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Uncovering China’s market opportunity

Daryl Guppy
Daryl Guppy10/13/2022 11:54 PM GMT+08  • 5 min read
Uncovering China’s market opportunity
Apple has shifted portions of their production out of China, moving to Vietnam and India, where costs are cheaper. Photo: Bloomberg
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Under varying degrees of political pressure, some American firms are abandoning China. Many are not bringing business home — as is US President Joe Biden’s intention — but are simply chasing cheaper labour in Cambodia, Vietnam and Bangladesh.

The partial withdrawal of service and consumer companies from China leaves a vacuum, and like all vacuums, it will get filled. Some of these newly exposed gaps will be filled by domestic Chinese companies. Once competitors, they now find the competition is withdrawing, so it gives them room to expand.

Other areas become open for competition as a result of regulatory reform. More foreign-funded travel agencies in Shanghai and Chongqing will be allowed to conduct outbound China tourism services from 2023 to 2024.

No matter what the reason, these vacuum gaps offer opportunities for those prepared to take a long-term view to reach the China market. It is not a pretty once-in-a-generation opportunity, but these politically driven vacuum gaps are a unique opportunity.

Credit Suisse reported the average Chinese citizen has a wealth of US$26,752 ($38,380), around US$60 more than the average European, so this is a market of opportunity.

Business in China was never for the faint-hearted. The primary objective is to build brand recognition and strength in your identified market segment. One consequence of Covid-19 is shifting orientation towards digital awareness and using this as a sales channel. People, on average, spend nearly six hours on the internet daily. Around two and a half hours are spent on one social media platform. Developing a social media presence along with associated followers and influencers created through active social media posts is essential.

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

The China social media environment is crowded, although many Western businesses are familiar only with WeChat. Channels like Zhihu, Douban and XiaoHongShu offer access to more closely defined market segments. Zhihu’s voting mechanism enables good brand content to last. Long-term branding will work very well on this platform.

Whereas in the past, the idea was to develop the desire to purchase a branded product or service by using keywords associated with the brands on Alibaba, this is no longer the most effective strategy. It is the equivalent of having a strategy to sell in China. It is simply too broad. These techniques work more effectively when applied to specialised social media channels.

Unless you are the size of Apple or Starbucks, distribution is unlikely to be via flagship stores or physical outlets. The Covid-19-induced digital economy has triggered a growth in authorised online selling partners. Rather than go it alone in the social media space, it makes more sense to work with partnership stores or online outlets. This reduces the risk of breaking into a new market as an unknown brand.

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

This approach is not the same as using an influencer or brand ambassador, although these offer apparent advantages. The Covid-19 key to sales growth is transparency and accountability — think the Trusted Buyer ratings on eBay. Online buying risks the goods or services will not be as advertised. Working with a partner who already has a proven word-ofsocial-media reputation immediately boosts the credibility of your product or brand. The use of authorised online sellers provides a short cut to market penetration.

Technical outlook for the Shanghai market

The Shanghai Index continued its move below the long-term support level, near 3,050. The rebound on Oct 12 is not an indication of a trend change. It will retest the old support level near 3,050, acting in its new capacity as a resistance feature. There is no indication of a trend change. However, the market may develop some consolidation around these levels in anticipation of the 20th National Congress of the Chinese Communist Party meeting next week.

The Guppy Multiple Moving Average (GMMA) relationships show downward solid selling pressure. They remained well separated and maintained a consistent separation between the two groups of moving averages. This is characteristic of sustained solid trends.

The expansion in the long-term GMMA shows unrelenting selling pressure. An increase in selling pressure is shown as the long-term GMMA expands significantly.

The Shanghai Index is characterised by a sharp accelerated plunge followed by a rapid recovery. This was seen in April 2022. The current downtrend has similar characteristics.

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Weak support is located near the April lows at 2,870. This is the target level of an exhaustion sell-off. A rapid rebound rally may follow a test of this level. The key feature to watch for confirmation is rapid compression in the short-term GMMA.

This exhaustion level is just below the trading band projection level.

The current index activity is moving below support near 3,050 and has a trading band downside target near 2,880. However, this does not preclude a sharp exhaustion sell-off that carries the market down to 2,870 with a fast rebound.

There are currently no indications of relative strength index (RSI) divergence, which would suggest an end to the downtrend activity. This remains a solidly bearish environment with the potential to develop consolidation around historic support levels.

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

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