In my primary school days, we were forced to listen to English folk music and sea shanties. One chorus sticks in my mind: “What to do with a drunken sailor? Roll him in the scuppers ‘til he’s sober.” The assumption was that the drunken sailor would recover.
In some ways, it is an apt description of the Shanghai market in 2023. The market has consistently fallen down and the only hope is that it will sober up and go back to the task of underpinning the capital requirements of the Chinese economy in 2024.
As readers know, I cannot help but be bullish on China and its innovative development but this does not necessarily translate into Shanghai market performance. Despite this persistent pessimism of the index, there are many individual opportunities for traders to take good profits from the long side — buying low and selling higher.
Over the last week, more than 80 stocks rose by more than 10% despite the market falling heavily. When the market rallies, the number of trade opportunities delivering a better than 10% return for the week rises dramatically. It is a characteristic of the China market that there is a greater correlation between the index activity and the behaviour of individual stocks. That is only to be expected as the Shanghai Index includes all listed stocks rather than just a curated selection of stocks as with the S&P 500 and Dow.
There are five reasons for my optimism about China, the economy and the market.
The first, and perhaps surprising, is the increase in sanctions and anti-free trade measures initiated by the United States in an attempt to impede or halt China’s development.
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The Chips Act and other measures have several unintended consequences. The sanctions act as a spur to technical development in a way that competitive pressure does not.
Competitive pressure pushes towards better products and services but lacks the urgency of the need for survival.
Cutting off access to advanced semiconductors spurs development in a way that the newest iPhone does not. The result is new chip technology found in the Huawei Mate 60 along with impressive strides in developing the standards for next-generation 6G services.
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These sanctions have brought Chinese research talent back to China because working in the United States has become more difficult. One result is the major strides made in the development of sodium batteries for use in electric vehicles and other applications. The long-term implications? There is less need for rare earths which invalidates the current US attempts to restrict this market through protectionist trade subsidies.
The second reason is the development of the digital economy. This goes way beyond the ability to ditch the credit card and pay by WeChat or Alipay. The use of Artificial Intelligence to enhance productivity is the pathway out of the middle-income trap that Western commentators forecast will cause the downfall of China. It is the digital economy that takes the next step after lifting people out of poverty. It is the path to common prosperity and although this rings as a hollow slogan for Western observers, it represents the genuine policy position of China.
It is the digital economy that extends banking services to the unbanked. It frees them from the hungry grasp of the money lender. It creates a credit history that can be used to access loans for business development. It enriches economic activity and enhances productivity.
The third reason is the shift to the green economy. At a strategic level, this means China will reach its green climate targets five years early. That achievement rests on a massively installed base of carbon-neutral supply services. However, this hides the innovation that underpins this. Its innovation is not yet widely shared with the world as China has focused on resolving its own issues first. When these innovations are available for export it will unleash a restructure of the way green targets are achieved elsewhere. If you want the best, then it will come from China.
The fourth reason for optimism is the continued rollout of the Belt and Road Initiative (BRI) and the way this flattens trade barriers and enables and improves cross-border transaction efficiency as with the Single Window Customs Clearance process in Singapore. The BRI is moving beyond the simple hard infrastructure builds and developing a framework of soft infrastructure consisting of regulatory harmonisation.
Integral in this is the implicit challenge to the Swift currency settlement system which counters the weaponisation of Swift by the US. An internationalised renminbi does not intend to replace the US dollar but it does intend to offer an alternative currency settlement and transfer process.
The final reason for my bullish outlook can be called generational optimism. It is seen in China’s vibrant growing cities. It is in the outlook of parents and children, both of whom expect that the future will be brighter and more prosperous than that of their parents.
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It does not mean it will be easier but it will be better. It is an expectation that is not found in the doldrums of the US with its increasing levels of social dysfunction and horrendous debt. Even at reduced levels, China’s growth is higher than that of comparable economies. It is significantly higher than the anaemic economic growth forecasts for the US and Europe.
As an informal measure of this optimism and the growth of discretionary spending, the number of branded coffee shops in China increased by 58% over the past 12 months according to research by World Coffee Portal. The US market grew by just 4%.
None of these factors is to say that China will not face problems, both economic and social. However, the economic lights are not dimming, let alone going out as some in the Western media suggest. The future of China remains steadfast.
Businesses do not enter the American market and then demand Americans change their laws but this has been the approach adopted by many foreign businesses in China. How businesses engage China will continue to slowly change in ways that fully recognise China’s strength and legitimacy. Adapting to that change is the most significant challenge of 2024. China stumbled in 2023 but it is not scuppered.
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
