China was widely portrayed as a villain at the recent United Nations Climate Change Conference (COP26), held recently in the UK.
President Xi Jinping did not attend the Glasgow conference, but it was not widely reported that his request to deliver a video address was denied by the organisers. China was represented by the country’s climate change czar Xie Zhenhua.
Much to the surprise of observers, he negotiated an outstanding agreement with the US announced in the final days of the conference. Many news outlets portrayed this as a US initiative, but the evidence suggests otherwise.
China has supported the Paris climate accords whilst the US withdrew entirely from their commitments.
However, China is often portrayed as a laggard and obstruction in COP26 reporting. Getting behind this type of media coverage is important for investors because this helps identify where the future opportunities lie and allow for a more accurate assessment of investment developments.
Contrary to the commonly repeated narrative, China is well advanced in its efforts to tackle climate change. It is the world’s leading producer of wind, solar and hydroelectric energy. It is also a leader in afforestation and high-speed rail. China and the European Union (EU) also formulated a jointly recognised set of standards for defining green projects to help sustainable businesses in the two markets attract more cross-border investment from each other. This lists 80 economic activities across six industries that have been defined as green and sustainable by both China and the EU.
The six industries are agriculture, forestry and fishing, manufacturing, electricity, gas, steam and air conditioning supply, construction, water supply and sewage, waste management as well as transportation and storage. COP26 confirmed China’s commitment to carbon reduction and to other efforts to develop green economies. It is this commitment that will drive state-backed innovation in these areas. Investors can reasonably expect substantial growth in this area as state funds are diverted and polluting industries forced to either close down, or to accelerate their move towards a green economy. We know from past experience that state-backed initiatives attract capital and talent in a way that is not matched in Western markets. These advances will be deployed first on a domestic basis so investment in these areas is not subject to sanctions or export risk.
The new Beijing Stock Exchange, which started trading on Nov 15, is a likely listing venue for these innovative green companies. Some of the new listings are companies that have moved from the over-the-counter market into the more formal stock exchange environment. This over-the-counter market was not accessible for foreign investors. There is a substantial IPO pipeline for the Beijing exchange and this offers ground-level investment opportunities.
The demand for decarbonisation and green technology can also be met from outside sources. This is technology and services imported into China.
Companies that can satisfy this demand are also added to the pool of investment opportunities.
Those making investment decisions need to move behind the facile headlines and reports about China’s approach to COP26.
Technical outlook for the Shanghai market
The Shanghai Index rally is struggling to break out above the resistance offered by the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator. This group of averages tracks the behaviour of investors. This failure to breakout suggests that investors are not yet convinced that the rally is a precursor to a trend change.
The index retreats briefly tested the long-term support level near 3,450 as the index slid down the value of downtrend line C. This rapid dip and rebound started from the short-term consolidation area near 3,490.
This type of price action is often associated with a trend capitulation. It potentially signals the end of a downtrend and the move to a new phase of development leading to an uptrend.
This change is confirmed by a strong rally. Proof comes when the index closes above the upper edge of the long-term GMMA. Any break out is limited by the long-term resistance near 3,580.
At the end of October, the index plummeted below the upper edge of the long-term trading band value near 3,580 and the slid down trendline C, using it as a support feature. Trendline C shifted from acting as a resistance feature to acting as a support feature.
The index created a temporary support level near 3,520 which was again broken with a new short-term consolidation support near 3,490. The current intra-day low used the value of the horizontal support level at 3,450 as the rebound point.
Potentially this is significant because it means that trend line C can no longer act as a support feature unless support near 3,450 fails.
Despite the current rally, the bears remain in control. The important question for investors is to decide if the long-term support near 3,450 is strong enough to halt the market decline if it is tested again by a retreat from the lower edges of the long-term GMMA. The 3,450 level is the mid-point of a long-term broad trading band. The bottom of the band is near 3,330. The upper edge of the trading band is near 3,580. This broad trading has been the defining feature of the Shanghai index for around 18 months.
There is a low probability that the market rebound from the support level near 3,450 will develop into a new strong uptrend rally.
However, the 3,450 level may continue as a strong support feature and confine the index activity to the narrow trading range between 3,450 and 3,580. The index also traded broadly in this range in June to July this year.
Investors watch for the markets to successfully test support near 3,450 and move above the upper edge of the longterm GMMA before they will consider entering the market as buyers.
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 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
Photo: Bloomberg
