China’s capital markets seem to be undergoing a sustained change in recent months. In spite of this, we need to try to put these recent moves into a broader context to understand if they are a threat to investments, a major change or just a readjustment of policy.
The initial reaction was that President Xi Jinping was hell-bent on destroying the Chinese capitalist model. Former Australian Ambassador to China Geoff Raby has argued that these changes represent a shift away from former Chinese leader Deng Xiaoping’s declaration: “It doesn’t matter whether a cat is black or white — so long as it catches mice”.
Raby suggests that it now matters very much what colour the cat is. But there is a strong case to suggest that Deng’s observation that “socialism is not poverty” plays a far more important part in President Xi’s approach, especially if you remember that Xi spent his youth as a student sent down to the countryside.
These recent changes are not a divergence in direction, nor a return to a hard-line path. They are changes consistent with a policy philosophy that is trimming off some rough edges and reining in some excesses.
There are six issues to consider. The first is the restructuring of the education system because it reflects a deeper philosophical change in policy.
While it seems a tenuous link, this is also related to the wrestling of control of big data away from commercial operators. Both of these policy actions are related to the idea of common prosperity.
Key to achieving these objectives is an increased awareness of the importance of sovereignty. One manifestation is the so-called wolf warrior diplomacy but the issue of sovereignty runs deeper than that and has long term historical roots.
All of this is wrapped around the access to capital in ways that reduce sovereign risk and break the stranglehold of traditional financing.
Understanding how these are all part of the same parcel helps business to identify opportunities.
The sudden restriction of the education system to eliminate for-profit extra-curricular coaching providers like New Oriental Education rocked not just the industry, but also Western observers. It appeared to come out of nowhere.
It had been foreshadowed in policy papers in May. The extent of the move may have been a surprise, but the move itself was not.
There are several principles underpinning this move, and it is through these lenses that we can view this and other policy adjustments.
The first principle is equality of access to services. The expensive coaching industry delivered an advantage for those sitting the gaokao (the National College Entrance Examination, a standardised college entrance exam held annually in mainland China).
It is an advantage that depended on wealth, and it is an advantage that served impoverished families.
The second principle in the education sector was the importance of education as a path out of poverty. The old system of imperial examinations meant many individuals of low social status were able to rise to political prominence through success. Education is a foundation and Confucian principle and education are prized in China and Asia as a means of escaping poverty.
Expect to see this equality of access principle rolled out amongst other service industries, including health and aged care. The same applies to the attacks on the investment darlings of the West, the hi-tech industry. We will consider these next week.
Technical outlook for the Shanghai market
After every fast rise there comes a fall and the Shanghai Index is no exception to this rule. The rapid index breakout reached the previous peak highs near 3,720 and then pulled back. The pull-back is no surprise because this is the normal behaviour of a rally breakout.
The key question for traders and investors is to determine how far the retreat will fall before it finds a support level. If the rally is to turn into a sustainable uptrend then the support level must hold and act as a base for a new, and perhaps less powerful, rally.
It is this combination of retreat and rebound that provides the anchor point for the new and more stable uptrend line.
There are four support features in the Shanghai index chart.
The first is the value of trendline C. This trendline defines the fast-moving rally. This is the least powerful of the support features because it does not include any significant retreat and rebound features. It is a rally trend line.
Still, it does match the value of the second and more important support feature which is the value of the lower edge of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. Currently the value of trend line C and the value of the 15-day exponential moving average (EMA) are around the same.
This combines two support features: One weak and one stronger to make these more significant. However, both are essential support features in a rally environment rather than in a sustainable trend.
For the potential longer-term trend, we look at the role played by the long-term uptrend line A. This is the third support feature. This has variously acted as a support and a resistance feature. It has been tested many timers so there is a high expectation that it will again act as a strong support feature. The current value is near 3,590.
A fall below trend line C and the lower edge of the short term GMMA will find support near 3,590. This support is further buttressed by the fourth support feature.
The horizontal resistance line has acted as a long-term resistance feature of the Shanghai Index. It is the upper limit of a long-term sideways trading band with a value near 3,580. This places it very near to the value of uptrend line A.
This suggests these two support features will offer a strong pause and rebound point for any major retreat in the market.
