What the West seeks from China often differs from what China desires for itself. Last week, the Ministry of Finance failed to deliver a “bazooka” rocket, leaving many Western economic commentators sulking because their expectations were not met.
This is the same group that often believes a single individual, President Xi Jinping, dictates every policy adopted by China. They inhabit a certain fairytale, shaped by perspectives from a colonial era, convinced they know what is best for China.
The country, however, has a very different perspective on what is needed. Senior leaders acknowledge that progress has been more difficult than anticipated, but they remain committed to the path underpinned by high quality development. That was the key message coming from the Third Plenum, a key meeting of the Central Committee of the Chinese Communist Party (CCP).
At a global investment conference in Haikou, I listened to Long Yongtu, the former vice-minister for foreign trade and economy, expand on this policy headline. He noted that three decades of high growth were unsustainable. However, the growth target of around 5% was sustainable as China turned towards high-quality development. This also reflected a change in the international environment.
Until recently, globalisation was based on the rule of law of the World Trade Organization (WTO), but the use of sanctions and tariffs by the US has undermined that. He sees the competition now as values-based and supply chains are readjusting to this metric.
With poverty eliminated, the challenge now is revitalising agriculture and transforming traditional industry into high-end, value-added production based on emerging technology. The growth of electric vehicles is an example. Although they have apparently burst onto the global stage, this is the result of a decade of research and development work.
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China is embarking on a long-term journey that has had a slow start. The journey involves greater engagement with Asean and the Global South. These two markets are seen as replacements for the reduction in opportunities in Europe and the US due to political actions and limited opportunities for substantial growth. Europe and the US are mature economies, but Asean and the Global South still have much room to grow with the expansion of the middle classes.
The Belt and Road Initiative (BRI) is an integral component of this change in economic focus. Regulatory changes in China mean that millions of SMEs can now engage in foreign trade. They can use the improved cross-border transaction environment made possible by advanced blockchain technology, which enables trade settlement without involving the US-dominated Swift or the Society for Worldwide Interbank Financial Telecommunication system.
When WTO operations are compromised, the BRI becomes the mechanism for the renewal of globalisation. Huang Qifan, the former mayor of Chongqing, further developed these changes by discussing the mobilisation of new productive forces. He said it was not suitable to follow the old patterns of development.
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New productive forces were at play in the environment, including new materials, new digital developments, biotech and high-end manufacturing.
Technical outlook for the Shanghai market
The Shanghai Index rally was astounding but, as expected, ultimately unsustainable. The retreat from the 3,674 high slowed and developed the beginning of a consolidation pattern near 3,200. The rally was consistent with the characteristics of the Chinese market, where fast moves are a regular occurrence.
As noted last week, a rally is not a trend. A trend is initially defined by two anchor points and confirmed by a third. These anchor points may develop over several weeks, with each anchor low preceding a genuine change in the short-term trend. This is the behaviour traders and investors are waiting for with the Shanghai Index.
We need to see several retreat lows to provide a series of anchor points for plotting longer-term trend lines. The first potential low is the consolidation around 3,200, which is also near the peak highs of May.
Further falls are possible, with 3,080 providing the next support level. A new rally from this level faces resistance near 3,430. This is a historical resistance area. Again, we look for the market to consolidate in this area before developing another retreat and rebound, which will provide the third anchor point for the emerging trend.
The breakout is part of a longer-term double-bottom pattern. This pattern is not perfect, but it has many characteristics. Applying double-bottom pattern analysis to the index chart gives an upside target near 3,620. This target was achieved and is near the market peak in 2021.
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Volatility is a feature of the Chinese market, but it is also a starting point for stable and prolonged trend development. These policy changes are the “bazooka” impacting China’s future growth. They meet China’s needs and not the expectations of the West, so Western commentators will continue to be disappointed. Those who sulk, miss the opportunities China is offering.
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
