China view: China bounces back from Covid-19 disruption
The Golden Week holiday in China has shown what economic recovery looks like post- Covid- 19 when there are effective track-and-trace systems in place. A colleague in Beijing, who had just been to a packed cinema to watch a film without any reservations about Covid- 19, observed that he was just one of the more-than-99 million movie tickets sold during the holiday, making it the second highest level of sales for the National Day holiday.
The film, My People, My Homeland, topped the takings table by grossing US$280 million ($380 million) for the week. Media pictures of crowds on the Great Wall near Beijing further support the notion of a safe economic recovery. The city-wide rapid testing in Qingdao explains why people have such confidence.
Some benefits of this Covid-19 recovery are detailed in a report by Shanghai-based research house China Skinny. It estimated that 637 million trips were made over the Golden Week, which was 81% of the trips made at the same time last year. Many hotel brands in the luxury hospitality sector are back to pre-Covid-19 levels of occupancy, helped by discount pricing, although consumers did not spend as much, with an estimated 28% decline.
Retail and catering sales were the big sector winners. During the Golden Week, sales were up by 5% to US$239 billion. Retail sales are anticipated to show a y-o-y growth of 1.6% in September. Bank of America Global Research analysis expects China’s GDP to expand 5.4% a y-o-y in 3Q, up from 3.2% in 2Q.
This is all domestic growth, and these figures underpin the relevance of President Xi’s Dual Circulation Economy policy approach. This concept signals a reduction in China’s once overweighted economic dependence on exports. The approach has been summarised as “we’ll take what we need from the world but focus on building up China from the inside”.
Pandemics are often seen as great levellers, with disease hitting rich and poor alike. But this 2020 pandemic does not seem to follow this pattern, with the economic burden falling disproportionally on the poor. Most households in the bottom 60% — those earning less than US$14,650 a year — said their wealth declined in the first half of 2020. In contrast, those earning more than US$50,000 a year reported net gains.
Just like for billionaires globally, China’s 415 billionaires have seen their wealth soar — an estimated 41% since lockdown.
This economic growth is not just driven by domestic tourism and consumption; services activity is growing at its fastest pace in three months and this reflects a changing economic structure.
This growth is a change that US banks and financial companies have been keen to become involved in. Citibank and others have moved quickly to take advantage of the loosening of partnership requirements to increase their stakes in their Chinese counterparts. Despite the rhetoric coming out of the US presidential campaigns, it appears that US businesses are increasingly committed to increasing exposure to China’s markets. That is a lead that investors should add to the Golden Week evidence of a rapid economic recovery.
Technical outlook for the Shanghai market
The gap-up rally after the Golden Week holiday is bullish and it is developing into a trend break. The immediate upside target is the resistance level near 3,450. This was a double-top pattern and it now has the potential to develop into a triple-top pattern. A triple top is confirmed by a failure to break above 3,450 and a substantial retreat.
If we consider this from a bullish perspective, then the following bullish features are noted:
• The long-term Guppy Multiple Moving Average ( GMMA) has compressed but it has not developed any crossover. This shows downtrend weakness, but it does not confirm the development of a new downtrend.
• The long-term GMMA is turning upwards but has not developed any expansion, so support for any new uptrend remains weak.
• The short-term GMMA has compressed and is turning upwards. This is part of a rally reaction, but further compression will show a stronger rally with good potential to develop into a new uptrend breakout.
• The index has moved above the short-term downtrend line B.
• The rally has developed from a consolidation base near 3,220. The bullish breakout is confirmed when the short-term GMMA moves above the upper edge of the longterm GMMA.
If the Index fails to stay above the long-term GMMA and the downtrend line B, then this is a bearish development. A bearish development is confirmed with sustained closes below 3,220.
It is possible that the Shanghai Index is developing a broad consolidation pattern with resistance near 3,340 and support near 3,220. This is a very broad sideways trading pattern or trading band. The pattern is proved when the index again successfully tests 3,220 as a support area and when the index retreats from the resistance level near 3,450.
In this situation, the depth of the trading band consolidation is measured, and this value is used to set an upside breakout target. This is near 3,680. This analysis should be applied with caution as it is a longterm pattern development and target.
The evidence for the failure of this pattern is a sustained move below the support area near 3,210. The same measurement method is used, and this sets a downside target near 2,980. This is near to the historical resistance and support features.
This is currently a good bullish breakout from the short-term downtrend, but it is not yet confirmed as a new uptrend.
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.