Doing business and investment with China is getting easier following two recent policy events, but paradoxically it is also getting more complex. This seems contradictory, but it reflects the changing business environment that makes competing with Chinese products more challenging. The nature of China’s economic development is evolving, so businesses need to adapt.
The recent meeting of technology business leaders with President Xi Jinping was the latest in a series of sessions dedicated to economic reform. This was followed by another National Development and Reform Commission meeting detailing a new action plan to stabilise foreign investment, with 20 specific measures. These meetings are closely examined for clues about policy changes, rightfully so.
Xi said that the Party and the country should ensure that economic entities under all forms of ownership have equal access to factors of production by the law, compete in the market on an equal footing, and are protected by the law as equals.
Equal access for all forms of ownership breaks down the barriers and restrictions that have inhibited the operation of foreign companies in China. It reduces the home-grown advantage previously enjoyed by domestic competitors.
The policy will lift restrictions on domestic loans for foreign-invested enterprises, allowing these firms to use domestic financing for equity investments.
To compete in the Chinese market on equal footing has long been the dream of foreign businesses trying to expand their footprint in China.
See also: China’s Two Sessions set development directions
Foreign companies operating in China, large or small, have always desperately tried to avoid engaging with the Chinese legal system. Even Chinese businesses will go to extraordinary lengths to prevent this engagement, which is, in part, why so much emphasis is placed on establishing good relationships. Knowing your counterpart in business in China is essential for survival.
The formal declaration that the law protects all economic entities as equals is fine in principle, but the litmus test will be in its practical application. It is unlikely to be a smooth transition, but the intent is clearly established.
In 2018, Xi held a forum for business leaders and entrepreneurs. In that forum, the focus was on coping with survival pressures and trade wars initiated by the first Trump presidency and seeking policy support from the attendees.
See also: The wind beneath China’s wings — new productive forces
Last week’s meeting was about new areas of global competition, social responsibility and deep collaboration between government and enterprises. This briefing was on the strategic upgrade of the Chinese private economy from being “policy-dependent” to “innovation-driven”. It also signalled a re-engagement with a push for increased global presence for Chinese companies.
These high-level policy changes signal strategic changes in the business and economic landscape. The current Two Sessions meeting will add more detail to the policy implementation.
Technical outlook of the Shanghai market
The breakout Shanghai index is losing momentum, but this is normal with the development of any new uptrend. The Guppy Multiple Moving Average (GMMA) indicator relationships suggest the trend is stable and can tolerate a pullback without threatening the underlying trend activity.
The steady rise remains stable and sustainable with a low level of volatility.
The GMMA indicator is used to understand the behaviour and character of the two groups in the market — traders and investors. These groups of moving averages show the level of confidence in the developing trend.
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The index is clustered in the values of the short-term group of averages in the GMMA. This behaviour is often associated with prolonged trending activity.
The long-term group of averages shown in red have maintained a steady degree of separation. Better trend strength is indicated when the long-term GMMA is more widely separated.
However, the current narrower but steady separation shows steady support for the trend development.
The lower edge of the short-term GMMA is clearly above the upper edge of the long-term GMMA. The move above the long-term GMMA is usually a signal of trend strength and continuity.
The support and resistance features on the chart, coupled with trend line analysis, provide the structure of the market and help the trader to set index objectives.
The first significant barrier to a rising trend is now the value of the upper edge of the trading band. This resistance level is near 3,435. This is better considered as a weak resistance area.
Historically, this has been a well-defined resistance level, but in recent months there have been three breakouts above this level that were quickly followed by a retreat.
This breakout and retreat pattern may develop again.
A successful breakout above this level hits the next resistance feature, which is at the value of the old uptrend line. This now acts as a second resistance feature.
This remains a solid bullish breakout environment.
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 former national board member of the Australia China Business Council
