However, that’s not life for SMEs where a contract may appear not to be worth the paper it’s written on. This is where it’s both true and false.
From a Western perspective, a contract is an endpoint, a line in the sand that marks a final decision. Any disagreement or change is handed over to arbitration and layers of lawyers.
For many Chinese, a contract is a formalised starting point on which a future relationship is built. To Western eyes, this can look like the Chinese side is rewriting the deal, adding new conditions and obligations.
Not always, but in many cases, this reopening of the business conversation takes place because you are trusted more. In many traditional Chinese business contexts, a signed contract formalises a relationship at a specific moment. It crystallises both sides’ positions at that point. It is expected that the relationship will keep developing and that the contract will need to informally evolve to deal with emerging circumstances.
See also: China: the 21st century’s gravity well
In any contract situation beyond the merely transactional, there is a recognition that as conditions change, so too will the application of the contract.
The base contract is a foundation on which future business can be constructed. It’s a foundation that new business opportunities will use as a reference point without the need to start a new contract from scratch. The initial contract opens a trust account and gives the Chinese counterparty an indication of how far this trust relationship can develop.
For many Westerners it’s often a deeply uncomfortable approach to business. In return for contractual certainty, they appear comfortable with missing out on developing opportunities. That’s an acceptable approach in largely slow-moving markets found in Europe and the US. It’s commercial suicide in fast-moving, innovative and highly competitive markets like China.
See also: China is taking on mining giants to reorder a US$190 bil market
Your Chinese partner knows the market better than you. He wants to move fast and bring you, his Western counterpart, with him. A rigid, black-letter Western contract will not give him the flexibility to keep pace with a market that does not stand still.
Many businesses have found that this flexibility is essential to survive and thrive in the Chinese market. How you experience it depends on the company, the sector and, perhaps most importantly, the generation sitting across the table. Those shaped by US business schools tend to bring Western approaches to contracts.
But to make sense of any deal, you need to understand the culture beneath it, because that is what drives the conversation around every contract.
Technical outlook for the Shanghai market
Three horizontal lines on the Shanghai Index chart provide the analysis framework. The first line is the support level near 3,900. The index is currently developing a weak rebound from around this level.
Any rebound faces significant resistance features, so the outcome is more likely to be a consolidation around 3,900.
Any breakout from this level has strong resistance near 4,100. This was a major support and resistance feature that essentially capped the long-term uptrend in the index. The index hovered or oscillated around this level for weeks before finally breaking the uptrend line and falling below 3,900.
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The index plunged to 3,800 before developing the current rebound. The problem is that sustainable rebounds rarely develop from mid-air. By mid-air, we mean that the rebound level — 3,800 — has no previous history as a support feature. This lowers the probability that 3,800 will act as a successful and sustainable rebound point.
Another market fall below 3,900 has a historical downside target for support near 3,700.
These support and resistance levels provide areas where the market has a higher probability of pausing and then developing a rebound or a trend continuation. When assessing the consolidation and the chances of a trend continuation, the Guppy Multiple Moving Average (GMMA) indicator provides information about the way that traders and investors are thinking.
Currently, investors, shown by the red group of moving averages, are confirming the downtrend pressure. They have not become strong sellers, as this would be indicated by a wide separation in the group of averages. However, this is the first major change in behaviour in many months; investors are not bullish.
The short-term GMMA shows the initial sell-off has slowed, but this group is still widely separated. Traders look for short-term profits in this environment. They are not trading in expectation of a trend reversal.
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.
