While much of the world remains locked in a struggle with Covid-19, China has emerged into a post-Covid world. The post-Covid world is not the same as the one before the pandemic. As other countries emerge from their pandemic battle, they will find the need to engage in a different environment defined largely by China’s revised place in the world — and one informed by President-elect Joe Biden’s return to multilateralism.
The most profound change is the dual circulation economy policy outlined by President Xi Jinping at the Fifth Plenum, which wrapped up in Beijing on Oct 29. The rising China middle class has always been regarded as the bagatelle by Western nations. This is the gold lode that every Western business and country wants to mine.
Now, China has decided it can also mine this growing middle class, supplying it with products produced in China rather than relying on imports. This is possible with the official elimination of absolute poverty in China. It was made possible by a significant increase in the average wage.
That is the first part of the dual circulation economy. A turning inwards for economic solutions by driving the growth of the Chinese consumer market. Business is supported by increased spending opportunities arising from digital currency advances and reduction of bank lending policies.
The external circulation is China’s exports to the world and its imports from the world. China imports will slow their rate of expansion as the domestic economy demands are satisfied by domestic production. Exports will find the China market more difficult to prise open in terms of ever-increasing demand.
Concurrent with this dual circulation economy is the growth of China's trade relationships with its surrounding areas. Our primary interest is in the Asean group, but the same also applies to the countries across central Asia. This expansion and involvement are all consistent with the Belt and Road Initiative (BRI), although the involvement is not necessarily part of the BRI program.
The Regional Comprehensive Economic Partnership (RCEP) agreement — a free trade deal between Australia, Brunei, Cambodia, Vietnam, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and China — signed on Nov 15 is an important stepping stone. It shows that China is able to negotiate multilateral agreements.
This is a major departure from the unilateral agreements China has pursued for many years. The experience China gained from negotiating the China Australia Free Trade Agreement has paid dividends in terms of managing the RCEP agreement process.
Elements of RCEP are consistent with the strands of emerging Chinese policy. Other member countries have yet to develop post-Covid economic responses, so China is a leading example.
The digital renminbi is the forerunner of an enhanced cross border trade settlement system built on a blockchain foundation. The RCEP is also an agreement to establish agreed cross border trade and settlement procedures. China has already established the outline of those processes with many of the 15-member countries already involved with BRI. The mechanisms and intent of RCEP first proposed eight years ago are now consistent with China’s new view of its economic relationship with the world.
China has reached a point in development where it still needs the world, but not as much as the world needs China. This realisation changes the investment balance.
Just how these changes filter through the investment universe — and how quickly they do so — remains a moot question. Those that come up with the answers first will reap investment rewards.
Technical outlook for the Shanghai market
The Shanghai index has decisively moved above the midpoint of the broad trading band. This is a bullish breakout with an upside target ear 3,450. The lower edge of the trading is near 3,220. The upper edge of the trading band is near 3,450.
The Shanghai index has oscillated around the centre point of this trading band near 3,360. Since September, the index activity has mainly been in the lower half of the trading band. The current breakout has the potential to move the index activity into the upper half of the trading band. This will be confirmed in the future when the index retreats and uses the 3,360 level as a support feature.
This is a well-supported breakout and the development of a new uptrend. The relationships with the Guppy Multiple Moving Average (GMMA) support this conclusion. The long-term GMMA is moving upwards and is well separated. This shows good investor support for the developing uptrend. Any pullback has a high probability of using the long-term GMMA as a support level.
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The short-term GMMA is showing strong separation. The index is hugging the upper edges of the short-term GMMA and this shows strong trader support for the developing trend. If traders were cautious then we would see more compression and expansion activity on the short-term GMMA as traders took short term profits.
The third factor is the degree of steady separation between the long term and short-term groups of moving averages. This is usually associated with strong and stable trends.
This is a bullish breakout, but it is not yet a long-term bullish trend. The key test of this behaviour will be the ability to breakout above the upper edge of the trading band near 3,450. This has been an important resistance level so a breakout above this level will be very significant. In the longer term this sets an upside target near 3680. The initial first breakout target is near 3,590.
These targets are calculated by taking the width of the trading band and projecting it upwards from the upper trading band value near 3,450. These targets are a guide to future activity, but they do not help investors to understand how the trend may develop.
It may be a smooth uptrend, or it may consist of many short-term rally and retreat behaviours.
The key features of trend continuation will be steady separation in the long term GMMA with the upper edge moving above 3,360. The current GMMA behaviour shows a steady and stable trend 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.
