It is a statement of the obvious but China’s economy is too large to be ignored. Investors should remind themselves of this statement when the drift of media coverage becomes negative. In any country, dig a little bit deeper and you can sure find significant economic problems.
Remember the US sub-prime mortgage crisis which triggered the Global Financial Crisis of 2008 or the harm Brexit has done to the UK economy? Or presently in Australia, which has a rapidly imploding housing sector because rising interest rates may soon start to throw people who cannot service their loans out of their homes to live on the streets.
However, none of these problems, no matter how significant some are, seem to taint our assessment of the European and US economies as we consider them to be transitory problems. But when we consider China and its problems of a similar nature, the conclusion often edges towards the hysterical. The naysayers will say: “China is on the verge of collapse and is an unsafe investment!”
Therefore, we need to restate the obvious about China’s economy. It is the second largest in the world in nominal terms and is well on the way to becoming the largest global economy. This is not just about size. It is also about in inevitable and irreversible engagement of the Chinese economy with the world economy. China’s GDP is nearly US$17 trillion ($23.5 trillion) or approximately 18% of the world’s total GDP.
China is the largest manufacturer in the world. Apart from the technology in Huawei and other brands of Made-in-China mobile phones, we tend to associate the country with the extensive production of steel and downstream low-tech manufacturing. While many investors are less familiar with China’s activity in electronics and robotics, the country has shown long-term significant commitment to innovation, particularly in retail, healthcare, technology and renewable energy.
Over the past three years, Covid-19 and its attendant trade restrictions have masked its continued development in these areas. It has taken time but China’s dependence on Taiwanese chipmakers has been greatly reduced. Although the US had imposed these restrictions to strangle China’s development in high-tech areas, the curbs have had the opposite effect, accelerating China’s development and self-sustainability.
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In addition, China has the world’s largest economy when measured on a PPP (purchasing power parity) basis. China accounts for 33% of global economic growth — a number we should not forget. China’s PPP is four times more than that of the US, Europe, the Middle East, Africa, Latin America and Japan combined.
Putting aside its international trade engagement, investors need to note that China’s middle class has increased from less than 8% of the total population in 2010 to over 50% of total households today. Chinese consumer discretionary spending has doubled since 2010. As an increasingly advanced economy, the combined services and consumption sectors now contribute 75% to China’s GDP growth. This is encouraged by Xi Jinping’s dual-circulation philosophy and shows the Chinese government remains committed to economic growth through the expansion of domestic consumption, innovation and opening its economy to foreign investment.
China is too large to be ignored and investors are unwise to bet against China. The country is not going to disappear or collapse and cannot be excluded from a balanced investment portfolio.
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Technical outlook for the Shanghai market
The Shanghai Index consolidation failed with the index closing below the support level near 3,220.
The Guppy Multiple Moving Average (GMMA) relationships show downward selling pressure and they are now developing a strong downtrend development. The long-term GMMA is moving sideways but has developed rapid compression and turned down. This shows investors have become sellers.
The short-term GMMA is no longer using the long-term GMMA as a support feature. The short-term GMMA has quickly moved completely below the lower edge of the long-term GMMA. This is very bearish.
Additionally, a weak head-andshoulder trend reversal pattern has developed. It is weak because it is not well defined. The downside target for the pattern is near 3,080. The pattern is more important for the way it confirms bearish pressure rather than for any targets calculated from the pattern.
The downside target for the index is near 3,050. This target is calculated by taking the width of the trading band and projecting this value downwards. The trading band support is line B and the resistance is near line C. The downside projection gives a target shown by line A. This is not a particularly strong historical support level so it is used as a guide to the downside move.
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Currently, this is a fast retreat and if this continues traders will look for a rabid rebound similar to the index behaviour in March. However, if the downtrend development is slow the market will create a more stable and persistent downtrend. In this situation, traders will watch for consolidation to develop around 3,050. This may include sideways movement before any sustainable uptrend rebound.
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 national board member of the Australia China Business Council. The writer owns China stock and index ETFs
