The most common headline coming from China’s Two Sessions meeting — the annual assembly of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) — were along the lines of “no infrastructure stimulus in China as the economy stalls to 5.5% growth.”
That headline ignores the fact that 5.5% growth is beyond the reach of many major economies. The reduction in the growth forecast is also consistent with the long-term trajectory of economic growth outlined in the most recent five-year plan. The emphasis is on common prosperity rather than high levels of growth.
For investors and businesses, the most important information contained in Premier Li Keqiang’s Work Report is the business and investment outlook for 2022 and 2023. These are the policy frameworks which determine where Government support will be directed and where new business and investment opportunities are likely to be found.
China has been under attack from some countries who wish to eliminate it from their supply chains and cripple its efforts to modernise. Premier Li has made it very clear that China will make greater use of foreign investment. There was an implicit acknowledgement that the application of the negative list had not proceeded smoothly and he pledged to ensure a consistent national treatment for all foreign-invested enterprises.
When the Emperor is far away, it gives local officials an opportunity to apply some very individual interpretations to Beijing regulations. This has always been an irritant for business. Li’s acknowledgement of this problem is the first and welcome step towards resolving it.
The welcome mat was spread wider as he committed to encouraging foreign-invested enterprises to move into a broader range of sectors. This, combined with improving services for promoting foreign investment and accelerating the launching of major foreign-funded projects, suggests a more liberal and supportive environment for foreign business and investment. This makes it easier to work within the development areas identified in the earlier release of the 14th Five-Year Plan.
See also: China tightens securities lending rule to support stock market
Several weeks ago, I was asked by a European journalist to comment on the demise of the Belt and Road Initiative (BRI). The line of questions reflected a Western consensus and was based on an inadequate understanding of the components of that initiative.
The Work Report delivered a rebuke for those who believed the BRI was dead. Li has confirmed that China will continue to promote high-quality cooperation under the plan.
However, the emphasis on cooperation does not only mean hard infrastructure projects. The spheres of co-operation are more widespread and include developing regulatory and cross border transaction environments and protocols.
See also: Eight reasons why I am still in favour of China stocks
He also spoke of shared growth through consultation and collaboration as the basis of enhancing connectivity. When this objective is paired with the development of the digital economy, then it points the way to shared platform development that contributes to cross border transactions and more efficient trade settlement.
Software and systems that contribute to this policy objective will be welcomed in an expanding investment environment. For businesses, the challenge is to develop compatible systems and procedures. The Singapore government has already provided funding avenues for those who wish to upgrade and for the development of compatible back-end systems.
The Two Sessions Work Report was —ultimately — investment and business friendly.
Technical outlook for the Shanghai market
The Shanghai Index collapsed below the new uptrend line and a long-term support level near 3,350. A weekly chat puts these developments into context.
There are four important support and resistance levels on the weekly chart. They provide the strategic analysis framework for the index. The most important are lines B and D. Line B defines the resistance level that prevailed from July 2020 until now. It has acted as a resistance feature and as a support feature.
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Line D acted as a support level between July and November 2020. The value of this line is projected into the future. This support feature is now the first target for the current fall in the market.
The remaining level also plays an important role. Line A near 3,350 acted as a support and resistance feature early in 2020. From December 2020 until this week, this line was successfully tested as a support feature. In the previous five tests of support, this level had acted as a rebound point. This is what makes the move below this line so significant. This is a breach of a major long-term support feature in the market and that in itself is very bearish.
Line D is no longer relevant in the current situation, but it is worth noting that this is the target level established by a trading band breakout. The trading band is supported at line C — 3,220 — and resistance at line B at 3,450. The width of this band is projected upwards to give a target of 3,700 shown by line A.
This is important because it shows that the trading band is very useful for setting index targets. It can also be applied on the downside. This gives a support target near 3,000 if support near 3,220 fails. There is a problem with this target projection because it does not match any historical support level. Historical resistance is near 3,040 and this may act as a future support level in a declining market.
The first downside target is support near 3,220 and line C. Investors and traders will watch for evidence of consolidation near this level. In these extreme retreats, there is a high probability the market will over-shoot the support level before developing a rebound rally.
The solid close below support at 3,350 shows this is not a temporary dip. This is a significant confirmation of the downtrend.
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
Cover image: Bloomberg
