China: Assumption versus reality
This week I listened to a respected bank economist deliver his tenth annual talk about China’s economic outlook and development. He was neither relentlessly bearish nor bullish. Deep into his presentation, he admitted that almost none of his forecasts for 2022 had been correct. But he ploughed ahead with forecasts for 2023 using the same analysis bases he had used last year. He dragged out charts of housing, local government debt, and other segments of the big macro picture.
He told an interesting and wellinformed story at a macro level. He did not attempt to explain how or why not his 2022 analysis was wrong. Nor did he explain any adjustments or changes he had made to the methodology underpinning his 2023 outlook analysis to correct the failures of his previous 2022 outlook.
I don’t want to be too hard on him because this failed approach to China analysis is common, and it begs whether businesses can rely on this when making decisions.
The failure in his 2022 forecasting was partly because it treated China as if it was the same during and before the pandemic. His 2023 forecast also partly assumed that China postCovid-19 would return to the same trajectory and problems that had prevailed pre-pandemic. It was as if the country had remained in suspended animation throughout the lockdowns!
Unless the assumptions on which forecasts are based are changed, forecasts will continue to be inaccurate. We cannot operate under the same assumptions. Old problems have remained and been ignored during the pandemic. Things have changed, as he noted, but he seemed to dismiss the changes as unimportant.
The banking system has an extra RMB7 trillion ($1.3 trillion) in savings. How these savings will be spent will determine the economic structure of China, its recovery, and its interaction with the world. Business opportunities will emerge, but analysis based on the idea that things will return to pre-pandemic normal will not help identify them.
We readily acknowledge that Western economic activity is different in important ways post-Covid-19. The rapid, widespread use of electronic
settlement is one example of many that have shaken how business is conducted. Shanghai-based market analysis company China Skinny points to innovative marketing initiatives in China, particularly in the digital, online-to-offline (O2O), packaging and new product development space. They say these changes affect other consumer categories, including health, lifestyle, fitness, entertainment, food & beverage, fashion, tech, travel and more.
Yet, the hardy band of China analysts seem reluctant to concede that Covid-19 may have wrought similar changes in China’s business activity.
China’s financial stability is high, so the Covid-19 recovery response differs from the 2008 economic support required during the US-initiated global recession.
But try telling that to investors in Australian iron ore. They, like Australian Treasury officials, seem to believe that the China Covid-19 recovery will be a repeat of 2008 with massive demand for Australian commodities.
It is important to recognise that substantial change has occurred because this impacts consumer behaviour, investment decisions and how capital flows in the economy. Just as in the West, there are some
tidal waves of change, and foreign businesses operating in China must be ready to adapt quickly.
Technical outlook for the Shanghai market
The Shanghai index resistance area near 3,280 is strong and has again forced the index back into the longterm historical trading band before a strong breakout. The index has staged rallies and retreats between support near 3,220 and resistance near 3,280. This pattern has developed into a potential triangle pattern. This is not a well-defined pattern, but it captured the change to a more bullish outlook.
This bullish bias is confirmed by how the index has not retreated to the lower edge of the trading band near 3,220. Instead, the retreats found support near the value of the upper edge of the long-term Guppy Multiple Moving Average (GMMA) before the rally above resistance.
This suggests that investors were quick to enter the market on any pullback. This delivers support for the continuation of the longer-term uptrend.
The second bullish confirmation feature is the relative position of the support line near 3,220 and the value of the lower edge of the long-term GMMA. It is a bullish confirmation when the lower edge of the long-term GMMA moves above this support level.
The third bullish confirmation is the consistent degree of wide separation in the long-term GMMA. This shows that investors are not selling when the index dips. Instead, they are entering the market as buyers, supporting the rising trend. Additionally, the degree of separation between the long-term and short-term groups of averages has remained relatively steady. This is a feature usually associated with sustainable trends.
A sustained breakout above 3,280 resistance confirms the underlying momentum supports the resumption of the uptrend.
The short-term target is 3,415, with the peak of the breakout in July 2022. The current resistance tests are part of developing the long-term fan pattern and a double-bottom rebound. The 3,415 level is also a resistance feature, and it’s reasonable to anticipate the market will again consolidate and move sideways around this level.
The depth of the double bottom pattern is measured, and then this value is projected upwards. The very long-term target for the pattern is around 3,860. The index also shows a fan pattern that signals a long-term trend change. The fan starts from a single point and consists of multiple trend lines that fan out. The fan pattern is often associated with longterm breakout patterns that develop over months.
The most important indication of a trend continuation towards the 3,415 target is a sustained move above resistance near 3,280. Once this breakout is confirmed, the market will see a surge in investor buying to sustain the uptrend.