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Coercion impact on China investment

Daryl Guppy
Daryl Guppy • 5 min read
Coercion impact on China investment
The UK has caved in to demands from the US to ban Huawei. The US has removed Hong Kong’s special status and imposed sanctions on Chinese companies and legislators.
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(July 17): The UK has caved in to demands from the US to ban Huawei. The US has removed Hong Kong’s special status and imposed sanctions on Chinese companies and legislators. This is all in the headlines as international politics, so we shrug it off believing this is a dispute that has no impact on our business operations.

That belief is incorrect.

This international coercive behaviour seeps much further down the supply and business chain. The effects cascade from the national to the business to the individual level very quickly. Following the success of its Huawei pressure campaign, the US may seek to extend that pressure to other “friendly” governments such as Singapore.

The increasingly aggressive US stance against Chinese tech includes excluding Chinese companies from using US semiconductors. It is very possible the US ban will extend to other Chinese tech equipment. That will put pressure on any company which is using this equipment and also doing any business with US government agencies. Think supply replenishment contracts for visiting US Navy ships or software that is used in any part of the US government supply chain.

Telecoms is the headline focus and provides a template to the potential reach of this US policy initiative. Will Singaporean businesses be forced to strip Chinese equipment out of their businesses? Will the US put pressure on its allies and friends to ban Chinese handphones? This may be as straightforward as denying service contracts or stevedoring access to companies that allow workers to use WeChat or Huawei handsets.

This leads to a wider question of whether governments could be coerced to unwind existing contracts and replace embedded Chinese equipment. The Australian experience shows this is not as far-fetched as it sounds.

In March, the West Australian government walked away from a A$206-million ($200-million) contract with Huawei to supply a mobile data network for the Perth public train system. It said US trade restrictions imposed on Huawei had created a “force majeure event under the contract, which the parties have been unable to overcome”.

This can be extended further. CapitaLand Group President Lucas Loh recently talked about the increased use of technology in shopping malls as a response to the way Covid-19 has changed shopping patterns. The demand for technologically enabling hotels and accommodation is increasing. In many cases, due to cost and performance, Huawei is a major supplier of telco equipment to many hotels and apartments. Is it possible the WiFi routers and other equipment used in these buildings and supplied by Huawei will at some time in future face a ban or be ruled off-limits for US personnel?

The revoking of the trading status of Hong Kong also reaches down to individual business decisions and supply chains in ways that are yet to be fully tested. These represent an investment and business risk and require closer examination in coming weeks.

The media headlines are not above our paygrade. They have a direct impact on the way we structure investment portfolios. They impact the way we engage in business with China and use China as a source of materials or services in supply chains and business delivery. The headlines of manoeuvres in the South China Sea and sanctions are attempts to contain China but these bully actions are also designed to throttle China. There is not much we can do about this, but we cannot ignore the impact on not just investment portfolios, but on business activity and development.

Technical outlook for the Shanghai market

What a week to take the first break from these notes in five years. The Shanghai Index breakout was swift, adding 14% since our last notes. The resistance level near 2,980 was smashed with a powerful breakout that carried the index above the initial upside target near 3,280.

The next upside target is near 3,550 and is based on the peak highs made in February 2018. However, this breakout is a strong rally rather than a trend, so a pullback is expected. This pullback may use the 3,280 level as a support level.

The difference between a rally and a trend is significant because this helps project future behaviour. A rally moves rapidly upwards in a very steep trend without any significant pullbacks. It may last several days or sometimes several weeks. The current Shanghai index activity is a rally.

All rallies collapse, and the nature of the collapse will determine if the rally transforms into a sustainable uptrend. A trend consists of a series of rises and falls. The rebound points following each fall set the anchor points for the trend.

The current index activity does not have the characteristics of a trend, so investors should look out for the pullback and rebound activity. The first support level for this is near the historical resistance and support level at 3,280. The second support level is created by trend line A. This trend line has acted first as a support level, then as a resistance feature. In future, the value of the line may act as a support feature for an index retreat below 3,280.

The third support feature is the value of the upper edge of the long-term group of averages in the Guppy Multiple Moving Average indicator. This is currently near 3,120.

The Shanghai Index may develop a consolidation pattern around 3,340 and 3,460. If this consolidation is successful and provides a base for a continuation of the uptrend, then the consolidation area is used as an anchor point for a new uptrend line. This would confirm a very steep trend and investors would have to worry about the sustainability of the trend.

The pattern of behaviour is similar to the pattern between January 2019 and April 2019 when the index rose rapidly from 2,441 to 3,288 before a rapid retreat. Traders are ready to take profits if the index shows a significant retreat and then they will enter the market again as the index fall pauses near support levels.

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