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Breaking the ‘monolithic China’ perception

Daryl Guppy
Daryl Guppy • 6 min read
Breaking the ‘monolithic China’ perception
SINGAPORE (May 21): Monolithic China is a concept exploited in many comments about the country. China is ruling the South China Sea, or China is stealing intellectual property, or China has an all-powerful central government. This is the vision of China t
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SINGAPORE (May 21): Monolithic China is a concept exploited in many comments about the country. China is ruling the South China Sea, or China is stealing intellectual property, or China has an all-powerful central government. This is the vision of China that represents the majority of Western thinking about the country.

Tourists have a slightly different perspective. It is obvious that China has many different parts. This stretches from the super metropolises of Beijing to the second-tier cities such as Xi’an. Tropical Kunming is very different from Harbin in the cooler north. The seaside resorts of Hainan are different from the mountains of Yunnan or the landscape of Guangzhou. But these same tourists who have seen the diversity often continue to subscribe to the idea of a monolithic China.

The domestic reality is different. The government is not unified. It is filled with diverse opinions and diverse politics. The politics is not split along the same lines as in the West, but by the same token, it cannot be described as monolithic. Divisions are deep and just as real as the division between Democrats and Republicans.

Eating dinner yesterday high above Jianguomen in Beijing, I was involved in an at times heated discussion with Chinese colleagues about the need for central rule because China is a divided society. But it was not between the haves and have-nots — that is a Western dividing line.

The central government spends only around 11% of the total expenditure by all levels of government. The provincial governments spend almost 90% of all government expenditure, so it is no wonder that there are strong divisions and opinions about the way government funding is allocated. You cannot blame the national government. In most cases, the blame lies with the provincial government.

Additionally, the national government employs around 4% of all civil servants. The idea that this is a monolithic central government is not supported by the facts.

It is these divisions of governance and spending power that highlight the need for a strong central government.

The generally accepted conclusion in the discussion was that the Chinese Communist Party, with about 90 million members, is essential to national unity to unify the otherwise divided society. It was agreed that the Chinese have developed a state system run by a technocratic elite of highly educated bureaucrats under party control. The Communist Party Executive Leadership school in Shanghai is an example of this professionalism. They bring in political leaders from around the world to talk to their executive students about management and political management.

This is China’s enduring imperial system in modern form. It is a system from which the West derived both an independent bureaucracy and the concept of promotion based on merit judged by a civil service examination. It is also the source of what we now call red tape. Edicts from the Emperor to officials came tied with red tape.

It is unwise to take the lack of very public discussion and dissent as evidence that there are no deep and real divisions in Chinese politics and society. There is a unity around the need for a strong central government because it constrains these divisions. There is less concern for the have-nots because there is a belief that the children of today’s have-nots will have a better life than that of their parents. This is an aspiration that has faded in many Western economies.

Technical outlook for the Shanghai market

The Shanghai Index is showing the potential for a substantial change in trend. Aggressive investors are buying and this is shown by the way the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator are compressing and turning upwards.

There are two features in the developing trend change.

The first feature, and the base of this trend change, is the double bottom created over three months. The first reference point for this double-bottom pattern is the low of 3,063 on Feb 9.

The recent retreat in the Shanghai Index clustered around this 3,063 value and confirmed a new support level. The support was punctuated by a few intraday lows below this level, but the Shanghai Index has closed consistently above this level since April 17. This created the second point for the double-bottom pattern.

This double-bottom trend reversal has the first upside target near 3,320. This trend reversal is sometimes called a W-bottom reversal.

The second feature is the development of a classic three-part GMMA 1-2-3 breakout pattern development.

The first part of the pattern is when the short-term GMMA group of averages follows an index rally that reaches and then retreats from the lower edge of the long-term GMMA (Point 1 on the chart).

The second part of the pattern is when the rally and the short-term GMMA group of averages reach and then retreat from the upper edge of the long-term GMMA.

Traders and investors are alert for confirmation that the current rally is the second part of a GMMA 1-2-3 trend-reversal pattern. Confirmation comes when the Shanghai Index rally is able to reach near the upper edge of the long-term GMMA, currently near 3,200. This is currently developing (Point 2 on the chart).

The third part of the pattern is when the third rally and the short-term GMMA move above the upper edge of the long-term GMMA and when the retreat uses the upper edge of the long term GMMA as a support level.

This GMMA 1-2-3 pattern is a strong and reliable trend-reversal signal. The development of this pattern would support the conclusion of the double-bottom pattern and confirm the upside target near 3,320.

The development of the GMMA 1-2-3 pattern is further confirmed when the long-term GMMA begins to turn upwards and compresses. This behaviour shows investors have stopped selling and as the long-term GMMA turns upwards, it shows they have started to become buyers. The long-term GMMA is showing early signs of this compression.

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.

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