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Navigating China’s investment landscape

Daryl Guppy
Daryl Guppy • 5 min read
Navigating China’s investment landscape
Despite China’s economic growth, many investors hesitate to engage in direct investment due to issues like language barriers and complex brokerage processes. Photo: Bloomberg
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The rise of the Chinese economy aside, many investors remain wary of direct investment in China. This hesitation stems from unfamiliarity with the market, language barriers for non-Chinese speakers, and the often complex process of opening brokerage accounts for direct access to Chinese stock markets.

One solution has been to invest via Exchange-Traded Funds (ETFs) or managed funds, but Hong Kong-listed red chips often dominate these. The behaviour of these stocks is often quite different from that of their mainland-listed counterparts.

Consider investing in companies outside China that already conduct business within the country. This third-party investment method often includes Australian companies directly linked to the Chinese economy. Iron ore producers like Fortescue Metals are a popular investment target. Their share registrar includes many Singapore investment entities and citizens attracted by the stable political and regulatory environment. 

Astute Singaporean investors have built positions in several emerging Australian companies dealing with rare metals, including Arafura Resources, Lynas, Arcadium Lithium and Northern Minerals. This has delivered ground-floor exposure to an expanding industry with strong links to Chinese investment capital and the Chinese markets for their offtake.

The Australian Treasurer, Jim Chalmers, recently announced significant changes to the Foreign Investment Review Board (FIRB) processes in assessing foreign investment. It is supposed to be country-neutral, but it cannot be hidden that it is primarily directed at Chinese investment in Australia.

This significantly impacts current rare earth projects and their planned expansions, as highlighted at a recent mining summit in Western Australia. Singaporean investors who have relied on these companies to capitalise on the rare earth boom for electric vehicles and to benefit from China’s increasing demand should take note of the concerns raised.

See also: Singapore lawyers drawn to China as international peers retreat

Conference attendees were told the industry could not see a future where Australia and China do not co-invest together. “You’ve just got to understand there is a coexistence that needs to occur,’’ Arcadium Lithium chairman Peter Coleman said.

The FIRB changes not only impact capital raisings and offtake agreements. They also impact the company’s management and operations. Singapore-registered Yuxiao Fund has been pushing for boardroom changes at Northern Minerals and the FIRB is probing the company.

Northern Minerals is developing the strategically important heavy rare earth Browns Range project in northeastern Western Australia. Yuxiao signed a cooperation agreement with China Northern and Shanghai-listed Shenghe Resources.

See also: China property crash is battering a niche pocket of ESG finance

Those who have invested in Australian rare earth companies may need to re-evaluate their exposure in light of these challenges. 

If global trade tensions with China worsen, Australia will face the second-largest national income drop worldwide, warned the Organisation for Economic Co-operation and Development. This would impact investments beyond China-related operations in Australia.

Technical outlook for the Shanghai market

The Shanghai index retreated and tested both the upper edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator and the upper edge of the previous trading band. The index then rebounded from these areas, supporting a continued bullish outlook. 

A rebound from these support features moves the index towards the trading band upside target near 3,240. This target is calculated by taking the width of the previous trading band and projecting this upwards. It is a long-term target, but achieving it is underpinned by the index’s steady uptrend behaviour.

There is sufficient index activity to plot the placement of an uptrend line. This line uses four lows as the anchor points. It adds a support feature to the developing trend.

Any index retreat can find support at the lower edge of the long-term GMMA. There is also support at the upper edge of the most recent trading band, near 3,080. The value of the uptrend line also provides a new support feature. This value is currently near 3,080 and provides additional strength for support at this level.

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It should be noted that the value of the lower edge of the long-term GMMA is now above 3,080. The move above the previous resistance level is usually bullish. These all suggest the market can pull back to a level near 3,080 and remain in a long-term uptrend.

The GMMA indicator relationships also support this analysis. The long-term group of moving averages shows the most important measure of trend strength and stability, which shows how investors think.

The long-term GMMA shows broad and consistent separation, suggesting strong support for the uptrend. There has been some flattening, but this has not developed into compression of these averages. This suggests the uptrend remains sustainable and that the pullback represents a buying opportunity at a temporary trend weakness.  

The lower edge of the long-term GMMA is above resistance, near 3.080. This usually confirms the continuation of the longer-term uptrend. The trading band target is near 3,240. This is a bullish trend environment.

The character of the move towards the upside target near 3,240 remains unknown at this stage.

However, consistent separation is usually associated with strong and stable trends. The pattern of trend development suggests the market may continue to move upward in a stable trend. Traders will watch for consolidation near the 3,240 target level.  

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 China stock and index ETFs

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