China’s trade surplus just crossed US$1 trillion ($1.2 trillion) for the first time in the first 11 months of this year, despite direct shipments to the US plunging 29%. When indirect shipments to the US via third countries are taken into account, the plunge was more like a shallow dive.
As we noted in these columns when the excessive and erratic tariffs were first announced, we suggested that businesses needed to plan for an increase in Chinese exports into our home markets, which made once comfortable markets and market share vulnerable in a much more competitive environment.
Much of the narrative is that China has flooded markets with cheap goods, but this does not stand up to closer analysis.
The primary and persistent problem facing developed economies is inflation. For example, Singapore’s official inflation figure is around 2%, while the US is struggling to keep inflation below 3%. Meanwhile, Australia has held back on interest rate cuts because inflation is at 3.8%.
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This inflation is not created by a flood of cheap Chinese goods, contrary to some assumptions. The growth in China’s trade surplus comes largely from Europe, Southeast Asia, Latin America and Africa. China quickly pivoted to new markets, but most significantly to those markets in the developing Global South. These are new markets, and China enjoys the comparative advantage of being a first mover of scale in many of these areas. Much of this growth is tied to the Global Development Initiative promoted by President Xi Jinping.
The expanded Chinese footprint in developed economies comes not from cheap goods, but from high-quality products that are demanded by consumers. Chinese EVs offer high quality and very advanced features at a competitive price. Place a BYD Song Plus/Seal U series or a Xiaomi SU7 against a Tesla Model Y, and many professional motoring commentators agree that there is no contest. The Chinese vehicles, dollar for dollar, are simply a better value. One US motoring writer described the Xiaomi SU7 as being worth twice its asking price.
The same comparison applies to high-end tech products — phones, servers or AI. Price matters, but quality and value are the true competition.
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As China becomes dominant in the production of hi-tech goods such as electric vehicles and batteries, it is unlikely to lose its place as the world’s factory for the products that are vital to global development. While overall Chinese exports grew by 5.9% this year, certain products — such as semiconductors — saw even larger increases, with a 24.7% jump in exports.
Despite distortions from Trump’s tariff regime, the growth of Chinese exports fundamentally reflects China’s success in meeting global consumer demand for quality, advanced technology products that offer strong value.
Technical outlook for the Shanghai market
The Shanghai Index continues to hover near the strong resistance level near 3,888. This is not a strong recovery, but it is a determined, if slow, move upwards. This slow recovery means there is little change to the analysis made last week.
The only small change is in the Guppy Multiple Moving Average (GMMA) relationships. The long-term group of averages is compressing and developing an upwards move. This suggests investors are becoming slightly more confident that the recovery is sustainable.
The short-term group of moving averages has compressed and is testing the upper edge of the long-term GMMA. This suggests bullish traders are returning to the market.
The 3,888 level has been a significant barrier. It is no surprise it remains so.
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A breakout above this level signals the potential resumption of the long-term uptrend. However, the uptrend continuation may be significantly weaker.
The rally rebound started in mid-air from near 3,835 rather than from a historical support level. These types of rebounds are less reliable than rebounds that start from near historical support levels.
A sustained close above 3,888 and a successful test of this level as a support feature will confirm a bullish outlook.
The sustained close below 3,888 is a signal of trend weakness, but not a signal of a change in the trend.
Neither of these conditions has developed, so the Shanghai Index continues to drift sideways with a slight bullish bias.
Building on the notes from previous weeks, here’s a further update on what we expect to develop.
A successful rally rebound will move above resistance near 3,888. Currently, the index value continues to hover around this resistance feature.
A rally will also move above the value of the long-term uptrend line, currently near 3,970. A move above the trend line value is very bullish.
The ultimate upside target remains the trading band projection target near 4,100.
The downside picture is less complex with no decent support until around 3,700. A reaction away from 3,888 has 3,700 as the downside target. This is the base of the lower edge of the previous trading band.
Caution is required until proof of a sustained rally is provided with a sustained close above 3,888 and the value of the uptrend line.
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. The writer owns Chinese stock and index ETFs.
