China hit a rough patch of deflation in the first quarter of the year. It was a somewhat “hysterical” event as many Western commentators suggested the deflation signalled the beginning of the end for China.
Most of the deflationary pressures came from housing, followed by cars and white goods. The last two areas are subject to fierce price wars to gain or keep market share. It is a normal capitalist competition rather than a Chinese conspiracy.
On the macro scale, people are spending but it is not on the big consumer items. Consumer prices have picked up and discretionary spending on items like tourism and entertainment has increased substantially over pre-Covid levels.
The deflation in the housing market still has some way to go before it is fully resolved but aside from that, consumption remains quite strong.
This negative macro view was countered by political policy action in the US which suggested that they were more worried about a resurgent Chinese economy.
The ultimate expression of that fear is the proposed 100% tariffs the US wants to impose on China-made electric vehicles (EVs). The real reason behind this move is the US auto industry has ignored EVs for a decade or more and is now unable to compete with the sleek and efficient Chinese EVs. To provide a veil of justification, Secretary of State Antony Blinken is suggesting the problems stem from Chinese overcapacity rather than from Chinese advances in this area.
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The expectation of smooth and everlasting economic growth is a myth. It does not apply to Western markets nor does it apply to China. What remains unchanged is the foundation of the economy. China is unlike any other market in terms of scale, development and room for continued development.
There is an increasing tendency for US investors to withdraw from the China market. This is most often in response to political pressure. The tentacles of this pressure extend way beyond direct US company relationships with China. This is a new area of risk that business needs to take into account. Much as we do not want to be forced to choose, we may have no choice.
One of my friends runs a large private equity firm in Singapore while another runs a prominent VC fund. Both complained they are being “cautioned” by institutional investors not to have “anything” Chinese in the portfolio or face withdrawals and backlash. This is an extension of US policy pressure, particularly on US institutional and fund investors.
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In Australia, new changes to the Foreign Investment Review Board regulations make this explicit, with investment from “friends” receiving priority and an express regulatory pass.
There are reports of investors walking away from deals to acquire Chinese businesses because of negative publicity if they list in the US. We already see a shift to Chinese companies exploring Hong Kong listings.
Investment and businesses in China are becoming more complicated by political pressures. These will increase in the US election year. Existing businesses may have unfavourable choices foisted on them because of the withdrawal of US capital. This also impacts China-exposed Singapore-listed companies so investors will need to factor these pressures into investment decisions.
Technical outlook of the Shanghai market
The defining feature of the Shanghai Index is the strength of the new uptrend. This is shown in the Guppy Multiple Moving Average (GMMA) indicator relationships. The group to note is the long-term averages which indicate the way investors are thinking, and by extension, provide a guide to the strength or weakness of the trend.
The index pullbacks in March and April were considered temporary because the long-term GMMA did not compress in response to the selloffs. If they had compressed then it would have indicated that investors had joined the selling.
Instead, the long-term GMMA remained well separated, absorbing the selloff and setting the stage for a rebound rally and continuation of the uptrend leading to the eventual breakout above resistance near 3,080.
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This same analysis is taken further. Currently, the long-term GMMA is showing a slightly broader separation, suggesting strong support for the developing uptrend. This suggests the uptrend is sustainable and that any pullback will again represent a buying opportunity at a point of temporary trend weakness.
The upper edge of the long-term GMMA is above resistance near 3,080. When the lower edge of the long-term GMMA moves above 3,080, it will confirm the continuation of the longer-term uptrend. By then, there is a higher probability the market will have reached the trading band target near 3,240. This is a bullish trend environment.
This target level is calculated by taking the width of the long-term trading band and projecting this upward above 3,080. Historically, these trading bands have been an effective way of defining Shanghai Index behaviour.
The strength of the breakout is indicated by two features. First, the resistance level was tested unsuccessfully three times before the current breakout. This shows the resistance level was a strong historical feature. This means once it is broken with the breakout, it clears the way for the index to move quickly in a continuation of the rally.
The second feature is the behaviour of the long-term group of averages in the GMMA. It shows that investors used the dips in the index as buying opportunities.
The character of the move towards the upside target near 3,240 cannot be fully assessed at this stage although it appears to show a more steady advance than seen previously. There is still a low possibility the market could pull back and test 3,080 as a new support level before developing a new leg of the uptrend. However, the pattern of development suggests the market may continue to move upwards in an extended rally similar to that seen with the rebound in February from the 2,675 lows.
Daryl Guppy is a global financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears on CNBC Asia and is known as “The Chart Man”. He is a former national board member of the Australia China Business Council
