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Collateral damage for China investors

Daryl Guppy
Daryl Guppy • 5 min read
Collateral damage for China investors
Specimen of rare metals on display in a lab. Elements like Scandium, Neodymium and Yttrium have triggered a US-China trade battle / Photo: Bloomberg
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The adoption in the US of the Smoot-Hawley Tariff Act in 1930 worsened the impact of the Great Depression by destroying international trade.

However, the 1930 Act did not hide behind a security focus nor was it directed at a specific country. These are the differences that add a contagion complication to the current protectionist barriers that are enacted in the US under a variety of different Acts.

The Chips Act, the Inflation Reduction legislation and the most recent round of protectionist tariffs on Electric Vehicles (EVs) and other products are all aimed squarely at blunting China’s development.

That is of concern to those who have invested in China or China-related investments and to those who are doing business with China. If China’s growth is blunted, then the value of investments in China is diminished. If protectionist walls are raised, then it impacts the costs of doing business and forces changes in where we do business. This, in turn, impacts investment decisions.

The protectionist net is wide and it may impact the ability of companies like Singapore bakery chain BreadTalk to implement its expansion plans and CapitaLand’s property projects in China, both in terms of a failing Chinese economy and in their ability to undertake other work outside of China.

This is more plausible than it seems. Australian companies with Chinese interest in their share register are already experiencing this type of peril. Battery and carmakers in the US can access tax breaks if they source a defined proportion of their battery but most Australian lithium would be ineligible as they have a high level of Chinese investment, including via Singapore, on their share registers.

See also: Feel the pulse of real China at the street level

This is an issue under heavy discussion at this week’s Mining Expo in Western Australia where a large portion of West Australian mining projects have been turned on with the support of Chinese dollars and Chinese investment over the past two decades.

At this stage, this investment death-by-association is largely limited to the rare-earths sector but the way has been opened for a wider application as shown by recent tariff decisions on an unexpected range of products.

The headline tariffs introduced by the US have been about EVs. They are just one of 14 areas impacted by the new tariffs. The list of 14 includes a range of products that hardly hand a competitive advantage to the US or pose any security threat.

See also: Navigating China’s investment landscape

New tariffs are imposed on battery parts, including anodes, cathodes, electrolytes and separators, not hi-tech lithium batteries. These are 25% tariffs on the parts used to make old-fashioned Eveready batteries like those powering my mouse and keyboard.

Lithium batteries do not escape the new tariffs but the 25% tariff is applied to disc batteries used for small electronic devices, including digital cameras. Put aside the almost laughable reasoning that would call for a more than tripling of tariffs on these domestic products and consider the impact. If Singaporean products include these apparently threatening Chinese components, then the end product may also be required to pay the new tariffs. It is the spread of this third-party impact that carries a much broader impact than just the tit-tat trade war between the US and China. It poses a growing investment risk for third parties.

Other items on the new tariff list include medical face masks and rubber medical and surgical gloves, which all will see tariffs increase to 25%. Not to be outdone in pettiness, the tariffs on syringes and needles will also increase from zero to 50%, which does not help lower costs in the failing US healthcare system at all.

The illogical scatter-gun selection of tariff targets, like the Smoot-Hawley Tariff Act, increases global investment risk as well as for those involved with China. The collateral fallout may be much wider than anticipated. There is little investors can do to stop this protectionist spread, but they must increasingly factor it into investment decisions.

Technical outlook of the Shanghai market
The Shanghai index continues to move steadily towards the trading band upside target near 3,240. This target is estimated by taking the width of the previous trading band and projecting this upwards. It is a long-term target but achieving it is underpinned by the steady uptrend behaviour of the index.

This is shown in the Guppy Multiple Moving Average (GMMA) indicator relationships. The most important measure of trend strength and stability is shown by the long-term group of moving averages. These show the way investors are thinking.

For more stories about where money flows, click here for Capital Section

The long-term GMMA continues to show broad and consistent separation, suggesting strong support for the developing uptrend. This suggests the uptrend is sustainable and that any pullback will again represent a buying opportunity at a point of temporary trend weakness. The most recent retreat rebounded from the lower edge of the short-term GMMA. The retreat did not cause any compression in the long-term group of averages and this confirms trend strength.

The upper edge of the long-term GMMA is above resistance near 3,080.  When the lower edge of the long-term GMMA moves above 3,080 it will confirm the continuation of the longer-term uptrend. By then there is a higher probability the market will have reached the trading band target near 3,240. This is a bullish trend environment.

The character of the move towards the upside target near 3,240 still cannot be fully assessed at this stage.  However, the pattern of consistent separation is usually associated with strong and stable trends. There is an increasingly low possibility the market could pull back and test the 3,080 as a new support level before developing a new leg of the uptrend. The pattern of trend development suggests the market may continue to move upward in a stable trend. Traders will watch for consolidation near the 3,240 target level.

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 former national board member of the Australia China Business Council

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