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Investors reassured by China's commitment to free trade

Daryl Guppy
Daryl Guppy • 5 min read
Investors reassured by China's commitment to free trade
(Nov 11): Those who thought China was losing the trade war are wrong. Those who thought China could be intimidated into retreating from its commitment to free trade are wrong. Speaking at the opening of the China International Import Expo (CIIE) in Shangh
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(Nov 11): Those who thought China was losing the trade war are wrong. Those who thought China could be intimidated into retreating from its commitment to free trade are wrong. Speaking at the opening of the China International Import Expo (CIIE) in Shanghai on Nov 5, President Xi Jinping again reaffirmed China’s commitment to free trade and a lowering of trade barriers and tariffs.

His speech followed Premier Li Keqiang’s confirmation of China’s support for the Regional Comprehensive Economic Partnership (RCEP) in Bangkok. Together, these two speeches show China’s genuine commitment to free trade and to more opening up of the country’s capital and investment markets. It puts a floor under the trade threats coming from the US and boosts the investment environment and opportunities in the Asean region.

Xi covered five areas. For those who choose to really listen, these five areas point the way to a greater and more stable trade relationship that offers benefits for all participants. These five areas are consistent with the philosophy of the Belt and Road Initiative, and with that of the RCEP agreement announced in Bangkok.

The RCEP is an example of the reduction of trade barriers. This will boost economic growth within the Asean region and provide an alternative market environment to the increasingly insular markets of the US.

Investment opportunities are in logistics chains, port and trade facilities and companies that can now grow with the benefit of reduced industry tariffs.

Many of these countries have benefited from the structure and safety of the World Trade Organization umbrella. China’s reaffirmed support for the WTO is welcomed by most WTO members, including Australia, who show a growing genuine desire to support and reform the WTO. Xi confirmed that China will not retreat from these core trade values.

China has endorsed its commitment to the free flow of trade by further cutting tariffs and expanding the import of high-quality services and products. This is an open invitation for service companies to participate in the growth of the Chinese economy. These reforms include the continued dismantling of barriers to foreign investment. The negative list of off-limits investment areas will be reduced.

Xi showed that China is committed to nurturing a more sophisticated, multi-platform economy. He highlighted a record of improvement in the business environment as it becomes more internationalised and market-oriented.

Smart investors have already used the opening of capital markets to buy into the most advanced internet and AI companies in the world. Investors who have been slow to act now have the opportunity to take a direct investment in China and companies with China links. After this speech, investors can be confident about the ongoing support for this increasingly liberalised trading environment. With more listed companies than in the US market, China offers an excellent range of direct investment choices.

Technical outlook for the Shanghai market

The Shanghai index has rebounded strongly from the support level near 2,920. This development can be seen as part of a four-stage Guppy Multiple Moving Average (GMMA) trend breakout. It can also be seen as part of a consolidation pattern that may continue for several more weeks.

Which pattern is dominant will be confirmed by the behaviour of the index as it approaches the resistance level near 3,040. A sustained breakout above 3,040 confirms a new longer-term uptrend. A retreat from 3,040 and a retest of support near 2,920 confirm a longer sideways consolidation pattern. Aggressive traders are taking positions in anticipation of a breakout above 3,040.

In recent weeks, the index has tested and retested the support feature provided by the compressed long-term group of averages in the GMMA indicator and the historical support near 2,920. This behaviour is part of the process of building a base or foundation for the resumption of a rally and a longerterm uptrend breakout above resistance near 3,040. The current rally is not a surprise and is part of this development pattern.

Investors are watching for a breakout from the broad sideways band that started in May. The base support of this trading band is near 2,830 and the upper resistance level is near 3,040. Since May, the Shanghai index has oscillated around the central support and resistance level at 2,920. Over the past nine weeks, the index has remained in the upper section of the trading band, between 2,920 and 3040. This confirms a bullish bias in the index behaviour. This bias suggests the current rally has an increased probability to break out above the upper edge of the consolidation band and develop a new uptrend.

Investors currently remain cautious, and this is shown by the lack of expansion in the long-term GMMA group of averages. This tight compression shows a high degree of agreement. An expansion in the longterm GMMA indicates increased investor support for any developing uptrend.

A successful test and breakout above resistance will rapidly attract investor support and add strength to the new uptrend because a breakout above this strong resistance level has the potential to be very powerful. There is a high probability the Shanghai index will consolidate near the 3,040 level prior to any breakout activity.

The potential future development of the four-part breakout pattern is shown by the thick lines on the chart. Traders and investors wait for the rally to successfully test resistance near 3,040. Trend continuation is confirmed when the index is able to move above resistance near 3,040. A breakout above 3,040 has an upside target near 3,120.

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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