It was once said that cash was the friendliest way to do business. Of course, that came from a time when it was illegal to wear a mask when you walked into a bank.
Now, things are different — cash is suspect whilst masks are not.
Not so long ago, cash transactions were once the norm in China. Banks provided the archetypical brown envelope for large money transactions. This had a dark side, as cash was the preferred medium for those who wished to settle unlawful transactions. At this time, China was infamous for its bribery and under the table deals.
These nefarious activities have not been eliminated but they have been sharply reduced as a deliberate policy adopted by President Xi Jinping. The crackdowns have also captured some political opponents, but this was not the primary purpose of the “tiger and flies” or Xi’s anti-graft campaign.
The Chinese government has become increasingly concerned at the scale of corruption and the way this distorted economic activity has impacted the ordinary people.
The Chinese tradition of gift giving, for example, had become a base for corruption. Cash — or crypto cash like prepaid gift cards — were the foundation of both petty and large-scale corruption.
See also: China tightens securities lending rule to support stock market
However, things have changed and are heavily impacting legitimate business transactions. The first change is the move towards a cashless society. Online payment service providers WePay and AliPay led the way. The introduction of Digital Currency Electronic Payment (DCEP) — also known as the digital yuan — also signalled a government move into this area.
The anti-corruption aspects of this are not accidental. These are also positive steps that have made business and trade settlement more efficient. Still, the demand for ever-more documentation has brought with it a host of bureaucratic irritants. This is not unique to China and is no different from the increasingly intrusive Know Your Customer requirements imposed by Western regulators.
In recent months, it has become increasingly difficult to manage payments from Chinese business to foreign businesses. We are asked to (again) supply business registration documentation. Invoicing details must exactly match the details recorded by the bank and the paying authority. Payment delays due to bank requirements are becoming more common.
See also: Eight reasons why I am still in favour of China stocks
Starting March 1, the Action Plan on Banking Client Due Diligence, Identity and Transaction Record-keeping procedures lowers the threshold that triggers client due diligence reviews. The new threshold is now for any cash deposits or withdrawals over RMB 50,000 ($10,607). Any banking client who deposits or withdraws cash over the threshold will be subject to personal identification reviews, due diligence reviews on the source of the cash deposit and the use of the withdrawal.
This is part of a new crackdown on money laundering. This cash-control measure compliments also the final launch of the sovereign digital currency The DCEP enhances the traceability and verifiability of all Chinese savings and financial transactions via the digital currency platform.
The digital tracing process will not work with cash. It is against this background that business needs to prepare to meet the complications that arise from China’s move away from cash and the increased bureaucratic requirements and delays have impacted existing payment processes.
More importantly, Chinese company to foreign company payments have also become slower and more difficult as a result.
Technical outlook for the Shanghai market
The Shanghai market rebound rally moved quickly above resistance near 3,450 and then stalled. Following the rally, the 3,450 level did not provide a strong support level and the index again fell below 3,450.
The fall below this level was temporary and quickly followed by a rebound and a close above 3,450. This consolidation around the 3,450 level is not a bad thing. This retreat and rebound allows the tentative placement of a new uptrend line E.
For more stories about where money flows, click here for Capital Section
The line position is tentative because a reliable trend line requires three anchor points. An anchor point is created by a retreat and rebound activity.
Another retreat and rebound behaviour by the Shanghai index may confirm the placement of this tentative trend line. The key confirmation comes when the retreat hits the value of the projected trend line E and then rebounds from it.
If this develops then we can clearly identify a new uptrend behaviour with the Shanghai index. Until then, this remains just consolidation behaviour around 3,450.
A successful retest of trend line E would confirm a move towards the next resistance level near 3,520. This has been a long-term consolidation area for the Shanghai index.
A fall below the value of the projected trend line E sets a downside target near support at line D. This value is around 3,355 and is a long-term historical support level.
This is a long-term median line in the trading band that defined most of the activity in 2021. The lower edge of the trading band is line C near 3,450. The upper edge of the trading band is line A near 3,595.
The rapid fall in the market distorts the behaviour of indicators based on moving average calculations. These indicators are as diverse as the Relative Strength Index (RSI), Stochastics and Moving Average Convergence Divergence (MACD) indicators. None of them currently generate trend reversal signals.
The Guppy Multiple Moving Average (GMMA) indicator is also impacted. Investors need to wait for the influence of the steep fall to ‘wash-out’ of the indicator calculations before these indicator tools can again provide reliable signals.
Until the new uptrend develops, it is the less complex support and resistance and trend line analysis that will provide the best way to understand the market behaviour and the potential development patterns
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 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. The writer owns China stock and index ETFs.
Photo: Bloomberg
