(Aug 5): China’s economic growth slowed to 6.2% in the second quarter, making it the weakest pace in 27 years. The weakness has been exacerbated by trade and tariff wars, but it also reflects a long-term underlying economic slowdown. Inevitably, growth will slow further as economic development continues, so the challenge is to constantly examine the drivers and quality of growth.
Already, smart investors have shifted their China exposure from export-dependent industries to those associated with domestic China consumer growth. The contribution of exports to GDP has declined markedly over the past decade.
Some countries cling to the past in their assessment of China’s economic influence on their own economies. Australia is watching the slowdown closely, given its reliance on China’s demand for coal, iron ore and other exports. There is a reluctance to acknowledge that the changing structure of the Chinese economy may also mean a change in the structure of Chinese demand for resources.
Investors who use Australian companies as a substitute for investing directly in China may need to consider some portfolio rebalancing.
The same dangerous assumptions of the world that the Chinese economy is not really changing in any fundamental way also apply to other trade and product relationships. The belief that Australian milk powder formula dominates the Chinese market is well-entrenched and reflected in the price of companies such as A2 milk. This belief of market dominance is not so well reflected on supermarket shelves in Beijing, Shanghai or Guangzhou where Australian milk increasingly struggles for shelf space in competition with European baby formula and milk products. Brexit will unleash a raft of new trade deals and market access for similar UK products.
What were once safe bets on China have become more complex, and some less assured, as the nature of Chinese economic relationships change. A key driver in this is the Belt and Road Initiative. Countries that have engaged with BRI at a more sophisticated level are seeing a broader range of trade and market opportunities. As tariff barriers go up in relation to US goods, then market and product substitution is accelerated. This opens different areas for investors.
Singapore is actively exploring these changes. The Singapore Business Federation Belt and Road conference later this month will explore emerging business and investment avenues.
China growth has slowed as the nature of the Chinese economy changes. The country’s leaders have ruled out using the property market to stimulate the slowing economy. Old solutions are less appropriate as the economy changes. Many anticipate the introduction of policies encouraging consumption in automobiles, telecommunications and aged care.
The half-yearly update from China’s Politburo signalled Beijing would maintain stability through tax and fee cuts and policies aimed at encouraging consumer spending and investment, particularly for smaller companies. These are the areas of future investment development.
Technical outlook for the Shanghai market
Consolidation, fresh downtrend or oscillation? The question is a little easier to answer this week than it was last week. The evidence suggests that a fresh downtrend has come to an end. The short-term downtrend was defined by trend line A. The index has moved above trend line A, and also above the central support and resistance level near 2,920. This suggests that the short-term downtrend has ended. It does not, however, suggest that a new uptrend has developed.
The index is testing the value of the long-term group of averages in the Guppy Multiple Moving Average indicator. This is a resistance feature, so a successful and sustained move above this level is bullish.
The long-term GMMA is narrow and is generally moving sideways. It has a slight downside bias, but this is too weak to be described as a downtrend. This narrow separation indicates a small degree of selling pressure and it is mildly bearish.
The short-term GMMA has turned up, compressed and is currently testing the lower edge of the long-term GMMA as a resistance feature. It is far too early to get excited about the prospect of a new uptrend rally developing quickly. These behaviours confirm the short-term downtrend pressure has abated.
This sideways movement is part of the oscillation activity around the 2,920 level. This level has acted as a resistance feature and support feature. The recent activity over the past three weeks shows a narrow oscillation around 2,920. The most bullish development in the future is for the index to test and retest the 2,920 level as a support area and use this as a base for further rally activity between 2,920 and 3,040. The movement of both sections of the GMMA indicator above 2,920 suggests this may develop, but further confirmation is required.
The current consolidation and oscillation activity is taking place within the context of a wider trading band. Previously, the index had slowly oscillated around this level within a very wide trading band. The lower edge is near 2,830 and the upper edge is near 3,040. The longer-term perspective shows the Shanghai Index slowly oscillating between these two extreme levels.
The downtrend shown by line A has been broken. Traders now watch for the oscillation and consolidation support level near 2,830 to provide a base for a rally rebound. Aggressive traders will enter on the first rallies from support. Cautious traders will wait for a successful test and retest of support before entering new trades.
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.
