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China takes the next step beyond innovation

Daryl Guppy
Daryl Guppy7/10/2017 08:00 AM GMT+08  • 6 min read
China takes the next step beyond innovation
SINGAPORE (July 10): There remains a popular idea that China is a nation of copycats, with stores full of fake goods created with ideas stolen from others. There is an element of truth in that, but ironically, this copycat mantra is itself copied and repe
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SINGAPORE (July 10): There remains a popular idea that China is a nation of copycats, with stores full of fake goods created with ideas stolen from others. There is an element of truth in that, but ironically, this copycat mantra is itself copied and repeated ad nauseam by everyone, from the US president down to the man in the street. It is the same style of thinking that was applied to Japan in the 1960s, when the country had a reputation for cheap copies rather than innovative products.

This ill-informed perception of China is an exercise in ignorance, but more importantly, it blinds us to the vast R&D industry that underpins the country’s new economy. Chinese telecommunications manufacturer Huawei Technologies runs R&D centres in China that dwarf their counterparts in the US.

But it is not just research that poses a challenge. It is the new thinking that goes with the research. Three examples sum up the nature of the competition.

The first is the development of WePay and Alipay. Superficially, these look similar to US internet payment models such as Apple Pay. Scratch the surface and the difference is immediately obvious. The US model is based on disintermediation. In plain English, it means Apple getting between you and your bank and taking a slice of the action with new fees and commissions. Uber takes the same path.

WePay and Alipay are a completely new model that allows the customer to deal directly with the merchant in a way that makes micropayments possible. It does not rewrite the rules; it creates an entirely new game.

The second example is the humble multistorey car park. In Xi’an, I visited the new shopping centre Sai Ge. We parked in the multistorey car park, then spent the next 40 minutes deciding which restaurant to eat at. After a good lunch, it was difficult to remember exactly where we had parked the car.

Like all modern car parks, we passed under an Automatic Number Plate recognition gantry. In the West, this is used to issues fines for parking evaders and overstayers. China takes the next step. The carpark operators use this information to identify where each car is parked. Enter your registration number at any one of the terminals in the car park and a map showing the exact location of your car is displayed along with the shortest route to it. It took less time to find our car than it did to decide on the restaurant. This is China taking the next step by using data in innovative ways.

It’s a long way from the hi-tech Sai Ge shopping centre to the Mongolian grasslands, where sheep are still herded by shepherds. An enterprising shepherd has developed an app for tracking his sheep. Rather than braving the summer heat or winter cold, he is able to track his sheep, know where they are located as well as the weather conditions in that location. It saves time and effort and improves shepherding efficiency.

The next step? This tracking information is the first step in the fresh food logistics chain. In Beijing supermarkets, you will be able to track your cut of mutton back to the grassland where the sheep was born. You can know how much weight it gained, what grass it ate, the water it drank and its health. Not all of us want to do this, but this tracking is used to guarantee quality and protect against fake substitution.

Understanding the strategic political and business environment is important, but we should not ignore the on-the-ground practicalities. It is China’s ability, not just to innovate, but to take the next step beyond innovation that really challenges our business as usual. That is where the challenges to our business models are found and also where future opportunities are located.

The Shanghai Index rally consolidated near the target level of 3,200 and then developed a strong breakout. This is a continuation of the breakout pattern, which is also sometimes called a W pattern. The upside target for the W pattern is near 3,200 and this has been achieved. The breakout means the nature of the trend behaviour has changed. This is now a trend rather than a breakout rally. Investors are interested in the potential upside target for the trend. They are also interested in the strength and nature of the new trend.

The upside targets are calculated using previous resistance levels. This gives a target near 3,265. The Shanghai Index moves in well defined trading bands, so this method is also used to set the upside targets. The width of the trading band is measured and the value is projected above 3,195. This gives an upside target near 3,260.

This sets an upside trend target for the index between 3,260 and 3,265. The key to understanding the nature of the new uptrend is the Guppy Multiple Moving Average relationships because they provide a guide to the strength of investor sentiment and the confidence of traders.

The long-term GMMA reflects the thinking of long-term investors. The long-term GMMA has compressed and is turning upwards. In the future, investors will watch for an expansion of the long-term GMMA group of averages because this confirms strong investor confidence in the new uptrend.

The behaviour of the short-term GMMA shows that traders are also becoming more confident. The short term GMMA reflects the thinking of traders. The current activity in the short-term GMMA shows wide separation and indicates that traders are more aggressively buying. Retreat and consolidation is normal behaviour for this type of trend breakout. This will lead to some compression in the short-term GMMA, followed by an expansion as traders move into the market to take advantage of temporary lower prices.

There are two GMMA trend confirmation signals. The first is when the value of the upper edge of the short-term GMMA moves above 3,195. This has developed. The second signal is when the lower edge of the short-term GMMA moves above the 3,195 level. This may develop towards end-July.

The breakout above 3,195 is bullish, but there may still be some consolidation around 3,195 as the index tests this as a support level. The index can drop to 3,180 and still remain in a long-term uptrend. In the longer term, investors will watch for the long-term GMMA to move above 3,195.

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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