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Australia not a safe China investment

Darryl Guppy
Darryl Guppy • 6 min read
Australia not a safe China investment
“Why is Australia attacking China? They are killing my Australian investments!”
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“Why is Australia attacking China? They are killing my Australian investments!” This was a cry of desperation and anguish from a colleague in Singapore this week as China imposed punitive tariffs on Australian wine. This follows previous moves by China to refer a number of issues to the World Trade Organization (WTO).

Another is worried about his investment in apartments in Sydney because changes to the Foreign Investment Review Board regulations have frightened his Chinese co- investors. The rejection of a Chinese bid for a milk company because it was “‘against the national interest’” was seen by many as a clear message that Chinese investment was not welcome.

As usual, with assessing market behaviour, there is a separation between the facts of the matter and the physiological impact it has on the market.

For whatever reason, Australia has been muscling up to China, particularly in the past 12 months. Australia’s constant criticism of China has been loud, shrill and often ill-founded. Australia has actively called for interference in China’s domestic affairs while demanding China stop making comments about Australia’s domestic affairs. These calls have sometimes relied upon reports of suspect objectivity prepared by think tanks that are themselves funded by foreign powers including the US. Australia has "attacked” China with over 100 anti-dumping referrals to the WTO.

At first, the business community dismissed this as the normal rhetoric meant for domestic politics, and they were slow to understand the impact on an international basis. Now they are fighting a rear-guard action to try to bring the Australia-China relationship back to civility.

After months of sustained anti-Chinese media coverage and constant loud attacks from political leaders, China has finally had enough and that impacts increasingly on investments in Australian companies that rely on China for much of their business. The listed company, Treasury Wine Estates, is the latest example of the direct destruction of investment value as a result of political activity.

China has referred two cases of anti-dumping to the WTO – Australian barley and wine. China imposed export bans on several meat companies that consistently incorrectly labelled their products. Due to Covid concerns, Chinas has increased quarantine inspections of all imported food coming from all countries, but Australia refuses to comply with the new conditions and believes it has been singled out by a vengeful China.

As Australia has become more unfriendly, China has exercised its right to source commodities from more friendly environments. Australian coal is substituted with coal sourced from Indonesia. It is no different from Australia’s cries of economic sovereignty and telling Australian businesses to look for markets other than China.

The reaction by some Australian politicians and media has verged on hysterical, claiming these moves are a direct attack on Australian sovereignty. It is an overblown reaction, but it is this reaction, rather than the facts, that has impacted on market activity.

There is an Australian wine labelled Innocent Bystander. It is an accurate description of many Australian businesses at the moment because they have been the innocent victims of a political war waged by others. Investors in Australian stocks are also innocent bystanders injured by this unnecessary conflict. Australia is no longer a safe place for proxy investment in China's economic growth. The only sensible investment solution is to cut losses, reduce Australian exposure and transfer investment capital to countries which have a more mature relationship with China, and which acknowledge the importance of China business.

Technical outlook for the Shanghai market

The Shanghai index is flirting with resistance near 3,450. There is not any fast breakout above this level, but this is not a surprise. The 3,450 level has been a strong resistance level starting in July 2020. However, there is a good probability that this resistance level will be broken. This sets an upside target near 3,690.

Here are the factors that support a strong bullish outlook:.

  • The short-term group of Guppy Multiple Moving Averages are well separated. This shows strong support for the new uptrend. When the index dipped on Nov 26, there was no compression in the short-term GMMA. This shows good support for the uptrend.
  • This trend behaviour is different from the previous trend behaviour when the index moved above the mid-point of the trading band near 3,360. The short- term GMMA relationship in August was weak with compression and expansion activity. This showed there was not strong support for the new uptrend.
  • The long term GMMA is well separated. This shows good support for the new uptrend is coming from investors. When the index pulls back, the investors use the opportunity to buy the dip. This is confirmed by the way the long-term GMMA remained well separated when the market pulled back on Nov 26.
  • The uptrend is well defined with the trend line. This confirms that a close below the value of the trend line is a signal the uptrend may be weakening.

The upside breakout target is near 3,690. This is calculated by measuring the width of the trading band and then projecting this value upwards. This is a long-term upside target. This calculation does not show how the uptrend may develop. It may be a smooth trend, or it might be a trend consisting of many small rally and retreat behaviours.

There is a high probability the breakout will pause near 3,580 because this was also near the peak index highs in January 2018. This is not a strong resistance level so the uptrend may quickly resume.

The long-term upside target of 3,690 also acted as a resistance level in December 2015 and May 2008. May. The influence of this long-term resistance levels needs to be treated with caution, but they help confirm the importance of the current trading band price projection.

The index may fail in this attempt to break out above 3,450. Any retreat has three levels of support. The first is the lower edge of the short- term GMMA. The second support feature is the value of the uptrend line. This is also near to the value of the lower edge of the short term GMMA. The third support feature is the centre point of the trading band near 3,360.

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 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.

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