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China’s economic adaptation

Daryl Guppy
Daryl Guppy • 5 min read
China’s economic adaptation
The sustained economic and political attack on China is revealing not China’s weakness, but its strength. The US is going all out to hobble and damage the Chinese economy.
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The sustained economic and political attack on China is revealing not China’s weakness, but its strength. The US is going all out to hobble and damage the Chinese economy. Whilst some of this is part of President Trump’s re-election campaign strategy, some of these efforts reflect the deeply held beliefs of people like the US Secretary of State Mike Pompeo. They see the relationships between the two countries as one of deep ideological struggle where co-existence is undesirable.

This thinking has a large impact on investment decisions. So, too, does the misplaced thinking that China’s economy can be damaged by a sustained attack on its export capacity and its economic interactions on a global scale.

China’s critics are mistaken in assuming that China’s continued economic growth depends largely on the maintenance of the global free-trade system and access to Western technology. After the 2008 global financial crisis, China has adapted its economy in five ways to boost domestic demand.

First, it allowed the renminbi to appreciate against the US dollar, and opened its protected market to foreign firms consistent with the World Trade Organization entry commitments. The increasing number of free trade zones allows China to meet its commitments regarding foreign-portfolio investment and facilitation of cross-border capital flows.

Second, China increased physical infrastructure and logistics investments resulting in new and improved domestic highways, railways, airports, and harbour facilities. This includes a high-speed railway network of more than 35,000km. This infrastructure enables domestic economic growth by bringing domestic markets closer together. Fresh food from Xinjiang is now just days away from Shanghai rather than weeks as in the past.

Third is the construction of largescale information and communication infrastructure networks. These are essential for a modern economy. China encouraged private enterprises in cutting-edge sectors including mobile payments, e-commerce, the Internet of Things, and smart manufacturing. Locally based enterprises became international technology firms, including Alibaba, Tencent and At the beginning of 2020, China launched a new round of largescale investment in 5G base stations to tackle the increased demand for data and low latency delivery.

Fourth, China implemented national strategic plans designed to create and integrate economic mega-regions to boost domestic demand. The bestknown is the Greater Bay Area that links Guangdong-Hong Kong-Macau. The government is encouraging closer cooperation among 16 cities in the Yangtze River Belt headed by Shanghai.

Fifth is the development of the Belt and Road Initiative, which in part is designed to move away from reliance on Western exports markets by providing the infrastructure to replace them with alternative suppliers. This does not mean China will move towards isolation. China will inevitably fill the vacuum left by the retreat of the US and its disengagement from long-time friends and allies. China has no incentive to disengage from global technology supply chains, but nor is it as dependent upon them as in past decades. Increasing domestic demand creates further expansion and opportunities for domestic and foreign investors.

China has shown it is adept at adapting its economy to changed circumstances and this makes it an attractive investment and business destination.

Technical outlook for the Shanghai market

The pullback in the Shanghai Index on July 24 has touched support at the upper edge of the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator. The first pullback in the Shanghai Index provided a rebound point and an anchor point for the placement of a new uptrend line. This is marked as line B on the chart. The placement of this line needs to be confirmed by another rally, retreat and rebound pattern before the line can be used with confidence for defining the future trend. The drop below the line turns this trend line B into a resistance feature. This will set the first upside limits on any rally rebound.

Some investors remain concerned about the speed of the rally and the sustainability of the rebound. This concern is allayed by applying Relative Strength Indicator (RSI) analysis. The RSI divergence signal is a very reliable one when applied to the Shanghai Index. The divergence happens when the trend line placed on the index moves in the opposite direction to the trend line placed on the RSI indicator. When a divergence occurs — when both lines are moving in opposite directions — it suggests a high probability of trend reversal on the Shanghai Index.

The RSI does not show any divergence pattern when the index was rising. The RSI was making new highs that match the new high peaks on the Shanghai Index. This is a bullish continuation, so investors may watch for a continuation of the underlying uptrend with a rebound from support.

The key feature to watch as the rebound develops is the way that any area uses support features because retreats within the long-term uptrend are inevitable. There are two support features to consider.

The first support feature is the value of the upper edge of the longterm group of moving averages in the GMMA indicator. The current value is near 3,187.

The second support feature is the value of the longer-term uptrend line A. The current value is near 3,138. It is important to note that the index can fall below trend line B, and move all the way down to the value of trend line A while remaining in a long-term uptrend. A fall of this magnitude is uncomfortable for investors, but it does not signal a trend change.

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