Many observers thought China’s Third Plenum was a damp squib — offering little in the way of changed economic policies. They were wrong.
The plenum confirmed the direction and continuation of the most significant changes in the Chinese economy since 2008. It endorsed the foundations of the shift to a digital economy. It continued to build a fortress against the subversive intent of unilateral sanctions and politically motivated trade tariffs. These changes were quietly developed in response to the changing geopolitical environment. They were changes that could not wait for the formal announcement at the Third Plenum.
It is unreasonable to talk of a move towards fortress China. Nor is this a withdrawal of China from the global trade system, as is often alleged that China did following the explorations of Admiral Zheng He in the Ming Dynasty. Isolationism is a charge more correctly directed towards America.
However, the Third Plenum enhanced the moves towards sovereign independence by reducing reliance on foreign services and imports. This will impact those whose business model relies on exporting expertise to China. These are not just service industries, but include industry support, project managers and other industries where foreign expertise is sought.
The Third Plenum consolidated these policy changes.
The search to reduce reliance on foreign imports does not hamper China’s export trade, despite the increasing tariffs in the US and the EU. Local businesses should not anticipate a reduction in competition from Chinese products. Increasingly, this will happen in the high-tech area.
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Despite looming tariffs, China leads the world with around US$769.7 billion ($1.035 trillion) in exports. Surprisingly, Germany sits in No. 2 position with US$223.4 billion, followed at a distant third by the US with US$166.4 billion in exports.
The reality is that China’s labour costs are higher than more than 100 countries around the world. The export advantage comes from manufacturing more high-end goods using technical skills and advanced robotics, not cheap labour.
Even though our desktop computers run American software, it is China that leads the world in high-tech exports that are used in an expanding range of industries. The comfortable belief, promoted by both US President Joe Biden and former President Donald Trump, that China’s export dominance comes from cheap labour is false.
China will remain the central source for high-tech goods for the foreseeable future. This move into new areas of export poses a challenge to existing high-tech industries outside of China. Prices are forced down this competitive environment and profit margins are squeezed.
Investors need to look more closely at this competitive threat. Nvidia and other US tech darlings may occupy media coverage, but it is the basic tools of high tech that grind out consistent profits.
The Third Plenum did not offer new reforms, but it consolidated the existing reform path which changes the locus of the competitive environment. Investors who focus on China and cheap labour simply miss the point.
Technical outlook for the Shanghai market
The potential for the Shanghai index to develop a new uptrend depends on its ability to use the 2,900 area as a support feature. If this area successfully halts the longer-term downtrend, then it contributes to developing a fan reversal pattern.
This is not a Fibonacci fan pattern. It is a pattern created by a combination of rally peaks reacting away from a well-defined support level.
A fan reversal develops when there are multiple downtrend lines. The pattern starts when all the trendlines are anchored to a common starting point. This is shown as point A on the chart.
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Trendline B initially acts as a resistance feature. The breakout moves above trendline B. The breakout peaks and then retreats to test the support area.
A new trendline line is placed to use the high of the rally as an anchor point. The breakout above this line also peaks and then retreats. The retreat uses the trendline C as a support feature.
A new downtrend line is placed along the most recent rally, shown as trendline D. This will act as a new resistance feature for the rebound from the support area.
Most often, this pattern consists of three to four fan trendlines and signals a long-term trend breakout. This pattern is “proven” with a new breakout above trendline D.
However, it is essential that support holds near 2,900. The index may dip temporarily below this level. Failure of support is bearish. The width of the trading band is used to calculate the potential downside target near 2,720.
The current activity suggests that the weak and tentative Relative Strength Index (RSI) divergence pattern was not a valid pattern. With this RSI divergence pattern, near enough is not good enough. The two valley lows used to determine divergence must both be below the 30% value of the RSI indicator. It is a tough rule, but it ensures that traders are not deceived by inaccurate patterns.
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.
