At times, it seems that every economic development in China is a precursor to fiscal doom. The latest round of economic figures have attracted the same assessment.
In an act of desperation, China is said to be engaging the monetary easing levers as inflation cools further. It is apparently a problem because as inflation continued to cool in China in January, it raised the prospect that the central bank may further reduce borrowing costs.
This is even more of a problem at a time when the US and other Western economies are moving in the opposite direction. It is difficult to understand the position here — is inflation a good or bad thing?
For consumers, inflation is a bad outcome and we see this anticipated impact roiling Western markets. Lower inflation is a good outcome for consumers and business because it enables business growth. The years of low inflation and low interest rates have been hailed in Western markets for their contribution to economic growth. The current market fears that when this ends, the economy and growth will suffer.
All of these factors have the opposite impact in China, when low inflation and low interest rates are bad for the economy. Inflationary pressures fell across a broad range of measures. Economists tipped food prices will fall further this year. Y-o-y, food prices fell 3.8%, which included a 41.6% fall in pork prices. China’s factory gate prices rose more slowly than expected. The producer price index (PPI) rose 9.1% last month year on year.
For many observers, this is evidence of yet another coming collapse of the Chinese economy rather than evidence a well-managed outcome that balances low inflation with sustained but lower levels of growth.
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For the China bears, the country’s latest economic data confirms expectations for more aggressive monetary easing as the government seeks to stabilise the economy.
ANZ chief economist for Greater China Raymond Yeung said: ‘‘China’s economic slowdown is not mainly due to its Covid-19 control measures, in our view. Policymakers are facing the bigger challenge of juggling the goals of growth stabilisation and the impact of structural reforms such as carbon emissions reduction and deleveraging.’’
Growth stabilisation does not mean halting an economic collapse, which is what is implied by many Western observers. Growth stabilisation means pulling back from the unsustainable growth rates above 6% that have characterised previous decades.
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Such growth rates are unsustainable so the challenge is to manage a consistent but lower growth rate as the country moves out of the so-called middle income trap. Lower, and stable, growth rates are the characteristic of more mature economies.
Both President Xi Jinping and Premier Li Ke Qiang have flagged this as an economic aspiration and it is embedded in the current five year plan. China should be applauded for moving towards these objectives without the economic disruption and violent shifts in capital that have tarnished these transitions made by other countries.
Despite their consistent criticisms, China’s critics cannot point to any failure of Chinese economic management over the past 30 years. This suggests it is unwise to bet against the country.
Technical outlook for the Shanghai market
The Shanghai Index rebound from the low of 3,357 continues. The position of trend line E is adjusted to take into account the most recent pullback and rebound. Trend line E has the potential to define a new uptrend as the index tests the resistance feature.
There are two resistance features that impact both on the shorter-term and longer-term outlook for the market. The first is the value of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This wide separation shows investors are still selling into the market rallies. This increases the potential for the current rally to pause near these levels.
The second resistance feature is the long-term, resistance and support level near 3,520. This level has been a dominant feature of the Shanghai Index for around 12 months. This is the centre point of a broad trading band that has support near 3,450 and resistance near 3,625.
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Any long-term trend behaviour must achieve three objectives. First it must break out above the upper edge of the long-term GMMA. This is more difficult if the long-term GMMA is well separated so a trend change is signalled when the long term GMMA begins to show compression.
The second feature of a long-term uptrend is when the index is able to breakout above the resistance level near 3,520 and then use this as a support level base for a new rebound rally.
The third feature is desirable, but not absolutely necessary. It is desirable that the index remains above the value of trend line E. This new uptrend line has the potential to act as the new longer-term uptrend line.
A fall below the value of the projected trend line E sets a downside target near support at line D. This value is around 3,355 and is a long term historical support level. Currently the index is testing and retesting the strength of the long-term support level near 3,450. A fall below this level confirms the next downside support target near line D.
Looking more broadly at the index behaviour we see that the resistance levels make it difficult for the index to easily move above 3,520. However, if this does develop then there is an unimpeded run towards the upper edge of the long-term trading band near 3,625.
Currently, the index activity is in the lower section of the long-term trading band. A bullish breakout will return the index to trading in the upper half of the long-term trading band.
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
