This week, we look at a few emerging threads. At this stage, it is unclear what pattern they will form when the threads are pulled together.
Investors need to start thinking about what this may mean for business and product development, and for the sustainability of existing business models. The first thread starts with the American mega-company Amazon. Mega is not a sufficient superlative to describe this behemoth. According to some estimates, Amazon is worth more than the total value of the Australian economy. Amazon’s net worth is probably even larger than the economy of the entire African continent.
With money comes power and influence. Some governments appear either comfortable with this influence, or choose to ignore it.
China is more alert and alarmed at the way Amazon and others have grown unfettered to this size. And that concerns them.
In part, this may explain why the rug was pulled out from under the DiDi Chuxing listing. These concerns may explain a series of actions taken to limit and reduce the power of the Chinese tech titans like Tencent and Alibaba.
This crackdown is extending to other companies from uber-like truck hire and the socially innocuous like TikTok.
The second thread comes from the treasure trove of personal information collected as part of the digital economy.
Facebook’s success is built around collecting and monetising personal information. Chinese companies have been quick to follow as have thousands of look-alike start-ups throughout the world.
Generally, governments have been slow to react to this commercialisation of privacy.
In recent months, China has implemented a range of policies designed to limit the commercialisation and use of this data collected as an inevitable part of the growth of the digital economy.
The impact is felt most fully on domestic Chinese tech companies, but the protection of private data and the way it is used also extends to every tech company where it intersects with Chinese consumers.
It is too soon to fully evaluate how this will impact on service and product development but it is a thread that cannot be ignored.
The third threat is the digital yuan. To date, it has only been released domestically but it is clear from several trial projects that this will be rolled out internationally.
Domestically, one of the benefits of the digital yuan is the way it reduces the opportunity for corruption.
The blockchain technology underpinning the digital currency allows for accurate tracking of payments and transactions. It is a significant blow to the petty — and sometimes not so petty — corruption that hindered business.
The real time analysis of digital expenditure patterns allows for more accurate policy planning and policy implementation.
That is a plus for investment because it directs capital more efficiently. This should make third party investment decisions easier.
The fourth thread is the potential for the digital yuan to provide an alternative to the US dollar which dominates the global financial market.
It is clear that it will displace the US dollar in some transactions and this will reduce the dominant role currently played by the US dollar.
These are four threads amongst many and they tell us that the landscape of the digital economy in China is changing.
New opportunities are emerging and some existing investment opportunities are deteriorating. Just what pattern emerges as these threads knit together is the most significant investment challenge.
Technical outlook for the Shanghai market
This week’s collapse of the Shanghai index showed what regulatory risk looks like.
The Shanghai index smashed through the support offered by the long-term uptrend line A that defined the index activity from March. The sharp fall reached a low of 3,425 and then rebounded to close at 3,467.
This index activity confirms three features of the market that help to define any recovery from the collapse that followed.
The first is the importance of the longterm support and resistance levels near 3,450. The second is the ongoing influence of the long-term uptrend line A.
For many months, it acted as a support feature. Going forward it will act as a resistance feature.
The third feature is the long-term support feature near 3,330. This is now the focus of index activity and investors are watching for consolidation activity to develop at this level.
Starting at the end of 2020, the Shanghai index oscillated around the central support and resistance level located near 3,450. The index spent several months in the upper area of this oscillation between 3,450 and 3,580.
Then, the index fell heavily in March and spent several months in the lower half of the oscillation area between 3,330 and 3,450.
The move above the central oscillation level in May was bullish with the index remaining in the upper half of this oscillation band.
Following the dramatic fall this week, the index has moved below the upper section of this oscillation band. The long-term bears dominate this market when the index closes below the central oscillation level of 3,450.
The index has smashed below the 3,450-support level. Investors who were looking for evidence that the index can find good support near 3,450 and develop a consolidation pattern prior to developing a new uptrend, have been disappointed.
The downside prospect is very bearish. A sustained fall below 3,450 has a minor support level near 3,390. This weak support level failed to arrest the collapsing market. The next significant support level is located near 3,330.
The market dipped below this, but rebounded to close above this level.
Consolidation around the 3,330 level may develop as a tight and narrow trading band, with the market moving between 3,330 and 3,450.
This has the potential to continue for several weeks as the market adjusts to new conditions.
There are not any relative strength index (RSI) divergence signals on either the daily or the weekly chart. The RSI trend lines are confirming signals. It also confirms strong downward pressure in the market.
Investors hope that the pullback may be contained in the lower section of the trading band as part of the long-term oscillation behaviour.
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 two decades. 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. The writer owns China stock and index ETFs