China view: Don’t bet against China
Despite efforts to isolate China, the Chinese economy continues to thrive. Looking behind the headlines helps to identify the extent of business opportunities. The levels of foreign investment flowing into China have continued to increase, while the sources of that investment are more diverse.
For example, the foreign investment flows into the securities markets were an outstanding contributor to the surge in inbound foreign investment to China last year.
This included the expanding bond market as well as investment into the global index linked equity market. Net inflows into Chinese bonds topped US$190.5 billion ($254.5 billion). This was an 86% y-o-y increase. Meanwhile, net inflows into the equity market was US$64.1 billion, giving a 43% rise over the previous year’s totals.
Despite the Covid-19 outbreak, China continues with its commitment to implement policies to open up its financial markets to international participation.
This includes curbing the growth and influence of monopolistic entities like Jack Ma’s Ant Group to create a more competitive environment. This also stands in contrast to the reluctance of US regulators to curb the monopolistic influence of Facebook, Amazon, Google and others.
In this favourable environment, the growth in capital flows into China this year are expected to continue.
China attracted US$520.6 billion in foreign investment in 2020. This was a y-o-y increase of 81% compared to 2019, according to a report released by the State Administration of Foreign Exchange on March 26.
In addition to this surge in foreign investment, the data on trade and investment flows suggests that pre-Covid-19 global supply chain patterns are largely reasserting themselves. There continues to be talk of sovereign security of supply chains, and a push to reduce dependency on supply chains starting in China.
However, this narrative fails to recognise that Chinese supply chains remain reliable and dependable systems of value flow. In fact, it is this reliability that minimised greater economic disruption during Covid-19 and which succeeded in meeting the global demand for personal protective equipment (PPE).
The calls for de-coupling and reduction of reliance in China supply chains are political posturing, but the impact cannot be entirely discounted.
What is perhaps more significant is the fall in Chinese outward-bound investment. In 2020, it fell by 20% — compared to 2019 — to US$109 billion. This means that there is 20% less Chinese investment money available for funding development projects outside of China.
Paradoxically, investment into foreign equity and other security markets rose 87% compared to 2019 to hit $167.3 billion.
This included $131 billion allocated to equity investments giving a 3.5-fold increase on 2019.
This tended to be investment in existing equities rather than IPO investment so listed companies may wish to structure future capital raisings with the China investors in mind.
Above all, these trade flows also suggest that it is unwise to bet against China.
Technical outlook for the Shanghai market
The Shanghai Index developed a slow but steady test of resistance near 3,460.
The first breakout has failed and the index has retreated towards the lower support level near 3,360.
Despite the failure, the initial breakout is significant because it carried the index above the longer-term resistance level that is the upper edge of the long-term trading band that dominated the market for most of last year, while the long-term trading band dominated in the second half of 2020.
The index movement was confined within the broad trading band that dominated the Shanghai index from July 2020 until January 2021.
The band has three features and these influence the way the current breakout is developing and these features are also used to set the upside targets.
For example, the first feature of this trading band is the strong resistance level near 3,450 while the second feature in the trading band is the support level near 3,360.
Finally, the third feature is the midpoint of this broad trading band located near 3,360. The index oscillated around this level.
The market was bullish when it remained between 3,360 and 3,450. The index was bearish when it was between 3,240 and 3,360. The width of the broad trading band gives an upside target near 3,630. The shortterm breakout target is near 3,540.
The Guppy Multiple Moving Average (GMMA) indicator is used to assess the way the breakout trend may develop in the future following the current index retreat.
The long-term GMMA is a guide to the way investors are thinking. The compression in this group suggests investors are not strongly bearish. The compression also suggests investors are waiting for a strong lead from traders. They are waiting for proof the breakout can remain above 3,460 before they enter the market again a strong buyer.
Despite the retreat, there is no expansion in the long-term GMMA.
The important message from this group is that investors are cautious, but not bearish. The short-term group of GMMA averages provides information about traders. The index rebounded from a double bottom test of support near 3,360.
During the rebound, the short-term GMMA compressed and moved upwards to test the lower edge of the long-term GMMA.
This shows traders are growing more confident. The degree of retreat and the way the short-term GMMA reacts will provide information about the strength of the developing trend.
Index activity is contained in the lower section of the long-term trading band but traders watch for another rebound rally to test resistance.
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.