(Apr 3): Western markets have soared with the arrival of helicopter money in the US. It’s a modern cargo cult where printing presses are cranked up and money drops from the sky, solving all problems and underpinning a massive rally in the US market indexes.
Those who join this rally will at some stage pause and decide just how newly printed money helps those in hospital without access to ventilators and other medical equipment.
There is a need for fiscal support for an economy moving into hibernation. The time for money for recovery should wait until the crisis passes and recovery is possible.
China is further along the path to recovery, so its economic recovery response is different. This influences the nature of export business and investment opportunities.
Local Chinese governments have distributed about RMB4 billion ($807.6 million) of digital coupons in the past few days. Digital coupons are used to stimulate personal consumption in catering, online shopping, sports and tourism. Coupons allow the government to target spending and stimulus at precise economic pain points.
The US is giving US$1,200 ($1,721) per adult below a certain income threshold. This will be dispersed across the economy and not necessarily to where it is needed most.
Netflix will see an increase in subscriptions but the struggling neighbourhood restaurant may get little.
Coupons are targeted and are particularly effective in the China context because it prevents stimulus cash from being saved. China currently saves around 45% of its GDP. This high rate of savings assisted lock down survival. Instead of reaching for their credit cards to pay for goods and services and online shopping, Chinese citizens drew down on their savings.
US citizens will increasingly need to expand their credit lines as US household’s savings are very small.
By some estimates, those savings are just over a single pay cheque for most families. There is some speculation that the multiplier effect of digital coupons is almost twice that of cash. It’s suggested that for every digital RMB coupon distributed, real consumption worth of RMB15 follows.
If this is an accurate calculation, then we can expect to see the Chinese economy rebound quite quickly. Already, some of the PMI figures are suggesting this is taking place.
However, the lofty aims of around 6% annual growth are unlikely to be achieved this year with growth estimates ranging from a Maoist period 1% to a more optimistic 4%.
Truth is, nobody knows because we have not seen this type of pandemic in modern history, let alone in this modern economic environment.
China’s pace and style of economic recovery may provide little guidance for Western economies simply because of the high level of domestic savings. This is not replicated anywhere in the Western world so demands on credit provision will be substantial.
However, the target areas for coupon expenditure provide hope for foreign exporters who served the catering market with meat, vegetables and seafood. Delivery into China remains a challenge, but targeted coupons show demand that needs supply. In addition to doing everything you can to ensure that your products can still get to your customers, you should keep them informed about your situation. Exporters who are able to shift products or services to an on-line delivery model will find both more opportunity and more competition. Getting the digital strategy right, including a strategy that is compatible with WeChat payment platforms will provide a lifeline for many businesses.
Technical outlook for the Shanghai market
The double bottom pattern in the Shanghai index is not perfect but it is holding fast. It is not a perfect pattern where the second major low is near to the value of the first major low, but it’s a close facsimile. The rebound from near 2680 has been sustained. The pattern of rally and retreat activity allows for the first tentative placement of an uptrend line.
The position of this line may need to be adjusted in the light of later activity but until then it is a useful guideline for the emerging uptrend.
This retreat and rebound rally activity defines this as a potential uptrend rather than a fast rally because it offers several anchor points for the uptrend line.
The double bottom pattern is less than perfect because the two low points are not near to the same value. The first major low on Feb 4 was at 2,685. The second major low on March 23 was at 2,657.
However, the close of March 19 was at 2,702 and on March 24 it was 2,722. These closes bracketed the value of the first major low at 2,685 so this remains a strong — but not textbook perfect — example of a double bottom.
This behaviour is sometimes called a W shaped recovery. The first target for this pattern is a retest of the peak near 3,060. It won’t be easy because there are two major resistance features to overcome.
The first is historical resistance created by the lower edge of the trading band near 2,850. The second is the value of the resistance level near 2,980.
Rally behaviour offers good trading opportunities but unstable investment opportunities. Better management of both is achieved when a steady uptrend develops. The key trend development feature is a pattern of behaviour that allows the placement of a reliable trend line with three anchor points, each created by a low following a clear retreat and rebound point. The low of these patterns is used as the anchor point for the trend line.
Currently the trend line has two anchor points, so traders wait for a new rally and retreat pattern to confirm the placement of a third anchor point for a trend line.
The large gap down in early February and the recent substantial fall in March followed by a rebound rally distorts the calculation of averages. Traders must wait for this impact to wash-out of any indicator calculation that relies on averages. This includes indicators such as RSI, Stochastic, MACD and GMMA. These indicators are all currently giving unreliable signals. E
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 more than a decade. 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.
