“Why would you even bother trying to develop business in China?” Surprisingly, the question came from a Chinese gentleman in the audience at a conference event.
It made me pause for a moment because I had assumed that everyone in the audience was there because they were interested in business development in China. Instead, I found myself bombarded with questions based on the largely negative media coverage of the China economy.
Countering these negative perceptions was the first part of framing an answer to the question.
The first barrier was China’s growth, and this was often combined with China’s declining population. The fall in growth from 6% to a projected 5% was seen as calamitous and evidence of a collapsing Chinese economy where it was unwise to engage in business.
This hysteria defies the rule of 72 — a calculation that estimates the number of years it takes to double your money at a specified rate of return. A growth rate of 6% doubles the economy every 12 years. At the end of 24 years, the economy would have grown by 200%. Such growth is unsustainable, so it is inevitable that growth rates will slip back towards the advanced economy average of around 3%.
The slowdown in growth is countered by an increase in productivity and this comes from advances in the digital economy. This productivity improvement increases wealth — common prosperity — and provides solutions to the problems of supporting an ageing population.
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This leads on to addressing the second barrier which is the level of Government control. This, apparently, leads to unexpected decisions and raises the risk associated with working in China.
It is certainly a risk for those who ignore the regulatory changes and for those who believe that their rules should trump any China regulations. These beliefs are not as improbable, nor as uncommon, as we might suppose.
The timing of regulatory changes may come as a surprise, but the intent should not. China economic policy is managed from the top, and the policy directions are made clear in Xi Jinping Thought. This book is usually dismissed by Western observers, but this is the primary policy statement about where China is going.
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He writes: “It is about establishing an effective system to boost domestic demand based on China’s actual economic development, strengthening demand-side management, and expanding consumer spending while also upgrading the level of consumption, so that the development of our vast domestic market becomes a sustainable process.” (my emphasis)
Stand these comments alongside regulatory action to rein-in the influence of social media giants, to make education equally accessible to all and avoid excessive food waste, and these regulatory changes come as no surprise.
The implementation of top-down economic policy may be interpreted differently in various provinces, but the intent remains the same. It provides a blueprint for economic opportunity.
There were other supposed reasons that inhibited the desire to do business in China but like those above, they reflected wilful ignorance rather than any genuine concern.
Technical outlook for the Shanghai market
The Shanghai index continues to oscillate around the support and resistance level near 3,220. This is positive in the sense that it suggests that downtrend pressure is not gaining strength. Other indicators also suggest that the downtrend strength remains unchanged.
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This behaviour is part of the development of the Guppy Multiple Moving Average (GMMA) 1-2-3 trend breakout pattern.
The GMMA indicator provides a guide to how traders and investors are thinking about the market. The degree of separation in each group of averages indicates the strength of commitment to the trend. The degree of separation between the two groups of moving averages provides information about the changing strength of the trend.
The GMMA is very useful in identifying the development of a trend change. The index is building a 1-2-3 pattern of behaviour, as investors slowly change their view of the market and gradually become convinced that the rallies created by traders are evidence of a trend change.
The 1-2-3 pattern starts with a rally that fails because it is overwhelmed by investors selling into the rally. The primary feature of this first leg of trend change is the inability of the short-term GMMA to move above the upper edge of the long-term GMMA. We saw this pattern on the chart in late June.
The earlier failed rally in area A is not part of the pattern because the retreat fell below the previous lowest points in the downtrend.
This initial rally at point 1 retreated. Traders have made an attempt to get in early for a trend break, but it failed. Now they are ready to move again and is the potential part two of the 1-2-3 pattern.
The next rally usually carries the short-term GMMA above the upper edge of the long-term GMMA before the rally again collapses. This is the development traders are watching for because it will confirm the potential for a trend change.
This is also the stage when the long-term GMMA often begins to compress and change direction. This is an indication that investors have stopped selling into the rally as they change their opinion about the direction of the trend. Currently, there is no indication of developing compression and this makes an immediate trend change less likely.
The full breakout pattern continues when the second rally fails and develops a retreat. Often, the retreat will use the lower edge of the long-term GMMA as a support feature. It is this third rally that confirms the breakout and the beginning of a longer-term uptrend.
The Shanghai Index is dominated by long-term trading bands and these set the limits for each leg of the rally. The first upper target level near 3,280 may cap the current rally. Support is near 3,150.
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
