(July 29): The China reality check remains alive and well. I took a colleague to Beijing. He is an author and financial market educator. It was his first visit to China. He had done extensive research but, as he commented, he discovered that he was not even fully aware of what he did not know. Perhaps more importantly, he found that what he did know, in large part, turned out to be wrong.
Visiting Beijing, he expected the pollution to be considerable and the road system to be in a constant state of chaos, with more than the odd horn blasting. He anticipated that every building would be adorned with red and gold trim, making for fairly garish city streets. These preconceptions largely came from the Google search images he had seen on the internet and via the media.
Instead, he found a quiet efficient road system and modern infrastructure and buildings. At times, there was traffic congestion, but this was a slowing of progress rather than a jam. Four days of clear blue skies had him questioning Beijing pollution stories, so I had to show him some Beijing pollution pictures just to balance the impression.
From a business perspective, he expected to be dealing with a people who were pretty straight-faced and inscrutable — able to read him far better than his ability to read them. He was not used to dealing with a language barrier, but they were. And, for some odd reason, he expected the general population to be very sombre in their demeanour. He assumed a linkage between authoritarianism and oppression that would lead to a general downcast demeanour like that seen in old black-and-white films of Eastern Europe.
Sombre demeanour was a difficult feature to find. Among the usual brightly coloured fashions typical of the West were fashion combinations that were distinctly mainland Chinese. The conversational chatter over Qing Feng steamed dumplings or a Subway sandwich were just as lively and animated as lunchtime in Lau Pa Sat or Melbourne. Couples walking in the park sunshine were not sombre.
Chinese inscrutability is a perception created by early European ignorance and inability to work with the Chinese. It starts at a time when the Chinese were described by the British as celestials. It is a falsehood further nurtured by countless Hollywood movies. While it is true that it can be difficult to “read” the counterparty in a business negotiation, this is also true of any business discussion in any country.
My colleague is no country bumpkin. He sits in the top 40 globally in his field, so this gap between belief and reality is interesting because these preconceptions often pass unremarked. With a willingness to apply an open mind, he was quick to adjust his thinking, which meant the first steps he took towards developing business relationships are likely to be successful.
Old China hands will roll their eyes at this tale, the substance of which has not really altered in 20 years. The fact that it needs to be told again shows that not all visitors to China have this adaptability. When all, or aspects, of these preconceptions continue to prevail, then it impedes the effective development of business. When these ideas also permeate national policy thinking, then the resolution of trade frictions is slowed.
Technical outlook forthe Shanghai market
Consolidation, fresh downtrend or oscillation? The Shanghai Index offers good evidence for each of these analytical interpretations. We do know for certain that the potential uptrend, following the breakout on June 19, has failed to develop. What has subsequently developed after the trend peak on July 2 is more difficult to define.
In the short term, the Shanghai Index has the behaviour of a fresh downtrend. The index remains below the value of the long-term group of averages in the Guppy Multiple Moving Average indicator.
The long-term GMMA is narrow but also moving downwards. This indicates selling pressure. It is not strong selling pressure, as this would be shown by wide separation in the long-term GMMA. This is steady selling pressure and mildly bearish.
The short-term GMMA is more widely separated and this group is entirely below the long-term GMMA. This is usually associated with a bearish trend behaviour.
In the longer term, the Shanghai Index has the potential to develop more oscillation activity around the 2,920 level. This has acted as a resistance and support feature. The index has slowly oscillated around this level within a very wide trading band.
The lower edge of the trading band is near 2,830. From May to June, the index moved inside this trading band.
Following the breakout, the index moved to resistance near 3,040 and created another narrow trading band between 2,920 and 3,040. The index moved within this narrow band for several weeks.
The lower edge of these narrow bands — 2,830 — and the upper edge — 3,040 — also form a very wide trading band. The longer-term perspective shows the Shanghai Index slowly oscillating between these two extreme levels. These are good rallies from 2,830 to 3,040 but they are not long-term trending behaviour.
The current fresh downtrend is part of the slow oscillation around 2,920. On a weekly chart, this movement between 2,830 and 3,040 has the appearance of a consolidation pattern. The Shanghai Index is simply moving sideways and building a consolidation base prior to a trend breakout move. On a smaller daily time scale, this provides rally-and-
retreat trading opportunities.
Consolidation, fresh downtrend or oscillation? Each analysis is correct, but the conclusion is a fresh downtrend testing the oscillation and consolidation support level near 2,830 prior to a rally rebound. Aggressive traders will enter on the first rallies from support. Cautious traders will wait for a successful test and retest of support before entering new trades.
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.
