In the past 245 years, there have been 27 amendments to the US constitution but it remains the foundation of US political thinking. It was a document framed in the context of 18th century political privilege where the anachronism of the electoral college is specifically designed to thwart the will of the mob. Some argue that the fixed nature of the construction is its strength, while others say that it is no longer fully fit for purpose.
China’s modern constitutional foundations are more recent, and it has adopted a more flexible approach to constitutional reform to ensure that the constitutional framework is fully fit for purpose in a changing modern environment.
The changes brought to the Sixth Plenum — held from Nov 8 to 11 in Beijing — reflect adaptations that will change the way China engages with the world, and the way that investment engages with the country.
The Sixth Plenum will outline a road map for the second century of the Communist Party of China (CPC). This exercise in self-reflection was not undertaken on either the first or second celebrations of the centenaries of the US constitution.
The preference for long-term strategic planning is a Chinese characteristic, and it sets the foundations for business activity. This is not State planning of the Soviet ilk, this is strategic planning to set the guidelines for economic activity.
This is the CPC’s major historic resolution so it is useful to examine previous resolutions as they provide a guide as to how these strategic changes really do impact on society.
The 1945 resolution that rewrote and set Chinese Communist Party history. It cemented then leader Mao Zedong at the centre of all power. It is arguable whether this was an approach justified by the emergence from the chaos of the civil war.
What is beyond argument is the way this strategic resolution shaped the economic and social behaviour of the next 33 years, including the Cultural Revolution and its aftermath.
The second historic resolution was delivered in 1978. It ushered in China’s reform and opening up era. It also endorsed Deng Xiaoping’s paramount leadership in a collective decisionmaking process.
There is no doubt that this delivered seismic change and defined the period where foreign investors engaged with China at all levels. The relative importance of some industry sectors and types have waxed and waned, but it is the 1978 resolution that delivered 43 years of engagement with China as we have come to know it.
It is also this environment that has delivered the China miracle for investors and those doing business with it.
The current major historic resolution will likely usher in a change of similar magnitude. The sixth plenum of the 19th CPC Central Committee will inevitably project a new party direction and a new set of doctrines.
It is the equivalent of a major restructure of the constitution. The headline focus will be on the status of current President Xi Jinping, but the really important detail is the economic restructuring because this will define where the business and investment opportunities lie.
Clues abound and include the dual circulation economy and common prosperity concepts. Socialism is not poverty, but nor is it extravagance.
It took decades for the 1978 resolution to deliver sustainable results. It may take decades for the 2021 resolution to do the same, but investors take note as the earthquake starts now.
Technical outlook for the Shanghai market
The Shanghai Index briefly tested the long-term support level near 3,450 as the index slid down the value of downtrend line C. This rapid dip and rebound started from the short-term consolidation area near 3,490.
This type of price action is often associated with a trend capitulation. It potentially signals the end of a downtrend and the move to a new phase of development leading to an uptrend.
The index plummeted below the upper edge of the long-term trading band value near 3,580 and the slid down trendline C, using it as a support feature, although trendline C shifted from acting as a resistance feature to acting as a support feature. The continued retreat shows the downtrend defined by trend line C has not ended.
The index created a temporary support level near 3,520, which was again broken with a new short-term consolidation support near 3,490. The current intraday low used the value of the horizontal support level at 3,450 as the rebound point.
This is potentially significant because it means that trend line C can no longer act as a support feature unless support near 3,450 fails.
The bears remain in control. The important question for investors is to decide if the long-term support near 3450 is strong enough to halt the market decline. This is the midpoint of a long-term broad trading band. The bottom of the band is near 3,330. The upper edge of the trading band is near 3,580. This broad trading has been the defining feature of the Shanghai index for around 18 months.
There is a low probability that the market rebound from the support level near 3,450 will develop into a new strong uptrend rally. However, the 3,450 level may continue as a strong support feature and confine the index activity to the narrow trading range between 3,450 and 3,580.
The index also traded broadly in this range in June to July. The index has now developed a confirmed downtrend. A new trend is signalled because the long-term group of moving averages compress and change direction. This behaviour shows that investors have changed their minds and are joining the new trend development.
The short-term Guppy Multiple Moving Average (GMMA) is widely separated showing a strong trend behaviour. The short-term GMMA is completely below the lower edge of the long-term GMMA.
Investors watch for the markets to successfully test support near 3,450 before they will consider entering the market as buyers.
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
