Several themes seem to dominate much of the media coverage of China in the pre- and post-Covid-19 environment. They highlight the collapse of the Chinese economy, the collapse of exports from China and blame inflation on the supply and logistics chain issues.
Whilst there is an element of truth in all of these, they are also a little exaggerated. And that is an issue, because taken at face value, this impacts on the way business invests in or interacts with China. The reality is that China manufacturing and exports have stayed strong throughout the Covid-19 period. This is despite the disruption from the war in Ukraine. China exports as a percentage of total world exports have declined by less than 1% in the period of 2020 to 2021.
Ratings agency Standard & Poor estimate that in 2020, China exports represented 17.5% of world total exports, up from 16.25% in 2019. Despite all the problems of supply chains, China exports at the end of 2021 represented 17.4% or total world exports. According to China’s Ministry of Commerce, foreign direct investment rose by more than 17% year on year for the first four months in 2022 to US$87.77 billion ($122 billion). The largest increases came from South Korea +52.8%, the US +27.1% and Germany 21.4%.
In terms of exports, one of the unexpected areas of increase is in tech. The period 2019 to 2021 saw a 54% increase in China’s export of laptop computers. This was alongside a 16% increase in China’s central processing unit (CPU) exports. This suggests an interesting shift to high tech high value exports and this is also reflected in some areas of domestic manufacturing.
Last year, at the height of the Covid-19 lockdowns, China sold 3.4 million electric cars. This is an astounding figure in itself, but even more so when you consider that only 3.3 million electric vehicles were sold in the rest of the world last year. This manufacturing and consumer performance is not evidence of an economy in collapse.
Another key component in this narrative is that the lockdowns are driving businesses, particularly the tech manufacturing businesses, out of China. Google, for example, has announced plans to shift production of its Pixel phones. Microsoft, Dell Technologies, Hewlett Packard, Quanta and others have also contemplated relocating some assembly.
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These plans fall far short of a significant restructuring of their global production footprint. The tech supply chains have developed over decades to cluster manufacturing and reduce the many process steps between suppliers and manufacturers. The result is incredible production flexibility on the back of a skilled workforce. There is a natural shift to manufacture more in India and elsewhere to diversify production and access emerging growth markets. This shift is measured in the decades required to duplicate the workforce and manufacturing efficiencies in China. This expansion is more likely to be in addition to existing activity in the country.
We do not want to pretend there are no problems in China and no challenges in the economy. However, we also do not want to suggest that things are as dark — or as bleak — as some analysts would lead us to believe. Arguably, the China economy and outlook is in better shape than the US economy, which is facing significant challenges from inflation and the fiscal and monetary responses designed to drive the US dollar economy towards recession. In the end, the China collapse story is a political story, not a business reality.
Technical outlook for the Shanghai market
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The Shanghai Index has continued to confirm the breakout from the long-term downtrend. The breakout is strong and the location of the uptrend line has been further confirmed by index activity in the last week.
There are three parts of this confirmation and together they give confidence that the index can move smoothly towards the first target near 3,380.
Trend line B is the first feature. This support feature has been tested successfully several times. The trend line now has three major anchor points and this can give traders confidence in the future trend development. This trend line is projected into the future and suggests the target level can be achieved towards the middle of July at the latest.
The second part of this uptrend confirmation is the clear, decisive and continued closes above the long-term support and resistance levels shown as line A near 3,220. Previously the index oscillated around this level before continuing the market decline. This time the market moved quickly in a strong rally from the support features. This is bullish behaviour.
The third part of the uptrend confirmation is the pattern of behaviour with the Guppy Multiple Moving Average (GMMA) indicator. The long-term GMMA has compressed and turned upwards. This shows investors are becoming buyers and supporting the trend rise. This is a major and significant change in the market behaviour.
Additionally the short-term GMMA is expanding. This shows traders are in strong competition to buy into the developing trend breakout. The lower edge of the short-term GMMA is above the longterm group of averages. This is the beginning of separation between the two groups and is usually associated with a sustainable trend.
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This price behaviour remains the most bullish behaviour seen since March 2020 and August 2021. This is a strong developing and sustainable breakout.
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
