It was a soft introduction to the scourge of corruption in China. The gentleman took out a banknote and held it up. “Money has two sides,” he said, strongly hinting at which side he wanted to work with. I declined and went on to pursue other businesses with more honest operators.
Tackling corruption in China is a much more important issue than whatever Western observers are fixated on because tackling this issue goes to the heart of improving everyday living and getting access to services.
To be sure, China is not the only country that suffers from corruption or is facing economic woes. For instance, just ask the thousands of Australians caught up with collapsing housing developers. Similarly, just ask the thousands of customers of banks that recently collapsed in the US. In addition, deflation may be an economic problem in China but it is nowhere near the same magnitude as the problem posed by inflation.
We know China’s economic growth will be significantly slower over the next 40 years because of an ageing population and lower population growth rates. This will exert pressure on Beijing to reform taxes, practise budget discipline and increase productivity.
However, the same conclusions can be made about Australia. Therefore, these economic problems are not unique to China so we need to put stories about the coming “collapse” of China into a broader context. Having said that, corruption is a different story because it impacts directly ordinary citizens.
President Xi Jinping’s “tiger and flies” anti-corruption campaign was widely derided in the West as a cover for purging Xi’s political opponents. To a certain extent, this is correct in some cases but the analysis ignores the impact of this prolonged campaign on the flies that hover around business. The pandemic also exposed some of these unacceptable practices.
See also: China tightens securities lending rule to support stock market
There is currently a strong focus on corruption in the country’s healthcare sector, in what has been described as the biggest crackdown in the history of the industry.
It goes beyond under-the-table payments to health staff to ensure priority treatment. The investigations also extend all the way down the pharmaceutical and health equipment supply chains.
At least 177 hospital bosses and Chinese Communist Party secretaries have been placed under investigation this year, which is more than double the number last year. The National Health Commission said the campaign would focus on people who had used their position to procure kickbacks and corruption in the pharmaceutical sector.
See also: Eight reasons why I am still in favour of China stocks
In the first six months of this year, nearly 2,5000 people have been investigated by the National Supervisory Commission. This is the government’s anti-corruption authority that works alongside the party-focused investigation units. More than 1,600 people have been punished.
The focus is on the healthcare sector but there is a wider focus on all aspects of business activity that have the potential to diminish the prosperity and well-being of ordinary people or laobaixing. This heightened awareness is something businesses need to be aware of although we are not suggesting any reader of The Edge is involved in any of these corrupt practices. What we are saying is that the “tiger and flies” anti-corruption campaign is aimed at reducing corrupt practices and it gains additional impetus when economic times are more difficult. Businesses acting legitimately may inadvertently be caught up in investigations through no fault of their own. Protection comes from meticulous record-keeping and compliance so that accurate evidence can be quickly supplied.
Outlook of the Shanghai market
The Shanghai index test of support near 3,160 has failed. The market moved rapidly below this level and is testing November 2022 lows and support features near 3,080. It is an ugly market and there is no significant evidence that the falls will stop.
What we do know from the index activity is that any rebound from near 3,080 will encounter significant resistance near 3,160. We know this because the 3,160 level twice acted as a recent support feature in June and July. This suggests the same level will act as a significant resistance feature in the future.
In addition, the value of the downtrend line B will also act as a resistance feature. Come late September, any market rally will first need to overcome the downtrend line acting as a resistance feature. Any successful breakout above this line will then quickly encounter the 3,160 resistance level.
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The key question for investors is to decide if the market can find and hold support near 3,080. True, any rebound from this level faces significant resistance barriers but a rebound is by its nature bullish.
A fall below 3,080 is unreservedly bearish. There is a very weak support level near 3,040 but the next significant support feature is near 2,980. That is more of a consolidation area than a support level.
This has been a rewarding market for those who are able to trade short on the market index using derivative instruments. But it is a horror market for those who can only trade from the long side as is the case for investors and traders in China. They are simply sitting on losses and this will colour the nature and strength of any recovery. It is reasonable to expect that activity will cluster around the historical support and resistance features as existing stockholders sell in an attempt to recover some dignity.
This means sharp rallies on the back of thin volumes in market activity are likely to be overwhelmed with selling around the resistance areas. This will result in extended consolidation periods where the index simply loses steam and momentum because buyers are overwhelmed by desperation selling.
Trading these rallies and consolidation bumps will generate good returns but without significant government intervention, we are unlikely to see the emergence of a long-term 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 former national board member of the Australia China Business Council
