China is bad news for the global economy in 2023, warned International Monetary Fund’s (IMF) chief Kristalina Georgieva recently. The headline says it all when it comes to China. Since the beginning of the Covid-19 outbreak, China has become the world’s villain. One Twitter poster recently said that China’s zero-Covid policy was evil. And then, just a few hours later, they scolded China for ending the same policy. In certain sections of the media, this sentiment has seeped into the broader coverage of China. Inevitably, the relentless negativity influences the way more people think about China. This concerns those doing business with the country with five significant impacts.
Firstly, the growth of these opposing opinions impacts consumers, making some more reluctant to buy Chinese goods or services. It does this by making compliance with US sanctions on aspects of China trade more readily acceptable. This includes prohibitions on Made in Hong Kong labelling for goods sold in the US.
Secondly, there is an impact on plans to expand business activity in China post-Covid-19. The increasingly gloomy picture painted by the IMF acts to limit plans for the resumption of business with China and the expansion of business. When China is consistently painted as a basket of discontent and where leadership is painted as having a weakening grip on power, it is no wonder that some businesses are increasingly cautious about future investment.
Thirdly, it is more than just business that develops these concerns. The risk-averse conservative banks become more reluctant to provide investment funding for China activity. Their research departments become victims of the daily China negativity, which exaggerates problems and smothers positive news.
The impacts on business and investment decisions cannot be dismissed. Businesses which wish to expand their activity in China postCovid-19 may need help accessing funding support. The risk premium on funds increases.
Fourthly is market disengagement. In part, this has been facilitated by logistical blockages imposed by Covid-19, but for some, the atmosphere of negativity has turned this temporary necessity into a firm policy. The temporarily forced disengagement from China becomes permanent as China’s activity is snapped up by competitors in Vietnam, Cambodia and elsewhere. For some businesses, this is an effective withdrawal from China forced on them by circumstance but endorsed and confirmed by the stream of negative media coverage.
See also: China tightens securities lending rule to support stock market
Finally, there is the fear of face-to-face meetings now that Covid-19 travel restrictions have been lifted. This fear is enhanced by the imposition of pre-flight testing for travellers from China. Forget for the moment the expert health advice that says such measures are unnecessary and ineffective. Whilst testing should engender confidence, travellers are tested as free from Covid-19 — the very fact of testing sends the message that the risk of new infections is very high. It adds a sense of caution that inhibits a rapid resumption of travel for tourists and businesses.
Three years of continuous negative media coverage of China will impact how business re-engages.
Technical outlook for the Shanghai market
See also: Eight reasons why I am still in favour of China stocks
The Shanghai Index paused around the first resistance target near 3220 and then retreated to test two support features. The 3.220 level is the lower edge of a resistance band. The upper edge of the band is near 3.280. The most bullish development was a further move towards 3,280, followed by consolidation within the resistance band. This failed to develop, but it is a vital feature to consider in future rally development.
The least bullish move was a retreat from the lower edge of the trading band near and a retest of support features. Despite this retreat, the index chart has three features that suggest uptrend breakout activity will continue to develop into a new longer-term uptrend.
The first feature is that the index activity is part of a long-term trend reversal double bottom rebound pattern. This sets the long-term market environment. The first target for the pattern is the top of the previous pattern peak near 3,415. The path to achieving this price target could be smoother.
The second feature is the way the rebound action continues to be defined by a fan pattern. The fan pattern is a unique pattern that signals a long-term trend change. The fan starts from a single point, shown as point 1. It consists of a series of trend lines, shown as lines A, B, C and D. The fan pattern is often associated with long-term breakout patterns that develop over many months. This is a trend reversal pattern, and it does not involve setting price targets.
The third feature is trend line D. This is also the long-term downtrend line starting from the high of 3,424 on Jul 5, 2022. This trend line is also essential because it forms a new support feature for the recent market retreat. This support feature is combined with a current support level of nearly 3,030, shown as line E. The combination of these two support features suggests the market can develop a new rebound activity and move towards resistance near 3,220.
The behaviour of the Guppy Multiple Moving Average (GMMA) indicators shows that investors are cautious. The long-term GMMA is compressed and moving down. The long-term GMMA has not expanded, and this shows investor caution. It shows that investors have yet to become strong sellers. This indicates weak investor selling and means it is easier for the rally to move above the long-term GMMA. The short-term group of averages are below the long-term group. Index values remain within the short-term group of averages, but the rebound rallies can change this relationship.
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Selling pressure is not strong, and the index has found two support features which can be used as a consolidation feature. These can be used as a base for future rallies and the development of an uptrend.
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
