Daryl Guppy Thu, Jun 02, 2022
Perhaps the most lasting financial impact of the 2008 Global Financial Crisis is the growth of Exchange Traded Funds (ETFs). Originally available across major indices, they have evolved to cover a plethora of sub-indices and specialist areas.
For a new generation of investors, these ETFs spread risks and remove the burden of having to make choices about individual stocks.
Although ETF-related trading has become a dominant feature of market activity in the West, this has not happened in China.
However, that will now change as a result of China’s structural market reforms and liberalisation policies that benefit the domestic economy. They will also increase the market’s attractiveness to foreign investors.
The first decision relates to ETFs and the second relates to the bond market. ETFs will now be included in the cross-border Stock Connect scheme between China and Hong Kong. This will improve the integration of the three Mainland markets of Shenzhen, Shanghai and Beijing with Hong Kong Exchange and other global capital markets.
Because an ETF is a basket of stocks, the Stock Connect platform will give investors and traders access to some stocks that might otherwise be unavailable individually. Currently, many of the Mainland-listed tech companies are not eligible for trading on the Stock Connect facility. However, these companies could be accessible to investors via the ETF.
This will provide an opportunity for the broader Chinese tech industry to access a wider range of financing avenues. The Chinese tech sector is characterised by a myriad of companies with high intrinsic value but they are often undercapitalised.
The second decision relates to increasing access to the bond market. Last week, the People’s Bank of China announced that foreign institutional investors, including central banks, sovereign funds, commercial banks and pension funds, will be allowed access to bonds traded on its exchange market. Previously, foreign institutional investors could only trade bonds on China’s interbank market so this marks a major change.
China’s bond market is the world’s second-largest, valued at around RMB140 trillion ($28.74 trillion). Of these, overseas institutional investors hold RMB4 trillion in bonds. This is an increase of 225% in the last five years.
The expanded access will incentivise foreign institutional investors to increase their exposure to the bond market.
These two decisions will expand access and increase the range of financial instruments available for investors in China and help manage their risks. They are important steps towards greater maturity in China’s financial markets and add depth to the market by providing a wider range of instruments to choose from. They also help reduce market volatility by providing more options for hedging risk.
A larger and diversified institutional investor base can provide long-term financing and a higher level of financial market sophistication but lower the risk of market volatility. These two decisions will also result in more cross-border investment opportunities and continued sustainable growth. China’s economy can only benefit.
Technical outlook for the Shanghai market
The Shanghai Index uptrend is now well developed. Trend line B has been tested successfully several times. However, as the index ploughs its way through the first strong resistance feature, there is the possibility of a significant retreat that may temporarily dip below trend line B. How this retreat develops is the key indicator of the future behaviour of the index.
There are two resistance features. The first is the wide separation in the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This wide separation shows that investors are dedicated sellers. They sell into the market whenever there is a rally. In previous months, their selling was strong enough to defeat the rallies and allow the downtrend to resume.
The long-term GMMA is showing limited signs of compression and the group is beginning to turn upwards. This suggests that some investors are not selling into the rally. This is a bullish development. However, the wide separation shows there is still strong resistance to a new uptrend and as the index moves higher, this selling may intensify. How will we know? The long-term GMMA will remain consistent in its separation.
The selling may also retreat as investors turn from sellers into buyers. How will we know? The long-term GMMA will compress as sellers move into the market to take advantage of the continuing rally. It is these behavioural characteristics that are the key advantages of GMMA analysis.
The second resistance feature is the long-term support and resistance level near 3,220. In March and April, the index oscillated around these levels before continuing the market decline. This suggests there is a higher probability that this level will influence the market the same way the current rally develops. This sets an upside target for the current move near 3,220.
A breakout above 3,220 has a target near 3,460 but that is a long-term development.
The most bullish outcome in the coming weeks is for the index to hit resistance near 3,220 and then use trend line B as a support feature for any market retreat. In this situation, traders can be confident of an uptrend continuation.
Daryl Guppy is an international financial technical analysis expert. 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