As we move towards Spring Festival holidays, it is appropriate to review 2020 to assess China's reactions and the way this has impacted on the country’s business.
The result is far more bullish than many of the media headlines would suggest.
Western attempts to isolate and vilify China ramped up first with the assessment of its role in allegedly unleashing Covid-19 on the world.
These narratives conveniently ignored several facts. This was a new virus and it took time to identify it as such and then evaluate how infectious it might be.
Covid-19 was first identified in Wuhan but it is an illogical step to then claim without evidence that it originated in that province.
The true origins of Covid-19 remain an open question.
This claim was quickly followed by the claim that China did not take enough action to prevent the spread of the virus.
It is a claim that is belied by China’s rapid clampdown on all travel just prior to the Lunar New Year.
This is often cited as a period with the largest movement of people ever seen globally so stopping travel was a major initiative.
However, it received scant thanks from Western countries that proved themselves incapable of handling the outbreak despite having advance warning.
Covid-19 is an ever present background for 2020, and potentially for 2021.
It fuelled the anti-China narrative in the US and former President Donald Trump’s election campaign last year kept the flames alight with baseless claims, slapdash sanctions and mafia-style attacks on Chinese companies in the US.
It appeared to be a very unfavourable environment for Chinese businesses.
Despite this, appearances are deceptive.
China surpassed the US as largest recipient of Foreign Direct Investment last year. It attracted US$163 billion ($217.18 billion) in inflows last year, compared to $134 billion by the US, according to a United Nations Conference on Trade and Development report.
Data from the Ministry of Commerce shows China’s actual disbursement of foreign investment reached nearly US$154.72 billion last year, up 6.2% year on year.
The service sector used foreign investment of over $119 billion last year, accounting for over 77% of its actual disbursement of foreign investment and growing by 13.9%. Foreign investment attracted by the high-tech industries grew by 11.4%.
China remained attractive for business and this is reflected in the recently signed European Union comprehensive investment agreement with China. New Zealand also took the opportunity to update and expand its free trade agreement and gave some unwelcome gratuitous advice to Australia in the process.
Business in China became more difficult, in part due to Covid-19 travel restrictions, political tensions and the attitude adopted by the US.
However, the opportunity to participate in the second largest economy in the world and virtually the only growing economy in 2020, proved irresistible.
There were lessons learned about managing these difficulties and they delivered good returns for those who stayed the course.
Alone amongst significant global economies — all of which shrunk — the Chinese economy grew by 2.3%.
This was in no small part due to the effective control and containment of Covid-19.
The West, and in particular the UK and the US, have much to learn from China’s approach to managing China. They rejected this and paid outlandishly, both in human and economic consequences.
In 2021, China will continue to offer excellent business opportunities.
Investors will look for those companies that have been agile enough to adapt their business practices to the new reality.
Technical outlook for the Shanghai market
The Shanghai Index rally ended with a sharp retracement from the resistance level near 3,620.
The index broke below the first level of support and successfully tested the second support feature.
The successful test resulted in a rapid rebound from the lower edge of the long term group of averages in the Guppy Multiple Moving Average (GMMA) indicator.
This rebound is consistent with the analysis of the Shanghai Index and this also sets the base for the recovery rally behaviour.
This analysis of Shanghai index behaviour has two aspects.
The first is the pattern of trading bands and this sets target levels.
The second is the behaviour of the GMMA indicator which tracks the behaviour of two groups in the market — traders and investors. This describes trend behaviour.
The trading band structure of the Shanghai index is derived from the behaviour of the long term sideways trading pattern that dominated the last half of the 2020 trading year.
This pattern of trading bands identified patterns of support and resistance.
The resistance levels that inhibit the market rise in a rising trend change their function and become support levels when the market retreats.
Trading band analysis allows for the calculation of upside and downside targets using support and resistance levels.
The first support level in the market retreat is near 3,540. This level failed. The next support level is a long term support and resistance level near 3,450.
This is the top of the long term trading band that dominated the market for many months in 2020. This level offered good support and the index has rebounded from this point.
This confirms the usefulness of this analysis framework.
The GMMA also helps confirm support levels. The fall below 3,540 finds support near the lower edge of the long-term group of GMMA average near 3,467 which is just above the 3,450 support level.
The longer-term uptrend remains well defined with the broad separation in the long term group of averages in the GMMA indicator.
This shows strong investor support for the uptrend.
If investors were also sellers then the long-term GMMA would show compression.
This did not develop so it suggests that the retreat was temporary.
Traders now watch for the index to successfully move above resistance near 3,540 before moving on to test 3,620.
This breakout behaviour has not yet developed so there is the potential for this market fall to consolidate between 3,450 and 3,620.
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.
