It is estimated that Chinese households deposited a record of around RMB135 trillion ($26 trillion) into their bank accounts last year.
The key question to be answered is when and how consumers will spend this money.
President Xi Jinping and his economic advisers are relying on an explosion of consumer demand to propel the dual-circulation strategy. This is designed to reduce China’s dependence on exports and replace it with domestically-driven growth.
China will strive to expand domestic demand to ensure a speedy economic recovery and promote stable growth, according to an interim report on China’s 14th Five-Year Plan published recently. This is consistent with the dual-circulation strategy. According to the head of the state economic planning body, Zheng Shanjie, China will “prioritise the restoration and expansion of consumption, stabilise bulk consumption and promote consumption of services”.
To achieve these objectives, China will also accelerate reforms aimed at expanding the country’s middle-income bracket to spend China’s way out of the middle-income trap. There is no doubt that China will encounter barriers to growth and social development. Some point to the risk of following Japan’s trajectory but this ignores three important differences.
First, China policymakers are well aware of the problems faced by Japan and the poor solutions that halted effective growth. This awareness means China will implement different solutions so they can avoid Japan’s mistakes.
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The second is China’s refusal to go down the disastrous foreign exchange path pursued by Japan under the Plaza Accords. China’s refusal to accede to US demands regarding currency exchange rates partly explains its pursuit of alternative trade settlement arrangements that are de-dollarised and outside of the US-dominated Swift foreign currency settlement system.
Third is the role of property in the economy. China’s old model of credit-fuelled, investment-driven growth has been severely undercut by the real estate crisis. This must also be placed alongside weak consumption and export demand.
However, unlike Japan in the 1980s and the US before 2008, China’s economy does not rest on real estate as collateral. Direct financing by banks for real estate amounts to less than 3% of total bank loans. Homebuyers account for 80% of housing-related debt. The historic default rate for mortgages is only 0.5%. With RMB135 trillion in savings, the risk of large-scale defaults is very low.
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China’s real estate debt is domestic and represents about 1.4% of GDP. Property debt and speculation are not driving a stock market bubble as was the case in 2008 in the US. Real estate mortgages in China are not financially engineered into collateralised debt obligations — the infamous CDOs — so there is no speculative process of making money through fee income and “mortgage re-sales” as happened in the US.
These differences in the structure of the economy mean it is reasonable to rely on growth in domestic consumption. The expansion of domestic consumption is reliant upon the expansion of domestic production. The challenge is to unlock the savings this year and turn them into consumer spooning.
How consumers will spend those savings is the burning question for foreign companies in China. The environment for those selling into China will become more competitive as production for domestic consumption is favoured and ramped up to move into niches previously occupied by foreign companies.
Technical outlook of the Shanghai market
The resistance features of the lower edge of the long-term group of moving averages proved too strong for the Shanghai Index rally. The index touched the lower edge of the long-term group of averages and then retreated. This shows strong investor selling has not disappeared.
Traders may have been enthusiastic about the potential for a trend change, but investors were not convinced. The continued wide separation in the long-term Guppy Multiple Moving Average (GMMA) indicator shows investors are dedicated sellers. They are selling into any rally and forcing the market further down.
This is a bearish environment. The potential for a double bottom or “W” reversal pattern has disappeared. The support level near 2,920 has been broken for the second time in a few weeks. This tells us that support is not holding. In future, this level may act as a resistance feature for any new rally from lower levels.
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How bearish is this market? There were three possible resistance points. The lowest of these was the lower edge of the long-term group of averages. The middle point was the value of the upper edge of the long-term group of moving averages. The highest resistance feature was the value of the long-term downtrend line.
The market failed the reach the lowest of these resistance features and that is very bearish leading into the Lunar New Year. This is a period that often sees strong selling as investors “sweep” last year’s bad luck out the door.
Current lows near 2,885 match the spike low in November 2022 but this is an unlikely support level. Historically, the next support level is near 2,800.
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 former national board member of the Australia China Business Council.
