China’s economy is going to collapse and drag the world down with it, says one group. Another group says that Covid-19 means we have to cut our reliance on China and its supply chains if we are to survive.
Sadly, this is representative of many of the views about China in the Western media.
China is both the saviour of and the biggest threat to the economy. Such contradictions would be laughable if they were not often the foundation of national policy approaches for some countries.
Investors should just try to navigate this range of increasingly negative notions around China and its place in business.
The first — and perhaps most important point to note — is that the end of the Chinese economy has been called persistently for the past 20 years.
Despite not getting it right, the China bears persist in this negative approach.
The most recent causes are embattled Chinese property company Evergrande and the overheated property market — the latter being a sector that has been seen as overheated since at least 2004.
The other most recent cause is China’s pursuit of climate goals, which has apparently resulted in power shortages and contributed to economic slowdown.
Many of the most ardent supporters of action for climate change refuse to acknowledge China’s commitment despite the apparent real economic pain.
There are times when it seems that China cannot win no matter what it does.
To some extent, that is a matter for politicians and appears to be well away from the discussions in business boardrooms.
However, the persistent China doom and threat narratives inevitably infect boardroom discussions and the examination of investment opportunities.
Analysts have long warned about the dangers posed by the country’s real estate sector and these same analysts now worry that the action they have advocated for so long will deal a blow to the economic growth outlook.
In August last year, the government released its ‘‘three red lines’’ which aim to restrict how much property developers can borrow. This policy forced the banks to wind back their exposure to heavily geared developers for most of this year. The Evergrande outcome was not unexpected.
Beijing appears to accept that the ripple effects from the downturn in the country’s property market will continue to affect economic activity and have been managing this sector deflation for a number of years.
The soft performance of the Chinese economy in the third quarter of 2021 was unexpected. The energy crisis triggered power cuts across the nation, causing factories and steel mills to reduce operations and shortages of computer chips interrupted car production.
Sporadic but limited outbreaks of the coronavirus pandemic have also led to the reintroduction of travel restrictions.
Despite these fluctuations, China remains on track to achieve its growth target of above 6% for 2021.
Rather than indulge in the China doom and collapse fantasies, it is more useful for investors to identify the new growth areas in renewables, the continued opportunities in consumer sectors and to lighten their exposure to the property sector and its supply chains.
China is not going to go away, but neither are the bears.
Technical outlook for the Shanghai market
The Shanghai Index continues to hover around the upper edge of the longterm trading band near 3,580. The move above this level is bullish but it is limited by the value of uptrend line A. This value is currently near 3,630.
This long-term resistance feature limits the ability of the Shanghai Index to quickly develop a strong breakout.
There is a high probability that index activity will be trapped between the value of support line B and the increasing value of trend line A.
A successful breakout above trend line A has the first upside target near the previous highs at 3,724.
The Guppy Multiple Moving Average (GMMA) indicator relationships will give early indication of a sustainable breakout. This signal comes when the short-term GMMA group of averages rebounds from the long-term GMMA and moves completely above the upper edge of the long-term GMMA.
An upwards trend change rally is confirmed when the long-term GMMA compresses and also turns upwards.
The potential for an uptrend change is not yet confirmed. Failure to hold the 3,580 level sets the scene for a resumption of the downtrend or a return to the previous long-term consolidation behaviour inside the very broad trading band.
This type of retreat represents a return to the trading behaviour which dominated the market in 2021. During this period the index oscillated around a central support and resistance level at 3,450.
This would again make the dominant feature of the Index chart the long-term support and resistance level near 3,450. The market has swung, or oscillated around this level on a consistent basis for 2021. The upper point of the oscillation is the resistance level near 3,580. The lower limits of the oscillation are near 3,330.
The current behaviour looks bullish with index activity testing the resistance features at 3,580 and the value of uptrend line A.
As the market retreated from 3,720 there were five potential support features. The failure of these five support failures confirm strong downside selling pressure continues. They are a powerful argument supporting the idea of the market moving towards the middle of the trading band near 3,450.
However, the current testing the resistance around the value of trend line A has the potential to develop into an uptrend.
It is too early to know if this will be successful, as traders remain very cautious until further evidence develops to confirm the direction of the trend development.
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: Bloomber
