(Jan 23): It’s not just a Chinese New Year coming up this week, it’s also a new decade. Along with a fresh haircut and sweeping old rubbish out the back door, it’s a suitable time to clean-up some decade long failures that have haunted discussions about China’s growth and economy.
Here’s a selection of candidates from my bookshelves that deserve to be swept away in a New Year and a new Decade cleanout.
The granddaddy of them all is The Coming Collapse of China published in 2001. It’s followed by The China Crisis (2013) and Beyond Chinas Coming Collapse (2009). Amongst others we can add the gloomy China Dream (2002) and Chinas Uncertain Future (2012).
There is a temptation to consign some more recent publications to the same fate.
The titles give the game away. These books, along with numerous articles, opinion pieces and ongoing economic commentary are part of the China doom and gloom industry. This industry continues to thrive despite being consistently wrong for all of the last decade.
The predictions have ranged from those forecasting the coming collapse of China. Beijing-based economic academic Michael Pettis confidently predicted China’s growth would “barely break 3%” this past decade.
Others damn with faint praise, predicting a pull back to the global average. This is the ‘reversion to the mean’ argument and although gloomy, it’s not as miserable as the total economic collapse school of predictions.
Chinas GDP has been slowing and will continue to slow. Assessments can be made based on the official figures – often considered unreliable – or an adjusted figure which often rest on some questionable methodologies. In either case the conclusion is clear - China growth has continued at rates well above the global average of 3.5%. Using official figures, the decade average was 7.2%.
This is unsustainable in the longer term, but this does not mean China is heading for a sudden crash as again forecast in the most recent books from the China doom and gloom industry. Annual growth of 6% doubles GDP in 12 years. Now the quantum of growth is more significant, so today’s 6% growth represents more in terms of actual output than the higher growth rates of earlier decades.
Another popular industry gloom product is the ‘middle income gap’ and China, unaware, is apparently is hurtling towards this trap. These predictions ignore the examples of countries which have successfully made the transition. The lead historical example is the United Sates although this is often dismissed as an example of American exceptionalism that cannot be matched by any other country. More recent examples are Singapore’s success and it’s no accident that China has reached out to Singapore to unearth its secrets of success.
As the Chinese New Year approaches it is a suitable time to sweep away the detritus of failed China predictions. The challenge for the new year and for the new decade is to continue to ignore these false prophets of doom and focus on the opportunities offered by the continued growth of the Chinese economy. Consistently growing at two to three times faster than the OECD makes China an economy we cannot ignore.
The Shanghai Index has reacted away from the resistance level near 3120 and fallen below the long-term support features near 3040. This retreat is driven by two factors. The first is the clean-out of poorly performing positions prior to the Chinese New Year. The second is in response to the growing concerns about the corona virus outbreak in Wuhan. The impact of these influences is assessed with a technical analysis of the chart.
The strength of the underlying uptrend remains strong. The index has plummeted below the lower edge of the long-term group of averages in the Guppy Multiple Moving Average indicator. Usually the GMMA acts like an airbag shock absorber. As the index retreats new buyers come into the market and stop the fall. This has not happened and this signals a bearish retreat. The good separation in the long term GMMA may still provide trend support but there is little doubt that the primary uptrend has ended.
The Shanghai Index with three chart features which define this up trend and breakout. These will now become resistance features that limit any rebound.
The first feature is the trend line that had been successfully tested multiple times as a support area. This uptrend line has been broken. It will act as a resistance feature in any new uptrend development.
The second chart feature was the breakout above the long-term resistance level near 3040. This has been a resistance feature since July 2019, defining the five-month sideways trading pattern. The market retreat has again broken through this level. This will now act as future resistance level.
The third feature is the Guppy Multiple Moving Average relationships. The long term GMMA has turned down. It is well separated but compression may develop quickly. The upper edge of this long-term group is near to long term support band resistance level at 3040. This usually shows good investor support for the developing trend but the substantial fall below this level confirms a strong downtrend development.
The short term GMMA has compressed and moved down. This is bearish. There is a high probability the short term GMMA will quickly drop below the lower edge of the long term GMMA and signal a substantial retreat.
Investors watch for the index behaviour around the support features near 2980. A sustained move below 3040 is a bearish outcome and has a downside target near 2980. Traders are alert for short term volatility with temporary dips below major support features.
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.
