SINGAPORE (Oct 28): It is no surprise that globally, all economies are slowing. The relentless attack on the logistics of free trade has an inevitable effect. The bears baying for China’s demise have found a new focus — China’s latest figures reporting 6% growth.
Some claim it proves that the US is winning the trade war and forcing China to its knees. In addition to the growth slowdown, they point to the US$28 billion ($38 billion) cash injection by China’s central bank as evidence of the country’s much-anticipated collapse.
Investors are neither surprised nor worried by the 6% growth figure. The long line of investors queuing up to invest in China, do business with China or attract Chinese investment is not growing any shorter. To be sure, some in the line are dropping out for political reasons, but their places are rapidly being taken by others.
The injection of fresh liquidity by the People’s Bank of China (PBoC) is designed to help support regional banks and small companies. It is no accident that the taps were turned on just prior to the release of quarterly GDP data.
The PBoC is looking to cushion these essential business lenders from sudden shocks. The risk of defaults comes largely from loans regional banks have made to smaller companies. These smaller companies are an essential part of the shift to supporting and enhancing domestic demand. The big banks have taken a more conservative approach to loans and this has limited their default exposure. However, as with any credit squeeze, this ends up raising the financing costs for smaller companies that are seen as weaker.
In their noisy celebration of China’s reduced growth, these China bears miss the improvement in credit growth in September. Both corporate and household new loans totalled US$239 billion, with corporate loans up 55% to US$142 billion.
This gap between the bearish narrative and reality provides opportunity. Shares in Bank of China, China Construction Bank Corp, China CITIC Bank Corp and China Minsheng Banking Corp are moving up slowly by around 25%. They are now trading at five times forward earnings. This gives a dividend yield of more than 5% for Bank of China and China Construction Bank.
Banks with lower yields, such as China Merchants Bank, have attracted strong investor buying, with the price for China’s fourth-largest bank gaining 50% this year. China Merchants Bank has been one of the most-bought Chinese companies by foreign investors in recent weeks. Shanghai Pudong Development Bank shows a 40% rise, as does Industrial Bank. Ping An Bank is the outstanding performer with a more than 80% gain. Many other Chinese banks are developing good technical rebound and breakout signals. This is attracting increasing interest from aggressive investors keen to enter early in anticipation of a trend breakout. They include Hua Xia Bank and Agricultural Bank of China.
A market that now has more listed companies than listed in the US markets cannot be ignored. The negative statements made by some commentators should always be tested for veracity against the performance of Chinese-listed companies.
Technical outlook for the Shanghai market
The Shanghai Index retreat was larger and stronger than anticipated. This has created a four-stage trend breakout. The current pattern of behaviour is bullish because the support level near 2,920 was successful in acting as a rebound level. Additionally, the dip below the lower edge of the long-term Guppy Multiple Moving Average (GMMA) was temporary and quickly followed by a rebound rally.
Uptrend continuation depends upon the index breaking above the resistance level near 3,040. Failure to develop this breakout suggests the Shanghai Index will move in a sideways consolidation pattern, with support near 2,920 and resistance near 3,040. This develops a future trading band.
Trading bands are useful because they provide well-defined breakout targets. The width of the trading band is measured, and this value is projected upwards for a bullish breakout. This gives a target near 3,160. A downside breakout has a target near 2,800. Currently, the balance of activity suggests an upside breakout is a higher probability.
Investors were watching for the index rally to move above the upper edge of the long-term GMMA. This is evidence of a sustainable rebound rally. In the longer term, investors watch for a successful move above the historical resistance level near 3,040.
The 3,040 resistance level is well established and stopped the market rise in July and again in September. This indicates a very strong resistance level; so a breakout above this level has the potential to be very powerful. Investors watch for the Shanghai Index to consolidate near the 3,040 level prior to any breakout activity.
This is a breakout from a downtrend that started in July. This breakout pattern often has three parts to the pattern defined with the GMMA indicator. In slower breakouts, the pattern may add a fourth part. A failure of the fourth rally pattern tells traders that this breakout has developed into a sideways consolidation pattern and this gives different analysis outcomes.
The current rebound is part of the fourth section of the GMMA trend breakout pattern. The potential future development of the breakout pattern is shown by the thick lines on the chart. Traders and investors wait for the current rebound rally to test resistance near 3,040.
Trend continuation is confirmed when the index is able to move above resistance near 3,040. A breakout above this level has the first upside target near 3,120. This is a historical resistance level, so some consolidation in the uptrend is expected.
Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. 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.
