The current Two Sessions meeting, or liang hui, in China, sets the economic trajectory for 2023 and beyond. Although much of the focus is on who will replace outgoing leaders, including current Premier Li Keqiang, a more important focus goes largely unnoticed. This is a change in the economic structure of the market, and this has important implications for some business activity.
For decades, the economic focus has been on growth enabled by its underlying operating principle of competition. This is the framework of policy decisions, and foreign businesses have gained from this. It is easier to do business in China now than a decade ago or at the turn of the century.
The momentum of change accelerated under Li, and businesses saw real changes that made it easier to open and conduct business in China. Competition was the driving force, even though it was constrained by the concept of socialism with Chinese characteristics.
The economic warfare waged by the US under former President Donald Trump and continued under current President Joe Biden has changed the economic landscape in ways that cannot be ignored. Biden’s chip sanctions, Trump’s tariffs and the congressionally approved China affairs attack committee have changed the competitive marketplace. It has forced China’s new priorities in organising the economy, which is bad news for some business activities. It hinders innovation and blocks business development.
“Western countries — led by the US — have implemented all-round containment, encirclement and suppression against us, bringing unprecedented challenges to our country’s development,” Xi said.
Economic control, rather than competition, becomes the guiding principle when security becomes the overriding factor in policymaking. In a speech last week, Xi suggested the Communist Party would further increase its influence in private companies and have more control over the science and technology sectors. How China balances the competing demands of control and competition will define the nature of economic progress this year.
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We see this already with the three economic leadership appointments: Ding Xuexiang is the vice premier in charge of economic affairs, He Li Feng is the new economic tsar, and Zhu HeXin becomes the Central Bank governor. The economic thinking of the new premier, Li Qiang, remains relatively unknown.
All four have risen to power through the domestic political struggle, and commentators point out that they are all allies of Xi. This is not unique to China: Biden also dismissed Trump appointees, surrounding himself with allies.
What is more significant in terms of the economy and from a business perspective is that none of these leaders has an extensive overseas education background. Outgoing Premier Li Keqiang brought this experience to managing China’s growing economy. The new economic tsars have a different background and are naturally inclined towards security and control rather than competition. It is too early to know how far the economic approach will tilt away from growth to security — from competition to control — representing a new area of business risk.
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Technical outlook for the Shanghai market
The breakout in the Shanghai Index has retreated and is testing a group of support features. The retreat may be enough to threaten the short-term uptrend rally, but the cluster of support features suggests the longer-term uptrend is not under threat.
These are the four trend support features and two additional features contributing to a bullish outlook.
The first feature is the long-term trading consolidation band. The lower edge is near 3,220. The upper edge is near 3,280, and the index has dipped below this level. A return to trading within this trading band is still bullish for the continuation of the longer-term uptrend.
The second feature is the value of the uptrend line. The index tested this line and then moved below it and the value of the upper edge of the trading band. This is a short-term bearish as the index moves to test the strength of other support features.
The third feature is the wide separation in the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicators. The wide separation is evidence of investors’ support for the trend.
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This shows that investors are not selling when the index dips. Instead, they are entering the market as buyers, supporting the rising trend. Additionally, the degree of separation between the long-term and short-term groups of averages has remained relatively steady. This is a feature usually associated with sustainable trends.
The fourth feature of support is the relationship between the lower edge of the trading band near 3,220 and the lower edge of the long-term GMMA above 3,220. This combination, where the long-term GMMA is above a support level, often confirms trend strength and continuation.
The fifth and sixth features contribute to a bullish outlook but are not support features. The fifth feature is the fan pattern (not shown on the chart). This pattern signals a long-term trend change. The fan starts from a single point and consists of multiple trend lines that fan out. The fan pattern is often associated with long-term breakout patterns that develop over months.
The sixth feature is the double bottom pattern (also not shown on this chart). The depth of the double bottom pattern is measured, and then this value is projected upwards. The very long-term target for the pattern is around 3,860.
This cluster of support features and the longer-term bullish chart patterns suggests that the longer-term uptrend in the Shanghai Index remains intact. The most important indication of a trend continuation towards the first target near 3,415 is a sustained move above the resistance near 3,280.
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
