The locus of growth is changing. Beijing, Shanghai, Shenzhen and other Tier 1 cities continue to grow but at slower rates. The average growth in consumer spending over the top-five Tier 1 cities is 3.5%. Hangzhou has the highest growth at 5.7%, while Beijing has the lowest at 0.4%.
The real growth story is in the lower-tier cities.
Growth of consumer spending in China’s smaller cities is outpacing growth in the largest cities by a significant margin. The average growth in eight selected Tier 4 cities is 5.5%. Binzhou recorded a consumption growth of 6.3%, among the highest of the 24 cities in a report compiled by China research group, Sixth Tone.
Where is Binzhou? It is in northern Shandong, about two hours from Jinan and has a population of 4 million, so it begs an important question: How large a population do you need to make it profitable to sell your product or service? At 4 million, Binzhou is almost the size of Singapore.
Frightened of Tier 4 cities? Try Tier 3 cities. Zhuzhou, Taian and Linyi have an average consumer growth rate of 5.56%. Market size ranges from 3.8 million to 11 million.
Tier 2 cities, including Wenzhou (7.2%), Taizhou (7.8%) and Jinhua (6.8%), offer substantial growth rates and the comfort of more developed cities not far removed from what you expect to encounter in Tier 1 cities.
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These lower-tier cities are driven by catch-up growth. They are poised to develop more quickly than richer ones once they receive the right investment. Their provincial government are more open to investment proposals. They are prepared to offer concessions to businesses, including local tax relief.
Foreign businesses often attack Chinese businesses by seeking entry through the front gate in the largest cities, where the competition is ferocious. You can attempt to storm the gates, but expect to be repelled and defeated. The full frontal approach sets you up as an enemy or a willing victim.
In China, there is always a side gate alternative to the full frontal assault. The lower-tier cities offer growth and lay out a welcome mat for investors. The Manchu found the side gate at Shanghai Pass in 1644, attacked it and founded the Qing Dynasty. Your small and medium enterprises may not be the same size, but the methods of success are the same.
See also: China banks cut deposit rates to aid margins, drive spending
Technical outlook of the Shanghai Index
Despite the shallow pullback, the Shanghai Index continues to move steadily towards resistance near 3,435. The rebound enabled the identification of a second anchor point for the uptrend line.
The line is anchored on the rebound lows of April 30 and the more recent rebound low of this week. The trend line B defines the potential support limits of the new uptrend. The accuracy of the line will be confirmed with a third retreat and rally rebound. This third anchor point confirms the validity of the trend line.
A trend line often has an anchor point at the very low of the previous price retreat. On the Shanghai Index, this would be at the April 7 low of 3,041. However, there is no valid way to plot a trend line starting at this point that effectively defines the subsequent index activity.
In this situation, it makes more sense to use the placement of trend line B.
The narrow spread in the long-term GMMA (Guppy Multiple Moving Average) is a weak resistance feature that can be easily overcome. The narrow separation shows investors’ caution, so they are ready to quickly jump on any new trend development. Investors are cautiously optimistic but are yet to be convinced that the uptrend is sustainable.
Traders are more confident, as shown by how the retreat was arrested and rebounded quickly from the upper edge of the short-term GMMA.
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A sustained relationship is shown with the GMMA indicator. The short-term group of averages is well separated, showing strong trader support for the breakout. The lower edge of the short-term GMMA is above the upper edge of the long-term GMMA. This is confirmation of an uptrend breakout.
Resistance is near 3,435. A breakout above 3,435 has a new resistance level near 3,490. This is the updated value of the uptrend line A. The projected trend line acts as a resistance feature.
Applying the trading band projection method, the next technical upside target is near 3,710. This is also an important historical resistance level. It acted as resistance in 2014 and 2015. It was a strong resistance level three times in 2021.
The key feature to watch is the market behaviour around 3,435, which has been a significant resistance feature in the past.
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
