Western companies looking to enter or remain in the e-commerce market in China need to recognise that the idea of adding a store-front on WeChat, linking to search results in Baidu and enabling WePay are no longer sufficient in the Chinese e-commerce landscape.
Covid-19 has changed the market place and Western businesses are playing catch up.
The Two Sessions, or in Chinese Lianghui (a common abbreviation for a pair of organisations which have close relations), have helped to set up the framework for these changes with an emphasis on 5G, management of the digital economy and payment gateways.
These changes also confirmed the new retail trends that emerged from a year of Covid-19.
There are three major trends and retailers when doing business in China. It is also almost inevitable that Western retail markets will see the same trend emerge.
The first trend is a result of market saturation. It can be argued that near universal access to the internet means there is no geographic saturation of the market as appears in a bricks-and-mortar market environment with downtown shopping precincts.
However, the universal availability of high-end stores online does not reach deeply into the marketplace.
It remains exclusive, and the extension of the e-marketplace into lower income streams — with suitable products and services — is the next growth area away from the saturated middle-class product reach.
It is estimated that this lower income market is more than one billion people. This is a useful market for new retail players in China and some apps are already experimenting with new business models to serve this segment.
The second trend is the erosion of the foreign premium. A decade ago, the trend was for Chinese brands to look similar to foreign brands.
These were not quite a knock-off but at times disturbingly similar. That has changed and China brands are now more nationalistic in their design so “Made in China” is now a selling point.
It is a trend that started pre-Covid-19, but which has accelerated.
In 2019, the winner of the Tmall Golden Makeup Award was Chinese cosmetic giant Perfect Diary.
At that time, it was just a twoyear-old Chinese cosmetics company known for being reasonably priced and its Western-style branding.
However, they beat established names like L’Oréal and Estée Lauder in China.
Still, this does not mean it is all over for foreign brands — just that the environment is more competitive Furthermore, logistic supply delays caused by Covid-19 have given “Made in China” a boost.
The third trend is live streaming which has made millionaires out of some. They have been assisted by social media and e-commerce platforms like Weibo and Xiaohongshu, and by short video sharing apps like Kuiashou and Douyin.
Food blogger and internet celebrity Li Ziqi struck the right note during the Covid-19 lockdowns. In her popular videos, she created a sensation with only fresh ingredients harvested from a village compound.
Li has over 10 million followers but she does not represent any big brands. That is a clue to how marketing has changed. Some estimated her income was over RMB100 million ($20.6 million) last year.
This has driven an army of hopefuls to adopt the same model — never mind that Li has an authenticity that is not easy to duplicate.
However, its importance comes from the competitive pressure it applies to other retail business activities in the e-commerce space.
Returning to China for retail business in 2021 is not the same environment as it was pre-Covid-19. In fact, these changes are permanent.
Technical outlook for the Shanghai market
The savage fall in the Shanghai Index has continued with a break below the major support level near 3,450.
The index has also dropped below the lower edge of the long-term group of averages shown on the Guppy Multiple Moving Average (GMMA) indicator.
The long-term GMMA developed rapid compression as investors joined the route.
The higher opening on March 8 near 3,525 quickly developed into a major retreat to finish below the support level near 3,450.
This signals a dramatic return to the broad trading band that dominated the Shanghai index from July 2020 until January 2021.
This trading band has three features. The first is the strong resistance level near 3,450.
This was tested many times during the last six months of 2020 so there was a good expectation that the breakout above this level would use 3,450 as a strong support level.
This did not happen. However, there is a high probability this will continue as a strong resistance level for any market recovery.
The second feature is the strong long-term support level near 3,240. This acted as a major support level during the last six months of 2020.
This also represents an extreme downside target for the current index activity.
The third feature is the midpoint of this broad trading band. This is located near 3,360. This is important because the index oscillated around this level during the last six months of 2020.
Broadly speaking, the market was bullish when it remained between 3,360 and 3,450, while the index was bearish when it was between 3,240 and 3,360.
The key behaviour feature investors are waiting for is to see how the index develops consolidation after the current rapid fall.
It is too early to know if consolidation will develop around 3,360 with rally rebounds towards 3,450.
The index may fall to 3,240 and consolidate. From there, we are using 3,360 as a consolidation target. It is clear that the longer-term uptrend which rested on broad separation in the long-term group of averages has been broken.
Investors have become significant sellers as shown by the compression in the long-term GMMA. Any rally rebounds in the near future will be limited by resistance near 3,450.
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.
