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Driving the China business strategy

Daryl Guppy
Daryl Guppy • 5 min read
Driving the China business strategy
Technical outlook for the Shanghai market The Shanghai Index rapidly developed a classic downtrend breakout pattern. This is often a three-stage pattern of behaviour. Traders will take early positions in anticipation of a long-term trend breakout
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(Aug 26): You are geared up to expand your business into China. It is a great idea, but what drives your China strategy? It is a question I was forced to ask when advising the board of a Singapore company.

The China business unit in the company was effective. The small team had a good track record of success in developing and sustaining its China business. The team had developed a formidable reservoir of intellectual property and expertise.

Yet the mood in the team was depressed. Despite their best efforts, the momentum had gone out of the China strategy at company level. China had become just one part of the company’s domestic and international strategy. A change in the structure of the management board had seen the removal of a China champion. This person had been headhunted by another China-orientated organisation.

The China champion believed passionately in the potential in the China market. He was not particularly skilled in terms of understanding Chinese business culture, but was convinced the company had to be in China and had to develop a long-term business in China. Armed with an idea and a conviction, he set out to assemble a team of skilled managers and staff who could deliver on his vision. This was a China strategy driven from the top.

The team he put together, and the team he empowered, had the skills, knowledge and experience to fill in the gaps and the details within the framework of the broader China strategy. In board meetings, the China champion fought for his team, not just because they were good but because he believed in the importance of what they were doing. He fought for the idea of China as a significant business opportunity.

When he left the company, he did not take any particular China-specific skills or knowledge with him. The China team he had developed remained behind. But when he left, the dedication, commitment and belief in the China strategy also left the boardroom. Regrettably, failure of the China strategy for the company is now a high probability because China business is a hard road. The nuances and demands of operating in the country are not just different — they are very different.

Doing China business with consistent success on a long-term basis is exceptionally hard work. It requires a commitment to the idea rather than just long working hours under high pressure. Unless the top levels of company management and the board share this commitment, there is a tendency to treat China business as much the same as business in other countries.

Within a few months, most of the China team had left. The best of the team are working with companies that have China champions at management level. They will carve out new business for their employers because they understand the subtlety of China business. The company the team had left found its China business slowly collapsing because China business requires high and detailed maintenance.

What drives your China strategy? It must be China from the top. Anything less is a waste of time. China champions come from management and from staff. They are the foundation of your China strategy.

Technical outlook for the Shanghai market

The Shanghai Index rapidly developed a classic downtrend breakout pattern. This is often a three-stage pattern of behaviour. Traders will take early positions in anticipation of a long-term trend breakout and move back towards 3,040. Investors are more cautious and may wait until the pattern is more fully developed.

This is a Guppy Multiple Moving Average (GMMA) indicator breakout pattern. The potential pattern of development is shown by the thick lines. The first part of the pattern is a fast rally following a significant downtrend. The rally encounters resistance near the lower edge of the long-term group of moving averages. The short-term group of moving averages also compress and turn upwards. The long-term group of averages begins to flatten out and move sideways.

This is the current situation with the Shanghai Index.

The second part of the pattern is created by a retreat from the lower edge of the long-term GMMA. The index retreat may fall below the previous lows before a new rally develops. In the current situation, traders anticipate a retreat and consolidation near support at 2,830. Traders will move quickly to enter the rebound rally if it develops from this support level.

The second rally carries the index above the upper level of the long-term GMMA. The short-term GMMA also moves above the long-term GMMA. The long-term GMMA shows good compression and is usually beginning to turn up. This shows that investors have entered the market as buyers and are supporting the new uptrend.

The third part of the breakout pattern is when the second rally retreats and uses the lower edge of the long-term GMMA as a support and rebound level. The index bounces away from this level and moves decisively above the upper edge of the long-term GMMA. By this time, the long-term GMMA has compressed, turned upwards and is showing signs of expansion. This is the final part of the uptrend breakout and it attracts more investment buying.

This is the pattern of development that traders and investors will watch for over the next few weeks. The note of caution is the way the first rebound has developed from near 2,740 because this is not a historical support level. The long-term upside target for the trend breakout is resistance near 3,040.

Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.

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