Much of the coverage of the opening session of the 20th National Congress of the Communist Party of China focused on President Xi Jinping’s statements about Taiwan and Hong Kong. There was no policy change, and it wasn’t reasonable to expect any.
The media largely ignored the more critical discussions around his response to ensuring economic prosperity in a lower-growth environment. Xi explained how the green and digital economy enhances the policy objective of common prosperity.
He acknowledged that China “has won the largest battle against poverty in human history”. Still, Xi recognised that this was just the beginning of building common prosperity that avoided the extremes of poverty or excessive wealth seen elsewhere.
Common prosperity does not leave sections of the community behind and requires that “agricultural and rural development come first.” China must “reinforce the foundations for food security on all fronts,” Xi added.
Increases in agricultural productivity are now driven by technological and digital change. The digital changes enable environmental modelling and effective harvesting to maximise agricultural off-take, offering opportunities in this section of the digital economy.
High-quality development rather than speed is the new requirement, reflected in focus on the green economy. This requires a system-wide approach to conserving China’s diverse geography of forest mountains, waters, farmlands, grasslands and deserts.
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“We will promote concerted efforts to cut carbon emissions, reduce pollution, expand green development, and pursue economic growth,” Xi said. China is already home to many innovative practices in this area, but it remains open to solutions developed elsewhere. Singapore’s floating grid of solar panels and success in water conservation are key areas where expertise can present business opportunities.
The challenge is sustaining growth in a way that supports the objective of achieving common prosperity. Part of the solution comes with striking a balance between the role of the market economy and a high-standard socialist market economy. “We will work to see that the market plays the decisive role in resource allocation and that the government better plays its role,” added Xi.
This is welcome news for financial markets and confirms the path towards market maturity remains open. It suggests a more open approach to adopting financial instruments and services. It means China will move more quickly to build a modernised digital economy which underpins domestic and international growth. “China is committed to its fundamental national policy of opening to the outside world and pursues a mutually beneficial strategy of opening up,” Xi said. China’s engagement with the open global economy is also achieved by promoting the high-quality development of the Belt and Road Initiative. He confirmed China wants to play an active part in the reform of the global governance system. This is a commitment that the US is uncomfortable with because it challenges its hegemony.
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Existing business relationships with China will not change, but Xi’s speech provided insights into the new areas of priority that will enjoy government support and encouragement.
Technical outlook for the Shanghai market
The Shanghai Index is slowly moving towards the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicators. This is not a formal area of resistance, but when investors overwhelm buyers, the market will retreat under heavy selling pressure. This suggests a developing retreat away from this feature and a retest of historical support near 3,050.
There is no indication of a trend change, but the market has reacted positively to the Communist Party meeting this week. However, there is no indication of a substantial and sustained trend change. The GMMA relationships show continued downward solid selling pressure. They remained well separated and maintained a consistent separation between the two groups of moving averages. This is characteristic of sustained solid trends.
The continued expansion in the long-term GMMA shows unrelenting selling pressure, even though there has been some slight reduction in the degree of downslope. The increase in selling pressure is shown when the long-term GMMA expands significantly. This has not developed, nor has any indication of a reduction in selling pressure.
The Shanghai Index is characterised by a sharp accelerated plunge followed by rapid recovery, as seen in April. The current downtrend has similar characteristics, but the current rally lacked the momentum seen in previous rebound rallies, suggesting a weaker rally within the context of a downtrend rather than a change in trend. Weak support is located near the April lows at 2,870, the target level of an exhaustion sell-off. A fall below support near 3,050 may see another test of the 2,870 lows. Following a failed rebound rally, traders will be alert for a retest of this level followed by a rapid rebound rally. The key feature to watch for confirmation is rapid compression in the short-term GMMA.
The current index activity made a weak attempt to move above support near 3,050. Future support failure at this level has a trading band downside target near 2,880. A sharp exhaustion sell-off that pushes the market down to 2,870, followed by a fast rebound, remains a possibility. There are no indications of relative strength index (RSI) divergence, suggesting an end to the downtrend activity. This remains a solidly bearish environment with the potential to develop consolidation around historical support levels below 3,050.
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
