The pace of regulatory change is accelerating in China. We see the tips of a very large iceberg in a variety of ways, including the crackdown on the number of hours children are allowed to engage in computer gaming.
Another of these tips is the action taken against Tencent, Alibaba and other large successful tech companies.
Other iceberg tips include the sudden banning of celebrity rankings to “clean up” fandom culture. It is consistent with the suggestion that the rich should make larger contributions to society rather than amassing large fortunes.
This is corporate social responsibility driven by the State rather than environmental, social, and governance (ESG) concerns driven by shareholders. Seven Chinese billionaires have already announced the establishment of charitable institutions.
America favours individual achievements over any obligation to society. Philanthropy is more often about tax avoidance than any genuine desire to contribute to society.
It is readily accepted that CEO salaries should be in the order of 300 times higher than the average worker’s salary. Education is a playfield for private providers and private wealth is a worthy aspiration in the US context.
Not surprisingly, American investors look for the same characteristics when they invest overseas and in China. These are the companies and the personalities they favour with funds because they mirror their own cultural expectations.
These investors are rudely disappointed when they find that these expectations are not universally shared. Many were quite resentful when China grew economically that it did not embrace American-style liberal democracy.
China is resolutely Chinese. Nowadays, this includes the addition of socialist aspirations on top of a long history of traditions. Closing the coaching schools levels the playing field for the gaokao (the standardised college entrance exam held annually in the country).
The “Common Prosperity” pressure applied to rich individuals and their companies is derided by many in the West as evidence of the worst aspects of socialism.
In principle, it is similar to the progressive taxation structure used by most Western countries which aims to redistribute income from the rich to fund the provision of services to the poor.
The concern that irresponsible social media plays a role in undermining and usurping the government is nowhere more clearly on display than in the US. Europe, Australia and others have all rapidly developed policies to curtail the power and activity of these groups — and the powerful grip they are creating over the control of their big data resources. China’s solution is more direct.
Investors are waiting for the cascade of detailed regulations that flow from these very visible iceberg tips.
The message is clear. Invest in China as you would in the US and you will lose. Invest in China in companies that operate in a socially responsible manner and you will win.
Technical outlook for the Shanghai market
The Shanghai index has a bullish bias as it remains within the upper half of the broad trading band that has dominated the market for more than a year. The index was temporarily capped with short-term resistance near 3,540.
The significant resistance features higher values. The developing rebound is loosely defined with a new uptrend line B.
Placement of the line is difficult and a new retreat and rebound point is needed before the line can be properly anchored.
However, line B does capture the bullish nature of the current index activity.
The two resistance features on the Shanghai Index are the long-term historical resistance near 3,580. This forms the upper edge of the long-term trading band. The second longer-term resistance feature is the value of up trend line A, currently near 3,540.
Following the sharp market fall and equally rapid rebound from the low near 3,320, the index has used the central level near 3,450 as a good support level.
The strength of the support level near 3,450 is a well-established feature of the Shanghai Index behaviour and is the central level around which the index has oscillated for many months.
It is also the central level of the very broad trading band. Any rebound rally activity in the Shanghai Index will continue to be capped by uptrend line A for several more weeks.
Any breakout above the trend line A will quickly encounter resistance at the upper edge of the trading band near 3,580.
The combined resistance features of the trend line and the trading band resistance level will act as a very strong resistance feature making it difficult for the index to develop a sustained bullish uptrend.
These resistance features suggest that the market will continue with rally and retreat behaviour within the bounds of the trading band. The test of new sustainable uptrend behaviour comes from trend line B.
This trend line requires another well-defined anchor point before the trend line B can be treated with confidence as a support feature. Once this is confirmed it creates a bullish upward sloping wedge.
This is a good breakout pattern but traders will look for supporting evidence from other indicators. The apex of this wedge is located at the end of September where line B intersects line A.
In mid-September line A crosses above the upper resistance line near 3,580. Index activity in the last two weeks of September will help determine the probability of a strong breakout or a retreat and return to sideways rally and retreat behaviour.
A successful breakout above this series of resistance features is very bullish.
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.
Photo: Bloomberg
