China said its economy fell by 6.8% in the first quarter, worse than expected, but it started showing signs of recovery in March as factories and businesses re-opened after a six-week shutdown due to the health crisis.
The first confirmation signal of this is the increase in road traffic volumes and inevitably, pollution levels. These are steadily increasing across all tier 1 and tier 2 cities. It’s a sure sign of a return to work and an economy regaining its feet. It leaves open the question of whether this is a domestic recovery, or also a foreign trade recovery.
The second sign is a decline in online buying activity on Taobao and Alibaba. This suggests that as consumers are returning to physical shopping and shops, stores and shopping malls begin to reopen. The use of state-sponsored consumer coupons is another indicator of domestic economic recovery.
These are all positive signs of economic recovery on the domestic front.
The third sign is the acceleration of export markets. This comes from signs of life in the ports and signals an increase in demand for Chinese exports. Putting aside the air-freighting of medical equipment, the recovery of export shipping is limited by the contraction in Western economies. Without a recovery in international demand, China’s container terminals will be short of work.
This segues into a broader global trade environment with its increasing clamour for economic sovereignty through a reduction in reliance on China-sourced goods, products and investment capital. This is not just the usual bluster from the right wing in America. There is a real danger this idea will become national policy. Australia, which often follows the American lead, has moved to the vanguard in this approach.
Australia’s second airline, Virgin, has moved into voluntary administration and is on the hunt for new investment capital. It is unlikely any bid by a Chinese carrier would be approved in the current environment. To put it in another way, Australia would sooner see the collapse of a second airline rather than have it rescued by Chinese capital. This attitude finds soulmates in the US and supporters in the UK. This approach fundamentally alters trade and investment flows, crippling some industries and supporting the less efficient behind a range of innovative trade and tariff protectionist barriers.
That’s a different universe and there are some straws in the wind that blow in this direction. China’s Belt and Road Initiative (BRI) has largely drifted into the background, obscured in Western media by a tumult of China Covid-19 cover-up stories. However, BRI is alive and well with continued momentum to establish an alternative to trade and exchange structures dominated by protectionist Western markets. We do well to remember that the growth economies are not in Europe or the US, and it’s these growth economies that are more involved with BRI.
The quiet trial of the homegrown sovereign digital currency has been implemented across Shenzhen, Suzhou, Chengdu and Xiong’an, as part of a pilot programme. This is the first step on the path to the first electronic payment system by a major central bank. It is a precursor alternative to a dollarised settlement system.
These straws in the wind don’t tell us how the new investment field will look, but they do tell us that it will not be a return to the previous structure.
Technical outlook for the Shanghai market
The end of April is a critical period for the Shanghai Composite Index because this is the tip of the up-sloping triangle pattern. The pattern is created by the intersection of the up-sloping trendline with the horizontal resistance level near 2,850. This is a bullish pattern, although it is not a perfect example of a triangle pattern.
The perfect triangle pattern has these characteristics — a well-defined base, a reliable uptrend line and a reliable resistance level. However, in the “perfect” pattern, there is more price activity in the “belly” of the pattern. The Shanghai index does not show this behaviour, with most of the index activity running in a broad band parallel to the up-sloping trendline.
This is significant because it reduces the reliability of the pattern breakout and suggests it’s a little more difficult to achieve the upside target near 2,980.
However, weighed against this is the strong uptrend behaviour and the consistent successful re-tests of the uptrend line. This shows building bullish pressure that increases the probability of a breakout above 2,850.
The breakout may move very rapidly as resistance is overcome. This would see a fast move towards 2,980 — a move perhaps similar in behaviour to the 2,850 breakout on Feb 6. Aggressive traders are preparing for this move by entering near the value of the trendline in anticipation of this fast breakout.
Given the steady trend behaviour, there is also a good probability that the slower and more restrained uptrend behaviour will continue. This is the preferred breakout pattern because it suggests a more stable and sustainable uptrend. It will take more time to reach 2,980, but the trend will be more reliable.
The third possibility is for the market to consolidate around 2,850. However, this level has usually acted as a rebound point rather than a consolidation area, so this possibility is lower on the scale of probable breakout behaviour.
This type of restrained rebound and longer-term steady uptrend is consistent with the double-bottom breakout trend pattern that makes the right-hand side of the ‘W’ recovery chart pattern. The first target for this pattern is a re-test of the peak near 3,060. There are two major resistance features to overcome before the index can reach the 3,060 target level. The first is historical resistance created by the lower edge of the trading band near 2,850, and the second is the value of the resistance level near 2,980.
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.
