The barriers have come down and the China market is back beckoning global investors and businesses. The solution for tourism and international student operators is easy because it is simply picking up from where things left off when Covid-19 started.
For other businesses, the situation can be more complex because the focus of domestic demand in China has changed. Just before Covid-19 struck, President Xi Jinping outlined what he called the dual circulation strategy.
The intention was the reduce China’s reliance on the export segment of the economy. It required the stimulation of domestic demand and the partial replacement of demand for foreign goods with demand for domestically produced goods. It was intended to be a gradual economic shift but this was accelerated by Covid-19 lockdowns which saw a massive increase in online ordering of locally available goods and services.
The lifting of Covid-19 restrictions has opened the way for the importation of more foreign goods but now they face a better range of established domestic competitors. The foreign premium that could be applied pre-Covid has been eroded in most sectors apart from the high-end premium products.
Breaking into this market with a product or service that is largely commoditised has become significantly more difficult. Singapore’s BreadTalk built a category brand in China but the space quickly became heavily populated with multiple competitors in a previous sector that was not served. The question now is whether the foreign cachet once attached to this product is enough to continue to gather market share in an economy that has become more domestically focused.
This is a question for brands established in China but it is more serious for sellers of commodity products seeking to enter the China market for the first time. The answer often lies in creating a premium product with an associated higher price by adding features that appeal to an increasingly environmentally conscious domestic market. Many China products are already displaying their green credentials although the veracity of these credentials may be questionable.
See also: China tightens securities lending rule to support stock market
One New Zealand honey producer provides an example of how a commoditised product can be turned into a premium product by showing how you can do something different in a category that has largely become commoditised and mass-produced.
The premium manuka honey market in China is already a crowded competitive space. This New Zealand company makes GPS hive-tracking accessible by the consumer to make sure every drop of their Bee+ Manuka honey was as pure and natural as possible. Their Bee+ achieved a 30+ UMF (Unique Manuka Factor) rating which is incredibly rare worldwide and one of the highest possible grades ever achieved.
They then repositioned the product as a luxury wellness product. It has the potential to usher in a new era of wellness-based gift-giving in China. The product boxing reflects this aspiration in a way that other Manuka honey packaging does not. The brand believes there is a shift away from products like whisky and other luxury indulgence products towards gifts with health and wellness benefits such as ginseng and honey. A wellness gift that says “I care about you, your health and your future” is a powerful message in a post-Covid-19 world.
See also: Eight reasons why I am still in favour of China stocks
China is a crowded marketplace but the competitive crowd also includes Covid-19-enabled and now well-established domestic brands which have changed consumer trends and present new challenges for foreign companies looking to do business in China.
Technical outlook of the Shanghai Composite Index
The Shanghai index is again testing the upper edge of the long-term consolidation band that has defined the China market for 2022.
The bottom of the broad consolidation band is near 3,220 and the top is near 3,280. The first move above 3,280 was unsustainable. The most recent breakout is weak but it indicates continued bullish strength in the market. The breakout above the 3,280 resistance confirms there is underlying momentum that can support the resumption of the uptrend. The short-term target is 3,415 which is the peak of the breakout in July 2022.
Historical support and resistance features are important. The consolidation band between 3,220 and 3,280 dominated market activity for three months in 2022 before ultimately breaking downwards. Traders are watching the current consolidation breakout test to determine if this is a sustained break on the upside. If this is confirmed, then more traders and investors will join the trend causing it to accelerate.
The current uptrend and breakout test is part of the development of the long-term fan pattern and a double-bottom rebound.
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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. To reach this target, the index must stay above 3,280 and also move above the strong historical resistance near 3,700.
The fan 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 very long-term breakout patterns that develop over many months.
The Guppy Multiple Moving Average (GMMA) indicator relationship confirms trend continuation. Despite the recent dip in the index, the long-term group of averages is well separated. This is usually associated with strong trend support and stability. This separation confirmed that investors were buyers when the index dipped. This is bullish support for the continuation of the long-term uptrend.
The short-term group of averages compressed and then quickly turned up and separated. This indicated traders taking short-term profits. The expansion shows new traders have come into the market and they are confident the uptrend will continue.
The most important indication of a trend continuation towards the 3,415 target is a sustained move above resistance near 3,280. Once this breakout develops the market will see a surge in investor buying that will sustain the uptrend.
Daryl Guppy is an international financial technical analysis expert. 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
