(Mar 27): Restore, Repair, Revive, Resuscitate or Remodel? These 5Rs define business investment decisions and are a precondition for the big R — Recovery. Examination of China’s economic and business response provides clues to how local businesses may survive, and to which businesses are better investments at current selldown prices.
Remodel is a major driver. The Chinese e-commerce site Taobao added 1 million new merchants during the China lockdown. They and other e-commerce platforms not surprisingly experienced more than 10% growth during this period. Ali-Health had a 7,000% growth rate so it is clear business will need to Remodel to embrace e-commerce and social media links in ways that are integral to their business model.
China’s new plans for infrastructure development reflect this and is focused on 5G networks, AI, industrial Internet, inter-city transit systems, vehicle charging stations and data centres.
For some businesses, it will be necessary to Restore business connections and develop new networks and logistic chains given some of their counterparties did not survive the lockdown. Chinese exporters may also find previous business links have fallen victim to a Western economic collapse. Foreign universities may have an uphill task to restore confidence in their support for students.
Restoring business connections will take time and effort to rebuild the levels of trust that prevailed prior to the Covid-19 crisis. This may also be hindered by national policies, with some countries determined to reduce their dependence on China for political reasons.
Of all the 5Rs, business repair is easiest. With the exception of airlines, these are business activities that slowed during the China lockdown but did not come to a complete stop. These companies suffered some damage, but this is easily repaired. Demand for household goods, for everyday items and services are returning to normal fairly quickly. Some, like car sales and tourism, will take longer. These businesses were damaged by the lockdown, but they were not destroyed. Fiscal support with a suspension of government fees and charges helped them to get up and running. They form the majority of business survivors.
Access to easy credit is a key requirement for those companies that need to Revive. For them, the lockdown was a near-death experience. These are the companies that almost went to the wall as cash flow dried up. It is not that they were marginal businesses. For many, the business model was based on just-in-time delivery and that’s what kept the cash flowing.
When orders and payments evaporated, the weaknesses in the business model was exposed. If they can be revived, they will need to remodel their business approach. This is not just a domestic economic issue, it is also an issue impacting global supply chains and Western business approaches.
These businesses can be revived but the question is to decide if revival of the old business model is appropriate.
Those in need of Resuscitation are not necessarily in need of rescue from the scrap heap of outdated business practices. The NanShan, Shenzhen high-tech start-ups in the cash-burn phase of development, the business that was unfortunate enough to first open its doors in anticipation of Lunar New Year crowds and the airline industry all need resuscitating capital investment. For listed companies, there is the opportunity for investors to buy at bargain prices.
For unlisted companies, the priority is the search for new capital, domestic or foreign sourced.
Delivery companies like SF, medical suppliers, the online portals, and essential service providers all thrived during the lockdown. This was due to exceptional circumstances and their growth will most likely slow and offer less opportunities for investment or business emulation.
Just to talk of business Recovery is too simplistic. Every Chinese business emerging from lockdown was faced with at least one of the 5Rs and these must be resolved before any thought can be given to business Recovery. That is what we must learn from China.
Technical outlook for the Shanghai market
Has the Shanghai Index created a double-bottom? It is not a perfect pattern where the second major low is near to the value of the first major low, but it is a close facsimile.
The first major low on Feb 4 was at 2,685. The second major low on March 23 was at 2,657. However, the close of March 19 was at 2,702 and on March 24 it was 2,722. These closes bracketed the value of the first major low at 2,685 so this remains a strong, although not the textbook perfect example of a double-bottom.
The pattern is strong enough to give confidence that the rebound rally and gap up behaviour is consistent with a new prolonged really to retest resistance near 2,850. This is the lower edge of the long-term support that formed the bottom of the prolonged trading band.
Often with a double-bottom pattern, traders describe this as a W-shaped recovery. In this pattern, the distance between the double-bottom line and the peak of the W is measured. This is then projected to the upside to set new breakout patterns.
This method cannot be applied in the current pattern because the peak of the W is exceptionally high near 3,060. This would set a target near 3,450. Time will tell if this is accurate but in the shorter 3–9 months’ time frame this target can be discounted.
The key development feature is the same as the previous rally from 2,685.
This is the creation of a stable uptrend that follows a fast rally. This includes the placement of a trend line using the same principles that applied to the first rally development in February.
A reliable trend line has three anchor points, each a created by a low following a clear retreat and rebound point. The low of these patterns is used as the anchor point for the trend line. The retreat and rebound behaviour enable the placement of a valid up-trend line.
The market rebound has two resistance features to overcome. The first is historical resistance created by the lower edge of the trading band near 2,850. The second is the value of the resistance level near 2,980.
The large gap down in early February and the current substantial fall and rebound rally distorts the calculation of averages so traders must wait for this impact to wash-out of any indicator calculation that relies on averages. This includes RSI, Stochastic, MACD and GMMA which are currently giving unreliable signals.
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.
