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Care needed with China sanction threats

Daryl Guppy
Daryl Guppy4/1/2022 12:03 AM GMT+08  • 5 min read
Care needed with China sanction threats
The Yangshan Deepwater Port in Shanghai. If the US spreads its sanctions net to China, then businesses working in and with the country would also face a potential risk of sanctions being applied to them. Photo: Bloomberg
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There are many consequences arising from the war in Ukraine and they include some that impact the way we do business with China. The consequences arise from the current use, and the potential future use, of sanctions against Russia. Like military WMDs (weapons of mass destruction), these economic weapons inflict pain indiscriminately, striking both the culpable and the innocent.

The sanctions do not apply only to Russian businesses. They also apply to countries that continue to do business with Russia, although there are special deals for friends. US President Joe Biden has threatened China with consequences should it break sanctions by trading with Russia. However, Biden has also approved India’s continued purchase of Russian oil and military equipment. The White House said this did not break sanctions, although it is difficult to see how this is the case.

The important point from a China business perspective is that if the US spreads its sanctions net to China, then businesses working in and with the country would also face a potential risk of sanctions being applied to them.

Sanctions cast a very wide and indiscriminate net.

The abuse of the Swift trade settlement system is another issue of significant concern, not just for China trade, but for all international trade. There are two aspects to the use of Swift.

The first is the way it is used at the discretion and directive of the US to exclude selected businesses from the Swift settlement and messaging system to deny them the ability conduct trade in US dollars. This exclusion from Swift may be applied on a countrywide basis, or to individual entities.

See also: China: structurally higher risks but timely policy responses can turn it around

Its reach is more widespread than just sanctioning trade with Russia. It is an exclusion from all Swift dollar settlement. That means that if you do dollar-denominated business with China, and the US excludes China from the Swift system, then all your China business will be unable to settle in US dollars. This is irrespective of any involvement your counterparts may have in any trade with Russia.

The second aspect of this weaponisation of Swift is the way it interferes with the sovereignty of other countries. This breaks a fundamental principle of the global rules-based order, which is designed to respect the sovereign right of countries to make decisions. The weaponisation of Swift by the US takes away the right of a country to continue trading as it wishes because exclusion from Swift effects all US dollar-denominated trade — not just trade with Russia.

There are some who talk of imposing Russia-style sanctions on China, but this is nonsense. They believe this would be devastating for China’s ability to remain a manufacturing superpower. Russia is the world’s 11th largest economy. China is, by many measures, the world’s largest economy. The removal of Chinese goods, manufactures and services from the shelves of Western businesses is simply economic suicide. It is fanciful thinking to believe that China can be excluded from the world economy.

See also: NYC Becomes Billionaire Family's Haven From China Property Crash

This style of thinking shows an extreme result from the use of sanctions, but companies with China business and investment need to be alert for any impact from secondary boycotts developing as a result of US-led sanctions imposed via Swift.

Technical outlook for the Shanghai market

The rebound in the Shanghai Index has reversed with the market falling below the 3,220 support level. This may be part of a consolidation around this level, but the failure of the rebound rally to find strong support is a bearish signal.

The Shanghai Index chart is dominated by the head-and-shoulder reversal pattern. This is a reliable pattern that indicates a market turning. The left shoulder was formed in June 2021. The head was formed by the highs in September 2021. The right-hand shoulder was formed in December 2021.

The distance between the top of the head and the neckline is measured and this value is projected downwards to set the downside target. This target was achieved with the market fall on March 16. The head-and-shoulder pattern is a reliable way of understanding the market reversal and setting targets. However, the pattern does not indicate how the market receiver may develop.

There is the possibility that the recent rally is a dead-cat bounce and that the index will fall again to test the head-and-shoulder downside targets. The relationship in the Guppy Multiple Moving Average indicator suggests that this downtrend remains very strong.

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The long-term group of averages, which reflects investor thinking, shows that investors remain very bearish. This is confirmed by the wide separation in this group of averages.

The short-term group of moving averages reflects the way traders are thinking. Despite the brief rally, this group of averages is also well-separated and that shows traders are also bearish in their outlook.

The strength of the downtrend is confirmed by the wide separation between the two groups of moving averages. This is a strong trend, so there is a high probability of a re-test of the head-and-shoulder downside target near 3,050.

A re-test of the lows near 3,050 may create the conditions for an RSI divergence pattern. This is where the trendline on the RSI moves in the opposite direction to the trendline of the low points of the index chart. This divergence is a trend reversal signal, so traders will watch carefully for this potential development.

This remains a very bearish environment.

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

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