On Oct 1, the skies over Beijing were enlivened with fireworks in celebration of the country’s 75th National Day. This came a few days after the China market put on its own fireworks display, rocketing by more than 10% in response to a range of government initiatives.
The sharp and fast rally looks impressive on the chart, particularly compared to the relentless months of downtrend activity earlier that dragged the Shanghai index to new lows around 2,700. The recovery rally rocketed past resistance levels at 2,900 and 3,050 and paused near 3,080. The upside target is around the previous highs at 3,170.
The behaviour is in contradiction to the somewhat disappointed Western reaction to the policy changes. The West, as usual, expected a bazooka-style collection of policy announcements that would explode the economy, preferably in their preferred direction.
This did not happen. Instead, policy changes were carefully targeted to achieve carefully designed outcomes. This was never meant to be the broad bazooka attack on an economic crisis like that generated by the 2008 Global Financial Crisis. This is no frenzy of infrastructure building. There will be no massive lift in commodity demand.
The West was underwhelmed and disappointed that their prescription for economic recovery had not been followed. Most of the comments suggested that these pre-National Day announcements were not enough and that they would be followed by more significant policy changes.
Technical outlook of the Shanghai market
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As the Shanghai index chart shows, the Chinese response was very different. There was a genuine boost to consumer confidence. Measures were announced that not only satisfied capital and investment markets but also provided prioritised employment support for key groups such as fresh college graduates, rural migrant workers, individuals just lifted out of poverty, and zero-employment households.
The announcements gave the provincial governments a way to manage their debt and refinance. This is a cautious restructuring of debt in a way that is designed to avoid the calamities of bankruptcy and its associated destruction of capital. These measures are more akin to a receivership rather than a bankruptcy process.
It is also important to note that the measures are all consistent with the approach outlined at the recent Third Plenum meetings. Many observers make the error of dismissing the plenums as a largely irrelevant talk fest, but they provide clear strategic direction. The latest policy announcements were an extension of the policy endorsements made at the Third Plenum.
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In this sense, the announcements came as no surprise. In fact, the descent of the Shanghai Composite Index had already slowed and was showing signs of recovery in the days before the policy announcements.
The fiscal and monetary announcements were a continuation of the reforms that President Xi Jinping was committed to in the Third Plenum. The meeting pledged to continue the reform path. Some took this to mean there would be a raft of new reforms. However, the commitment was to continue with the existing reforms and to allow these to develop fully.
That is the nuance that was missed by many Western observers. This commitment was not to something new but to continue along the lines already laid out.
The obvious reaction to policy announcements is not something unique to China. Western markets hang on every word of the Jackson Hole Federal Reserve Bank meetings. The new highs in US markets are a direct response to those policy announcements. China’s markets are no different.
The rally is astounding but, ultimately, unsustainable. It is consistent with the characteristics of the China market where fast moves are a regular occurrence. A rally is not a trend. In Western markets, this type of 10% move would be followed by a retracement of 50% or more before a new rebound rally developed. These lows provide a series of anchor points for plotting longer-term trend lines.
With the Shanghai Index, the new sustainable uptrend starts from near the peak of the initiating rally. In this market, we look for consolidation around 3,080, followed by a slower and more sustainable uptrend. The anchor point for the new uptrend line is closer to the peak of the rally than it is when this reaction is replicated in Western markets.
This is not a perfect double-bottom pattern, but it has many characteristics. Applying double-bottom pattern analysis gives an initial target near 3,150 and a long-term upside target near 3,620. This target is near to the market peaks 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.
