What should be made of the 36% rise in the Shanghai Index following policy change announcements on Sept 24? The first feature to note is that rallying is a characteristic of the Chinese market’s behaviour.
Ultimately, it is unsustainable, so the retreats in recent days come as no surprise. The retreat and rebound pattern will set the second anchor point for a new and sustainable uptrend. However, the second anchor point may involve a retreat of 10% or more, followed by a rebound.
The second point to note and dismiss is the notion that changes in government policy solely drive the Chinese market. There is no question that the market reacts to changes in government policy, but this reaction is not unique to China. Global markets hang on the outcome of US banker’s meetings and Jackson Hole, the annual economic symposium held in Wyoming, organised by the Federal Reserve Bank of Kansas City. They react strongly to changes in interest rates.
Although China’s reaction may be larger, the relationship between government policy and market behaviour is not unique. Over the Golden Week break, I spoke at an international trade and economic forum in Haikou. Professor Wu Xiaoqiu of Renmin University provided an excellent analysis of China’s equity market structure. Trade insights came from Mrs Yanling Zhang, former vice president of the Bank of China and Yang Li, academic division of the China Academy of Social Sciences. Long Yongtu, former vice minister of foreign trade and economic cooperation and Huang Qifan, former mayor of Chongqing, also provided insights into China’s economic policy.
They were united in confidence for the economic outlook despite US tariffs. They identified problems, welcomed solutions, and made policy announcements. Attending media were asked to turn off recording so the dialogue discussion could be more robust. The mood was optimistic despite the obstacles.
The audience was over 1,000 people from all over China. These were not the rich and powerful. They were retail traders — mothers from Shanghai, aunties from Hangzhou, uncles from Hunan, merchants from Xinjiang and fathers from Beijing. They were the “old one hundred names”, and their enthusiasm for the market pre-dated the September market rise because the conference had been booked weeks prior.
See also: China’s stock rally faces risk as retail enthusiasm seen cooling
Many Chinese brokerage offices remained open during Golden Week, and new clients stood in line for hours to open new trading accounts. We can reasonably assume that dormant accounts were reactivated as people returned to the market this week with renewed optimism for the economic outlook. Overreaction is a crowd-driven phenomenon, but it cannot be dismissed as a sign of Chinese irrationality. It shows a population that is prepared to invest in the future and a crowd that is prepared to spend savings when appropriate.
Western commentary frequently highlights the high level of savings and reluctance to spend as indicators of economic decline. This is portrayed as evidence of an economy in stagnation and, for some commentators, as proof that the economy is on the brink of collapse.
Participation in this conference was not cheap, and that was before the cost of accommodation and so forth at the Bo’an conference centre. People are willing to spend not just on holidays in Hainan on China’s Gold Coast but on all the extra costs associated with holidays. Streets were crowded and shops were busy. Hotels and flights were full.
See also: China keeps policy loan rate unchanged for second month
Shanghai Composite Index closed at 3,301.93 on Oct 10. Photo: Bloomberg
Technical outlook for the Shanghai market
The market was closed for the Golden Week holidays, so we are just giving a reminder update using the weekly chart. The most significant feature is the Relative Strength Index (RSI) divergence. The trend line joining two valley lows on the price chart slopes upwards, while the trend line joining the corresponding lows on the RSI display slopes down.
This is a classic divergence pattern. In China, the RSI divergence pattern is a powerful indicator of a change in trend direction.
The Shanghai Index rally is astounding but ultimately unsustainable. It is consistent with the characteristics of the Chinese market, where fast moves are a regular occurrence. A rally is not a trend. We need to see several retreat lows to provide a series of anchor points for plotting longer-term trend lines.
With the Shanghai Index, the new sustainable uptrend starts near the peak of the initiating rally. In this market, we look for a retreat from the initial rally that is then followed by a slower and more sustainable uptrend. The anchor point for the new uptrend line is closer to the peak of the rally.
This is not a perfect double-bottom pattern, but it has many of its characteristics. Applying double bottom pattern analysis gives an initial target near 3,150 and a long-term upside target near 3,620. This target was achieved and is near the market peak in 2021.
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.
