Secret escape through Chen Cang
In 2008, China pulled itself, and the world, out of the hole created by the collapse of US markets. China embarked on a massive infrastructure build, saving Australia in particular from the worst of the global financial crisis.
There is an expectation that China will do the same again, and save the world from the economic impact of Covid. President Xi Jinping’s recent observation that “infrastructure serves as a pillar for economic and social development” confirms the belief. They eagerly anticipate another infrastructure building programme similar to that of 2008.
That is an unwise assumption because this is more akin to the eighth of the 36 Strategies (a range of tactics that can be deployed in different situations) — secret escape through Chen Cang.
Xi’s new infrastructure plan may have some collateral benefit for Western economies, but its focus this time is determinedly domestic. It is not a knee-jerk response to the damage inflicted by China’s Covid economy. The policy framework is a consistent part of a long-term plan to develop economic security as a base for continued improvements in prosperity that help China to escape the middle-income trap.
That’s a mouthful, so we need to take the time to break it down and ferret out the future opportunities.
Common prosperity and economic security is the foundation of all national security. Communities riven by entrenched wealth disparity are ripe for unrest and social disturbance. The dying days of the Trump administration were a perfect illustration.
Economic security is a new catchword for Western economies as they discovered the limitations of just-in-time supply chains and overreliance on a single market. It comes as a surprise to some Western observers that China is no different.
For all, Covid is, in part, a national security issue because it challenged the idea of sovereign independence that could be threatened by sanctions, disruption to trade settlement, or interruption to trade routes.
But here’s the rub. The infrastructure required in this environment is not measured by steel rail tracks, high-rise buildings or bridges. The foundation of the digital economy is un-hackable, soft infrastructure. Its innovation is in AI applications such as managing country-wide electricity loads using quantum computing solutions delivered by secure satellite optical messaging.
The core objective is to develop a robust economy less reliant on external factors. Just as Zhang Han was deceived by Liu Bing’s escape via Chen Cang, so too is an expectant West deceived by the prospect of rescue by a China-led infrastructure build. An escape from the middle-income trap rests on improved productivity and new economic processes. This is a digital economy and soft infrastructure is required to make it work. Essential soft infrastructure development includes improved security of trade settlement, the growth of the digital economy using quantum computing, and reduction of business inefficiency.
Xi included developing a smart grid along with a series of new green, lowcarbon energy bases and fine-tuning the oil and gas pipeline network. These are domestic projects designed to build a stable dual-circulation economy.
To be sure, there remains much work to do with improved planning of waterways, the building of coastal and inland ports and the upgrading of water transport facilities nationwide, but this no 2008-style global rescue.
Technical outlook for the Shanghai market
The current rally has stalled as it approaches the resistance feature created by the lower edge of the long-term group of moving averages. The Shanghai Index remains in a severe downtrend. The index continues to consolidate around the target level set by the head-and-shoulder chart pattern.
The downside target for this headand-shoulder pattern was near 3,040. The pattern consists of a head, or peak, and two lower shoulders. A neckline is plotted between the low points of the two shoulders. The distance between the neckline and the head peak is measured. This value is projected downwards to provide the downside target near 3,040.
A bullish recovery encounters resistance near the lower edge of the long-term Guppy Multiple Moving Average (GMMA). This is around 3,100. However, the wide separation in this group shows a strong downtrend and this suggests a low probability of a significant breakout. The wide separation shows investors are committed sellers and as the index rises, they will overwhelm the market with selling.
There is a higher probability the market will react away from those resistance features and continue with the downtrend.
The next support level is a narrow support band. The upper level of the support band is near 2,620. The lower level of this support band is near 2,420. This narrow support band is not a well-defined support feature, so investors will watch for evidence that this support band can be effective. These levels are best seen on a monthly chart.
The GMMA indicator remains very bearish. The long-term group of averages, which indicate investor thinking, show that investors remain very bearish, so there is limited potential for a rapid change in the trend despite the compression in the short-term group of averages.
The short-term group of averages, indicative of the way traders are thinking, also remain in bear mode because they are unable to move above the upper edge of the longterm GMMA. Traders are testing the strength of the bears, but it is a big task to change the trend direction quickly.
Daryl Guppy is an international financial technical analysis expert. 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