China in 2021 is substantially different from the China of 2020.
Its success in managing Covid-19 and its resilience in the face of determined efforts from the US to contain and punish China.
This has given the Chinese mainland a new sense of its place in the world.
For many in the West, this is also seen as belligerency and disparagingly called “wolf warrior diplomacy”. Critics argue that China refuses to accept change or to acknowledge that change is not necessarily bad.
But for many others, the country’s success is just a fact of life.
While they may wish for some more nuanced responses from Beijing, their focus is now on how to manage in an environment that cannot ignore China.
Looking into 2021, there are five factors investors need to consider when thinking about the Chinese mainland.
The first we have alluded to already and that is the demand for respect that acknowledges China’s economic and political power.
The country will not meekly comply with US demands in part because it has seen that such compliance offers no benefits and is just a repeat of the 19th century.
Quite simply, that is not going to happen.
Consistent with this demand is increased involvement in the mechanisms of the global rules-based order.
Support for the Regional Comprehensive Economic Partnership (RCEP) trade agreement is part of this process as are the moves to establish new regulatory bodies and mechanisms.
These new trade-related mechanisms are the second factor investors need to consider.
Chief amongst these is the growth of the Digital yuan and the challenge it poses to the US dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) trade settlement system.
This has been weaponised by outgoing US President Donald Trump and the threat, once released, will always be there.
The digital yuan provides an alternative mechanism for cross border trade settlement. It is part of an expanding Belt and Road Initiative program that has also been supported with the recent China-EU trade deal.
The third factor is the rapid recovery and continued growth of the Chinese economy. Unlike the US and the UK, this is not an economy in denial about the impacts of Covid-19.
This pandemic challenge was faced head-on and managed effectively.
This provides a sound foundation for continued economic growth, particularly in the domestic economy.
The Dual Economy model outlined by President Xi Jinping places increased emphasis on the growth of domestic consumption as the main path to a moderately prosperous society.
For investors this means increased consumer demand from a rapidly expanding middle class as absolute poverty is eliminated. The Dual Economy concept does not exclude foreign exporters but it does change the nature of that export activity.
Some sectors, such as services, will see an increase as the demands for professional services for the middle class expands.
Other sectors will continue to see growth, but perhaps not from the same quarters. Market substitution of Australian commodity exports is a current example of this investment shift.
The fourth factor is the growth of Chinese capital markets. This is supported by sustained economic growth. It is also supported by risk-averse capital fleeing back to China.
The delisting of major Chinese companies by the New York Stock Exchange raises the sovereign risk of listing in the US. Chinese companies will look for Shanghai listings and foreign capital will be forced to follow if it wants exposure to China growth.
Potentially these represent phase transition changes — a decisive move from one state to another — rather than a gradual shift.
If this is a tipping point, then investors will need to look more carefully at how they manage their China market exposure.
Technical outlook for the Shanghai market
The Shanghai index breakout above the historical resistance level near 3,450 is powerful and bullish.
This is a strong breakout from the prolonged broad trading band that has dominated the Shanghai index for five months since July 2020. The first upside target is near 3,540 and has been achieved.
However, a consolidation around this area is probable so traders will have the opportunity to join this trend at more favourable levels.
The index used the support area near 3,360 as a solid base for a rebound rally and breakout. The lower edge of the long-term group of moving average in the Guppy Multiple Moving Average (GMMA) indicator is above the 3,360 support level and shows good investor support for the resumption of the uptrend.
The long-term GMMA has maintained steady separation and this is a bullish feature because it shows consistent investor support for the uptrend breakout that began in November last year.
Since July 2020, the index has oscillated around the centre line of the broad sideways trading band that has dominated the market.
The first upside target near 3,540 is calculated by measuring the width of the upper section of the trading band and projecting this value upwards.
The longer-term target of 3,690 is calculated by taking the full width of the trading band and projecting this value upwards from 3,450.
A characteristic of the Shanghai market is fast and extended rallies followed by a sharp correction and consolidation.
This suggests there is a good probability the market will resume the rally and move quickly to 3,690 prior to the Spring Festival holiday break.
The key challenge for traders and investors will be to set an appropriate stop loss to protect profits as the rally continues.
A volatility-based stop can be effectively applied when the index begins to lose momentum and consolidate. Traders watch for consolidation near 3,540, and then near 3,690.
The GMMA relationships show strong trend behaviour with an upwards bias. The long-term GMMA is well separated despite frequent retreat and rebound activity.
This shows good support for the uptrend continuation is coming from investors.
This separation also shows that when the index pulls back the investors use the opportunity to buy the dip, as the short-term GMMA has expanded and is moving above the 3,450 resistance level.
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.
