SINGAPORE (Mar 5): The announcement in the Chinese media that President Xi Jinping would seek to extend the tenure of his leadership beyond the customary two terms has unsettled many people. The proposal to abolish a two-term limit for the presidential and vice-presidential roles means Xi can remain in power beyond 2023. State media supports this because it provides consistency for China’s economic reform process. Others are more cautious or concerned.
Is it time to reassess China risk? It is not a question with an immediate answer, but it is a question with long-term consequences for those doing business with and inside China.
Much of the commentary is on the negative side with fears that China will move to a more authoritarian government mode. People point darkly to the chaos of the Cultural Revolution as a consequence of one-man rule. There is little evidence, however, that Xi favours a wholesale rewriting of the economy and economic progress.
The year 2018 is not 1949 — the formal date of the founding of the People’s Republic of China. China is not struggling for national identity and unity. There are no warlords to defeat and no occupying army to fight. In 2018, China is not war weary.
None of this is a vote in favour of consolidating power under one ruler, but it is important to note the differences in the circumstances because it means there is a lower probability that businesses will face the disruption and destruction that characterised the Mao years.
The careful and successful management of the economy, the gentle cooling and management of expectations and the well-coordinated journey up the value chain from “made in China” to “designed in China” all confirm a management approach that should be the envy of Western economies. This is a country that will reach and exceed the Paris Climate accord targets years before the due date. All this is unlikely to change and, if anything, will continue at a faster pace as China moves into cutting-edge technological development.
The way business is done in China has changed, and rapidly, since Xi became president. Key to this change is the now rarely mentioned Tigers and Flies anti-corruption campaign. It was often dismissed as a means to purge those who opposed Xi. This is true of some aspects of the campaign, but to dismiss it solely on this basis is a mistake.
In five years, by end-2017, 1.537 million officials had been punished for corruption and 3,453 overseas corrupt fugitives had been arrested. Some were political opponents of Xi, but the overwhelmingly vast majority caught in this net were just simply corrupt.
This has a dramatic impact on the way business is done in China. It is impossible to eliminate centuries of common practice, but Xi has done more along these lines than anybody since the beginning of the Qing dynasty. It is an essential part of economic stability and modernisation. There is no indication that Xi has any intention of turning his back on the opening-up policies that continue to deliver economic prosperity and alleviate poverty.
China has neither claimed nor aspired to be a participatory democracy. In many ways, it is a model of government by participatory bureaucracy, where soundly researched decisions are made. Close attention will be paid to the first annual session of the 13th National People’s Congress on March 5, which will discuss the Constitution revision. The deputies will also elect state leaders and confirm the nomination of state leaders.
This proposed change in the president’s term is unlikely to lead to large-scale policy changes. For most, it will be business as usual, albeit with a higher level of discomfort if this translates into a reduction of the long-term progress towards a less repressive society.
Technical outlook for the Shanghai market
The Shanghai Index rebound rally has developed a retreat. In the long term, this is a good feature because it helps establish a second anchor point for a new trend line. The retreat and a future rebound are consistent with stable trend development.
The key feature on the Shanghai Index chart is the trading band between 3,260 and 3,290. This band provided a critical support and consolidation area last December. The market dramatically overshot this support area with a plunge to 3,063. The rebound rally
was rapid, however, and traders look for this historical support feature to again act as a major consolidation point for index activity.
The rebound rally was strong, but traders do not treat this as sustainable until the Shanghai Index is able to move above 3,260. The rally peaked at 3,336 but was unable to sustain the market rise. Investors are now watching for the index to stabilise around the 3,260 level.
The Shanghai market recovery can develop
in one of three ways. The first potential development is an L-shaped recovery, similar to the way the consolidation base and breakout developed in December. This requires a considerable reduction in volatility.
The second potential development is a fast and rapid reversal of the downtrend, and current index activity has this behaviour. This is a very volatile and unstable reaction. It is treated with caution.
The third potential development is a slower development of uptrend behaviour similar to the behaviour between May and June last year. This is the most desirable development because it shows a steady recovery. The current retreat and any future rally will provide the second anchor point for a new future uptrend line.
There are three key resistance features.
The first resistance feature is the consolidation trading band between 3,260 and 3,290. This is a significant historical resistance feature. A rally followed by a consolidation within this trading band is the most bullish and stable outcome.
The second resistance feature is the relatively weak level near 3,360, which will possibly offer very little resistance when the market rebounds.
The third resistance feature is the lower edge of the long-term Guppy Multiple Moving Average currently near 3,380. As the retreat continues, the long-term GMMA will begin to separate. The wide separation in the long-term GMMA will absorb the initial market rally as investors sell into the rally. Currently,
the separation in the long-term GMMA is not very wide. This shows that investors are not strong sellers.
The fourth resistance feature is near 3,440. This is the value of a long-term support-and-
resistance level.
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.
