(Nov 27): In the excitement that often surrounds business engagement with China, it is easy to forget that this is not a one-way trade. We spend a lot of time thinking about business strategies, planning how to enter the China market or expand our footprint. Governments and businesses develop investment attraction strategies designed to bring Chinese investment into major projects and infrastructure.

Underpinning this is an unspoken assumption that China is a pot of gold with unlimited opportunities. It is a modern version of the Shanghai tailors’ dream. The dream of British cotton merchants was to convince as many Chinese as possible to add just one inch to the length of their shirts. If this was achieved, then the riches would be unbelievable. It is an unsophisticated dream, but at heart not too far from the way many modern businesses approach the idea of Chinese engagement.

However, the same is true from the Chinese perspective. They too have dreams of prosperity, or economic growth, of improved business opportunities and better living standards. Realising these dreams and aspirations required economic development and investment from foreign interests. Although China may appear to be awash with eager foreign investors, the reality is that much of this activity is focused on Beijing, Shanghai and the major tier- 2 cities. The rest of China remains largely unknown and this applies, in particular, to remote provinces.

I live in the Northern Territory of Australia, part of the great Australian outback. It is an isolated environment, out of the mainstream of investment, property and business. I have worked with the Northern Territory government over many years to develop strategies designed to attract foreign, and specifically Chinese, investment and business.

I was invited to turn these strategies 360 degrees and apply them to one of the more disadvantaged Chinese provinces to help them expand investment and business activity. The similarities were more startling than I had anticipated.

The first barrier was branding. Most of us can name eight Chinese cities and probably five Chinese provinces. The remainder of the 34 provinces are largely unknown. The first step is to lift branding and brand awareness so that potential investors and business partners know who you are and where you are located.

This can be achieved through tourism. It provides both a boost to business activity and an increased awareness of the brand and location. Many Chinese provinces do this very effectively within the Chinese domestic tourism industry, but have much less success in the international market. Their identity is swamped with more generalised China tourism advertising.

Tourism brings visitors, and among them are business people. Many investment and business enquiries are initiated following a tourist visit, although it may take some years to develop.

The second promotional leg is a “going out” strategy. Too often, this is limited to high-level delegations meeting other high-level officials. The result is many memoranda of understanding, but little genuine business activity. Again, it is about branding. Participation in carefully selected trade and business expos, either as an individual business or as a group of businesses in a shared stand, provides ready access to business contacts.

Take a step back, and turn 180 degrees. These same problems, and solutions, confront every new business wanting to expand into the Chinese business environment.

The Shanghai Index’s pullback on Nov 23 is a signal of a major interruption to the Shanghai Index uptrend. This behaviour shows the failure of three important support features.

Trend corrections and pullbacks are both inevitable and normal. However, the current pullback has broken three critical support features. This suggests the uptrend had lost momentum. At best, this could develop into a period of consolidation prior to the development of an uptrend continuation. At worst, this could signal the collapse of the uptrend and a test of support between 3,260 and 3,290.

The uptrend was defined with a straight edge trend line. This trend line has provided a significant support feature and a potential rally rebound point. It failed to provide strong support and has been decisively broken with recent dips to 3,337 and 3,342.

This is the first time since May 2017 that the index has dropped below the trend line. It is the first time the index has closed below the trend line. This is a significant trend break signal.

The second support failure is the close below the lower edge of the longterm Guppy Multiple Moving Average indicator. The strength of the uptrend is well defined with the GMMA indicator. The strength is shown with the steady and consistent separation of the long-term group of averages. The pullback developed some compression in the long-term GMMA group of averages. This is an early warning sign of trend weakness. Further falls in the index will develop rapid compression in the long-term GMMA, which shows investors quickly turning into sellers.

The pullback broke completely through the GMMA. This is not a temporary penetration and rebound like the activity on Nov 20. This is a close well below the lower edge of the long-term GMMA. The close is significant because it shows there is strong selling pressure. Closes at, or near, the low of the day are very bearish. The close well below the lower edge of the long-term GMMA is particularly bearish. It is usually associated with a change in the trend.

The third support failure is the close below the long-term support and resistance level near 3,360. This has been a significant long-term support level for the Shanghai Index. The substantial close below this level is very bearish. This is different from the activity in September where the index moved below this level for six days. In September, the index moved down to test the upper level of the long-term GMMA as a support feature.

In the current situation, the index has smashed through the lower edge of the long-term GMMA and the 3,360 support level. These are all features of an early warning of trend weakness.

https://edgemarkets.s3-ap-southeast-1.amazonaws.com/s3fs-public/807-china-view-guppy-chart.jpg

<i>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 more than a decade. 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.</i>

Boosting business activity in China

MSCI boss warns of climate risks

Keppel to acquire 50% stake in European asset manager Aermont Capital for up to $517 mil

Boosting business activity in China

Related News

Highlights

MSCI boss warns of climate risks

Related News

The productivity remedy

Winter has come

Why Is China cracking down on ride-hailing giant Didi?