It’s the beginning of a long and desperate winter in England, with dire predictions of increasing poverty and people dying in homes they cannot afford to heat. The situation seeems to be an apt metaphor for Western economies as they battle inflation and other economic headwinds. With it comes the assumption that the Chinese economy cannot be immune from the same forces.
In China, the week-long Golden Week holiday and the upcoming 20th National Congress of the Chinese Communist Party on October 16 provide time to reflect on the situation. Travel during Golden Week has been restricted due to Covid, but this increasingly irritating inconvenience cannot mask a brighter outlook than that experienced in the UK.
On a technical basis, poverty has been eliminated in China, an achievement much cited by Western observers. Millions of people who, not so long ago, lived under terrible conditions have been lifted out of poverty. On a 20-year time scale, this is an astounding achievement, but just as important is the growth of the other segment of the population because this is the driving force of the economy.
China’s middle class has grown at exponential rates. In 2000, only 3% of the population was classified as middle class. In 2022, it is estimated that between 45% and 50% of the population belong to or identify themselves as the new middle class.
The government defines the middle class as those earning between US$7,250 ($10,135) and US$62,500 a year. The official definition might not match our expectations, but it defines the way people see themselves in this demographic.
They are proud to be called middle class. They have worked hard to achieve this status, even if it is at the lower end of the scale. They believe that their lives are better than their parents’ and that their children’s lives will be better than their own. This is in contrast to the UK and the US where parents no longer have such expectations for their children.
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The middle class comes from a wide variety of backgrounds. They include entrepreneurs, doctors, lawyers, senior employees of foreign companies increasingly, and government workers. China is an aspirational market opportunity and this is reflected in its consumer patterns.
The habits of saving produce a sound financial backstop for households and the government, but the expanding middle class now has the means to spend on real estate, cars and luxury goods, hitech devices that power the digital economy, holidays and entertainment, and children’s education.
The quality of life has improved dramatically and visibly. Photos taken during the Golden Week holiday and posted on WeChat show an affluent population enjoying consumer-driven holiday celebrations with travel, festivals, and other activities. There are constraints imposed by Covid, but this is not an economy in decline. It is an economy filled with unsatisfied demand waiting to be unleashed.
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The challenge for export business is to identify the changes in demand that have developed during the long Covid lockdowns and to create products and services that address those changes.
Food parcels may be the main export to the UK this winter, but winter exports to China will be to meet the consumer demands from an expanding middle class. With China markets closed for the Golden Week holiday, this is an opportunity to step back and take a longer view of the Shanghai Index.
Technical outlook for the Shanghai market
The weekly chart of the Shanghai Index shows how we cannot ignore the long-term structure of the market. The Shanghai Index behaviour is defined by long-term support and resistance levels. Index behaviour between these levels includes rallies and retreats which provide shortterm trading opportunities. However, it is the structure of the market that determines the longer-term objectives and places current behaviour in a wider context.
The analysis starts with support line A near 2,880 and resistance line B near 3,050. This defines long-term trading and was first established in 2019. The placement of the levels is not exact, and the weekly chart shows some temporary breakouts above and below these levels. However, this 2019 behaviour still influences the market.
The width of the trading band is calculated and this value is projected upwards. This forms new resistance, and later support levels. In early 2020, the index rose quickly to reach the projected target level near 3,220 shown as line C. This fast move did not invalidate the calculation because the 3,220 level then acted as a support feature for several months. It was the base for further index rises.
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The same trading band calculated width is projected upwards to set the next resistance target near 3,380 shown as line D. This target was quickly achieved in mid-2020 and the market spent several months trapped in this trading band between 3,220 and 3,380.
When the market broke above the 3,380 level, it became a significant long-term support level that was tested many times before finally failing in March 2022. It is this pattern of resistance levels that is significant because they now act as support levels as the market falls. The fall below 3,380 had a downside support target near 3,220. This was exceeded by a sharp fall to line B, with a rapid dip and rebound to the value of line A.
The current index activity is moving below support near 3,050 and has a downside target near line A at 2,880. There is a good probability the market will consolidate around current support levels near 3,050. However this does not preclude a sharp exhaustion selloff that carries the market down to 2,880 with a fast rebound.
Applying the same analysis techniques suggests that a fall below line A has a downside target near line E at 2,720. However, this is a weak support level.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. 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
