One of President Xi Jinping’s signature policies is his “Tigers and flies” anti-corruption campaign. It has changed the business landscape in China with thousands of petty officials — the flies — and some corporate and senior leaders — the tigers — imprisoned or executed in this campaign.
Now, the campaign appears to have morphed and can be accurately described as the “Foreign tigers and flies” campaign. And foreign, particularly Western businesses, do not like it. The media runs scary headlines that question the safety of Western business executives in China and imply they risk arbitrary arrest.
Consider one recent high-profile case in the Chinese advertising industry as an example of what is happening. Industry insiders say China’s advertising sector is rife with corruption.
Last month, the US Securities and Exchange Commission reached a settlement with a US group for US$26 million ($35.6 million) for violations of the Foreign Corrupt Practices Act, after its local subsidiary was found to have bribed Chinese government officials to obtain advertising contracts.
So far, so good. That is an acceptable exercise of Western law. Acting on the information revealed in US courts, Chinese police arrested foreign executives in the China office of the company and questioned other foreign office workers in the company.
That is definitely not acceptable, because it is apparently an example of arbitrary detention in a country that has no rule of law.
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What is it with some Western businesses operating in China, and elsewhere in Asia? Why do they feel they have a right to ignore local law because what they are doing is okay under US or UK law? It is a colonial and imperial-style arrogance that has no place in modern business, but these attitudes persist.
A casino company built its business around attracting Chinese “whale” gamblers and group tours of gamblers to its foreign-based casino. Chinese law prohibits gambling and the advertising of gambling. At first, the company was careful to avoid breaking this law with its advertising in China. A trip to the casino was about fine dining, superior hotel services, and access to events and theatres. These low-key campaigns were successful, and emboldened by success, their campaign began a much greater promotion of the gambling component of the casino visit.
Chinese authorities sent a gentle warning, arresting several low-level employees of a rival Japanese group also based in China and involved in some minor aspects of the gambling industry. The larger company failed to heed the warning and continued their more obvious highlighting of the pleasures of gambling in their casinos. Perhaps they believed they were above the law, or that the law did not fully apply to foreigners, so they were shocked when senior executives were arrested in China.
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At the time, this was an exceptional move taken against a foreign company. Recent events suggest a shift in enforcement in a “Foreign tigers and flies” campaign. It is a logical extension of the issues we highlighted several weeks ago in this column.
The sad reality is that there may be foreign tigers and flies reading The Edge Singapore. It is only a matter of time before their executives are at risk. Investors need to assess their China company exposure accordingly. For new businesses entering China, it is very important not to become either a tiger or a fly.
Technical outlook for the Shanghai market
The Shanghai Index fell below the major historical support area around 3,080. This is very bearish. The next historical support level is near 3,000. This is a weak support feature which was quickly breached. It is an important level because it will offer some resistance to any rally rebound.
The Shanghai Index has dipped lower towards 2,900 as it did in October 2022. The 2,900 is not a well-established support level. It is the spike low of the market retreat in October 2022. It is around the same level as the market spike low in April 2022.
These are individual trend exhaustion lows that represent times when the market has moved to an extreme. However, these extreme moves may also represent a new support area around 2,900.
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Investors are watching for the market fall to pause in the 2,900 area and develop some consolidation activity. This occurs when the market stops its rapid decline and begins to move sideways.
The behaviour of the April and October 2022 lows provides a clue as to how the current index activity may develop. In 2022, the market rebounded very quickly from these lows. These fast rally rebounds are best seen on a weekly chart. However, the important behaviour feature is that the rebounds developed very quickly and delivered very good profits for those who had the courage and skill to enter early in the rebound activity.
These historical rebounds moved very quickly to test resistance near 3,080, and this is the initial target for any rebound activity in the current environment. In October 2022, the 3,080 level was reached in a six-day rebound rally. In April 2022, the rally took four days to reach 3,080. However, in April 2022, the market quickly retreated for three days before resuming the rally to test resistance near 3,080. This was similar to the index development in October 2022.
This is what investors are watching for — a test of support near 2,900, followed by a rapid rally and tests of resistance near 3,080. This is followed by a short-lived retreat from resistance near 3,080 before a new rally and the development of a sustainable longer-term uptrend.
That is the bullish outlook for the market. The bearish outlook develops when the index fails to develop a rebound near 2,900. This sets a downside support target near 2,700 and the lows of 2,020.
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
