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The China factor

Daryl Guppy
Daryl Guppy • 6 min read
The China factor
What was once perhaps unthinkable must now be included in our immediate investment and business calculations. China is not sitting back in the face of this bully behaviour, so the investment horizon is still wide.
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(May 15): The US is seeking to insert a clause in the proposed US-UK free trade deal that would allow it to retreat from parts of the deal if Britain reaches a trade agreement with another country that the US did not approve of. The clause is based on Article 30 of the US-Mexico-Canada agreement that locks out non-market economies. British diplomats are worried this would give the US leverage over any UK policy towards China.

This forces the UK into a “them or us” situation and this is not a threat confined to Western countries such as the UK. It is a threat that will increasingly come to our regional trade relationships. How governments react to this will shape our investment options and market exposure. What was once perhaps unthinkable must now be included in our immediate investment and business calculations.

China is not sitting back in the face of this bully behaviour, so the investment horizon is still wide. It has been interesting to see the way the Belt and Road Initiative (BRI) countries have been embraced by China. Under BRI, China has created a trade environment that is very different from the US model, which is based on “Making America Great Again” and devil take the hindmost. China’s BRI has been far more inclusive and supportive of the World Trade Organization (WTO) framework that gives smaller countries a mechanism to counter the otherwise-overwhelming force of major trade powers.

China moved beyond these trade issues to develop a more broadly based and attractive investment environment. This is perhaps based on the belief that if investment conditions are made attractive enough, then US and other Western capital would come.

To achieve this, China is promising to further relax foreign investment restrictions. Premier Li Keqiang told a meeting of the government’s State Council that market access for foreign firms would be relaxed, but he did not give details. This followed an earlier easing of conditions around foreign investment and the broader opening of bond and credit markets.

The annual Two Sessions meeting — the plenary session of the National People’s Congress (NPC) and the annual session of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) — scheduled for May 22, will provide more details around the strategy and direction of China international trading, although the primary focus will be on measures to assist in the recovery of the domestic economy. This is expected to include an acceleration of major infrastructure projects rather than a widespread introduction of new infrastructure projects.

Officials are suggesting there will be additional measures on top of the tax cuts and cheap loans previously announced to help struggling small businesses. It is estimated that around 90 policies and measures have been rolled out to help companies get back to work. These include tax breaks for transport, catering and tourism companies, along with refunds on unemployment insurance premiums. These are fiscal support measures designed to reduce business operating costs. Around 2.85 trillion yuan ($570 billion) of low-interest loans have been made available for small businesses.

The government’s priority is to stabilise employment and restore business growth. This requires a combination of domestic policy initiatives and a restoration or restructuring of foreign trade and capital environments. These changes open the way for capital investment with broader and easier participation in Chinese equity markets. The Covid-19 recovery path also offers a new range of business opportunities for investors.

Investors may soon be forced into making a hard choice around where they choose to invest geographically, or into the business models of companies based on their level of engagement with the US or China, but not both.

Technical outlook for the Shanghai market

The Shanghai Composite Index is developing a classic Guppy Multiple Moving Average (GMMA) trend breakout pattern. This consists of three, and sometimes four, features. This is a bullish pattern with an initial upside target near 2,980.

The GMMA consists of two groups of moving averages. The long-term group is used to track the behaviour of investors. The short-term group is used to track the behaviour of traders.

Compression in the group of moving averages shows agreement on price and value and usually precedes a change in trend direction. Separation in the group of averages shows strong support for the underlying trend.

The initial GMMA analysis of the Shanghai Index shows the long-term group has turned upwards and is beginning to compress. This shows the support for the downtrend is diminishing, although investors have not yet moved strongly to support the new uptrend.

The compression in the short-term group of averages shows investors are very bullish and they are aggressive buyers whenever the index pulls back.

The GMMA is showing a classic GMMA test, re-test and breakout pattern. The first rally, shown as A, tests the resistance strength of the long-term GMMA. This is followed by a pullback and a second test of GMMA strength. The second rally, shown as B, penetrates further into the long-term GMMA and shows that resistance is weakening. Usually the retreat from the second rally is small, but in this case, there were long-tailed dragonfly doji days.

The third rally, shown as C?, moved above the upper edge of the longterm GMMA. This usually signals a continued breakout. The retreat from this rally uses the upper edges of the long-term GMMA as a support feature.

This is the current situation. The retreat is developing and moving to test two support features. The first support feature is the long-term GMMA. The second support feature is the value of the uptrend line.

The long-term GMMA is like an airbag on a car. It absorbs the momentum of the pullback and allows a new rebound rally to develop. If this support fails, then it signals an end to the current uptrend. A successful rebound will attract more investors eager to join the new uptrend. This will be shown by an expansion in the long-term GMMA.

This is a classic GMMA trend reversal. It is often confirmed with a straight-edge uptrend line. This is used to define the early stages of the developing uptrend, so investors watch for additional successful re-tests of the line as a support feature.

It is normal for this breakout to retreat and test the support level before developing a new uptrend rally. Support is near 2,850. The upside target for the trend breakout is near 2,980.

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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