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Sensitive time to do business in China

Daryl Guppy
Daryl Guppy12/3/2022 02:13 AM GMT+08  • 6 min read
Sensitive time to do business in China
Health workers in personal protective gear guarding the entrance of a residential compound in Beijing. Photo: Bloomberg
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China has a political business environment that isn’t found in almost any other country. While businesses are right not to get involved in politics, it must also be acknowledged that politics is inextricably bound to even the most insignificant of business dealings.

Words, phrases, memes, comments and jokes can inadvertently touch on sensitive areas and damage business relations. Covid-19 is a fine example. When the outbreak started, former US President Trump came up with a variety of insulting terms for the virus. In early 2020 in this column, I noted that business affairs would be impacted by your response.

I said: “Do you call this a coronavirus or the Wuhan or China Flu? Your choice of terminology can inflict unintended damage on your future business because your Chinese partners are sensitive at this time to what they see as an underlying racism in the Western media coverage of the outbreak.”

The wheel has turned full circle. How businesses respond to or comment on the current Covid-19 protest outbreaks can have an impact on business relations. This is not to say there are benefits in supporting the government’s or protestors’ position. These are internal domestic affairs and increasingly sensitive issues. Businesses are well advised to carefully study the political landscape to avoid inadvertently becoming involved.

Is this a coward’s approach? I suggest not. Businesses understand that working in and with a foreign country is a privilege extended to a guest. As a guest, we are not invited to challenge or break the law. We are obligated to observe the customs, culture and regulations of the foreign country we do business in. At times, this is strictly defined so products must comply with a variety of consumer requirements, be they EU privacy laws or Californian vehicle emission standards.

Beyond that, there is compliance with the social and political environment in which we operate. Businesses are best done among friends and that requires a level of cultural courtesy.

See also: China's economy jumping into the Year of the Rabbit

That said, for those doing business, it is reasonable to wonder just how these protests will impact China’s much-anticipated rollback of Covid-19 restrictions. These are internal strategic considerations for every business owner that will determine the level and degree of engagement in 2023.

Before the protests erupted, there were signs that President Xi Jinping was preparing to modify the zero-Covid policy, though the timeline remained uncertain. China is a large country and the willingness to modify the zero-Covid policy hints at policy flexibility. The government has a history of creating special zones where policy can be trialled. If successful, the policy can then be rolled out nationally. The Special Economic Zone of Shenzhen is the best-known example of this approach.

There was some indication that modified Covid-19 policies were being trialled with suburban lockdowns rather than city-wide lockdowns. Some sources suggest further relaxation was scheduled to start sometime in January with a formal announcement of the end of the pandemic and a re-classification of Covid-19 as an endemic infectious disease. It remains an open question as to whether the current protests will accelerate or slow down this process.

See also: Shares in Tencent nearly double from October low as China prepares to end crackdown

Technical outlook for the Shanghai market

The Shanghai index has three chart features. First, the current index activity is part of a double-bottom rebound. Second, the rebound action is defined by a fan pattern. Third, the trend breakout is managed and signalled by the value of the long-term downtrend line D. The recent rally reacted away from the trend line D. This was expected because it is unusual for a rally to break through long-term resistance at the first attempt. The index is consolidating just below the value of the long-term trend line.

The analysis starts with the double-bottom pattern. The first low of the double-bottom is near 2,886 and was made in April. The second low in the double-bottom pattern is near 2,886 and was made in October. This is a long-term trend reversal pattern. The first target for the pattern is the top of the previous pattern peak near 3,415. This distance between the double-bottom support level and the peak is measured and projected upwards. In the very long term, this calculation gives an upside target near 3,940 but this may take a year or more to reach. There are many smaller trend changes on the way to this target level.

Confirmation of the double-bottom breakout pattern comes from the developing fan pattern. The fan pattern is an uncommon pattern that signals a long-term trend change. This is not a Fibonacci fan. This fan pattern is created by price activity rather than price predictions and projections. The fan starts from a single point, shown as point 1. It consists of a series of trend lines, shown as lines A, B, C and D.

The fan pattern is created by the series of downtrend lines all starting from a common anchor point. Generally, the pattern has between three and five segments. On the Shanghai index, this pattern has four segments. The longer trend line D is the last segment of the pattern. The fan pattern is often associated with very long-term breakout patterns that develop over many months.

This is a trend reversal pattern and it does not involve setting price targets. Other methods are used to set the first price targets. The strong historical resistance area near 3,220 is the first target for any breakout above trend line D.

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Trend line D is the long-term downtrend that starts from the peak of the double-bottom pattern near 3,415. A breakout above this long-term downtrend confirms the development of a sustainable uptrend.

This breakout analysis is supported by the behaviour of the Guppy Multiple Moving Average (GMMA) indicator. The consolidation seen in the GMMA relationships also suggests that a new uptrend is developing.

Daryl Guppy is an international financial and 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

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