(July 17): With China being the world’s biggest market, foreign food producers in countries such as Australia should be prepared for change as the Chinese government seeks to balance competing forces in its food supply chains.
Michael Whitehead, ANZ head of Agribusiness Insights, says the Chinese government has to perform a balancing act between satisfying its quality-hunting middle classes who want foreign products and keeping its domestic agricultural base viable, as well as promoting domestic agriculture productivity without degrading the environment.
“It’s a balance the Chinese government has to keep an eye on,” Whitehead says. “It has levers it can pull to rein back or expand various parts of its food supply chain, and Australian agribusiness operators should be vigilant about what those changes could be.”
He notes that large consumer forces have been unleashed in China over the past decade and the government will ensure enough food comes into the country to feed the population, while not impacting local growers — a large source of employment in China — and also not allowing local growers to endanger the environment with the overuse of chemicals, fertilisers and water.
“Australian producers have to remember that the No 1 advantage they have is that their goods are seen as safe and clean,” Whitehead says. “So, when the Chinese government wants to increase food imports through its ports, Australia starts from a good position. But exporters cannot be complacent. The sector has to be vigilant about the supply chain, safety and quality, and ensure it always knows what the new regulations are for importing into China.”
The drivers of China’s food puzzle largely come down to a huge and expanding middle class and an agriculture sector that comprises about 40% of the population.
In 2000, McKinsey & Co estimated the Chinese middle class made up 4% of the Chinese population. It now forecasts that 550 million Chinese will be considered middle class by 2022.
Boston Consulting Group has modelled a 9%-a-year growth in consumption to 2022, during which time the consumer economy will grow by 55%.
“China’s middle class currently has the same diet as the Japanese middle class had in 1990,” Whitehead says. “China has seen an increase in protein [consumption], such as eggs and meat, over the past decade, but a small decline in grains [intake].”
Such demographic disruptions are playing out in the food supply chain that Whitehead says has resulted in Australian producers being given very clear signals of approval from Beijing, through favoured status access and tariffs on food imports.
“Australia is part of China’s food plans and, as consumption rises [there], the government will not want food imports delayed at the ports,” he adds. “But we have to keep up the standards that earned our reputation in Beijing, and our producers have to be aware that rules and regulations might change as the Chinese government pulls the levers that it has.”
Whitehead says Australian agribusiness operators should also stay abreast of technology as China’s online retail markets rise to about 15% of all retail spending, and as internet platforms move into perishables.
At the same time, technology has evolved to enable consumers in China to see the provenance of a piece of Australian beef by running it under a scanner, a big marketing advantage for producers from Down Under.
Whitehead says the Australian agri business also needs to pay attention to analytics and use the sort of big-data services made possible by retailers such as Alibaba Group Holding, which is not only crunching consumer preferences across Chinese postcodes, but also using the data to predict the time and season of demand of specific products and niche consumer markets.
HSBC China internet analyst Chi Tsang says the role of the internet is favourable to Australian agribusiness companies because of the changing nature of consumer spending. “China doesn’t have the big national retail department stores and supermarkets like they do in the US or Europe. But anyone with a smartphone can shop on Alibaba.com.”
And shop they do. There are about 500 million active customers on Alibaba. com and every day, its courier freight company delivers 60 million packages.
Now, the internet retail industry is shifting to perishables as the growing middle classes want the meat, milk, fresh fruit and vegetables and other items found in a supermarket. This, Tsang notes, is a good situation for Australian agribusiness companies.
He says the market is opening in different ways, depending on the Australian company and its arrangements in China. Some use a China-based distributor to execute sales in- country. Others use Alibaba’s cross-border retail website, Tmall Global, which allows Australian exporters to execute orders for the Chinese market, without holding stock or having a corporate presence in China.
Tmall Global is a tightly controlled universe where vendors have to meet a number of regulatory and quality criteria before they can sell directly in China. But, once accepted, they reach hundreds of millions of potential customers, are accepted into the Alibaba payments system and can use its delivery and logistics network. They are also in a border-clearance express lane.
The Shanghai Index rally consolidated near the target level of 3,200 and then developed a strong breakout. This is a continuation of the breakout pattern, sometimes called a W pattern. The upside target for the W pattern is near 3,200 and this has been achieved.
The breakout means the nature of the trend behaviour has changed. This is now a trend rather than a breakout rally. Investors are interested in the potential upside target for the trend. They are also interested in the strength and nature of the new trend.
The upside targets are calculated using previous resistance levels. This gives a target near 3,265. The Shanghai Index moves in well-defined trading bands so this method is also used to set the upside targets. The width of the trading band is measured and the value is projected above 3,195. This gives an upside target near 3,260.
This sets an upside trend target for the index between 3,260 and 3,265. The key understanding for the nature of the new uptrend is the Guppy Multiple Moving Average relationships because this provides a guide to the strength of investor sentiment and the confidence of traders.
The long-term GMMA reflects the thinking of long-term investors. The long-term GMMA has compressed and is turning upwards. In the future, investors will watch for an expansion of the long-term GMMA group of averages because this confirms strong investor confidence in the new uptrend.
The behaviour of the short-term GMMA shows that traders are also becoming more confident. The short-term GMMA reflects the thinking of traders. The current activity in the short-term GMMA shows wide sepa ration and that traders are buying more aggressively. A retreat and consolidation is normal behaviour for this type of trend breakout. This will lead to some compression in the short-term GMMA, followed by an expansion, as traders move into the market to take advantage of temporary lower prices.
There are two GMMA trend confirmation signals. The first signal is when the value of the upper edge of the short-term GMMA moves above 3,195. This has developed. The second confirmation signal is when the lower edge of the short-term GMMA moves above the 3,195 level. This may develop towards end-July.
The breakout above 3,195 is bullish, but there may still be some consolidation around 3,195 as the index tests this as a support level. The index can drop to 3,180 and remain in a long-term uptrend. In the longer term, investors watch for the values of the long-term GMMA to move above 3,195.
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 more than a decade. 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
