a new high on the RSI. The result is a divergence between the Shanghai index and RSI trends. This divergence is a reliable indicator of significant trend changes in the China market.
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For the RSI signal to be completely valid, the RSI peaks must appear above the 70% line. This did not develop. The peak shown by the arrow on the RSI indicator is below the 70% line, so this was regarded as a weak RSI signal.
Traders will now watch for a new RSI signal as the valleys develop below the 30% line. This will be a signal for a reversal of the downtrend.
In the short term, the downside target is near 2,920. The short-term Guppy Multiple Moving Average (GMMA) is compressed and moving below the long-term GMMA. This is a bearish condition. The long-term GMMA has also quickly compressed and turned down.
Traders watch for a fast market fall followed by a rapid rebound and entry opportunity.
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
