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(Sept 23): Trade wars and tariffs may keep many in the China politburo awake at night, but this is not the issue that keeps people awake in China. President Xi Jinping famously stopped by a local QingFeng steamed dumpling shop several years ago and shared pork dumplings with customers. Now, it is the same humble jiaozi, or pork dumpling, that is occupying a key space in people’s thoughts. Pork shortages due to the outbreak of African swine flu have caused the price of the meat to skyrocket in China.

Pork accounts for around 60% of China’s meat consumption. The country raises around half of the world’s pigs, but the African swine flu has decimated farms and breeding stock. The result is a very unwelcome price rise in what is a Chinese food staple, with a 47% price increase in August. This contributed 1.08 percentage points to a 2.8% rise in the consumer price index, according to data released by the National Bureau of Statistics.

That is good news for pork producers outside of China as pork exports have increased substantially. However, African swine flu has just been discovered in the Philippines’ pig herd and reports are emerging of its presence in Vietnam. It is probably just a matter of time before the disease spreads to other countries in Asia. Australia, already a tightly quarantined country, has instituted new bans on many previously exempt pork products in an attempt to protect the Australian pig herd.

Protein other than pork will see an increase in demand and that is good news for investors in agricultural companies with a beef and lamb focus.

Recently, I spent time with colleagues and friends in Beijing, Xi’an, Qingdao and Dunhuang, and I was particularly interested in the on-the-ground impact of the current trade war as distinct from the political impact.

As it turned out, pork was a far more important issue. Chinese tariffs on goods imported from the US have not had a significant impact on consumer patterns. None of my colleagues suggested they might stop purchasing US products. Price rises were muted, and product substitution was actively keeping prices competitive. Product substitution is not copycat fakes. It is products sourced from alternative suppliers, particularly as the Silk Road connectivity expands. Imports from other countries are substituting for the more expensive US products.

There are exceptions. Some products such as the iPhone are only available from the US.

From a consumer perspective, many US products are already made in China for the Chinese market. These products and services are not impacted by tariffs. General Motors makes more cars in China than it does in the US. These cars are not for export. They supply the Chinese market with an “American” product that is manufactured in China for China.

Starbucks, Subway and McDonald’s continue to do “American” business in China without a tariff impact because, in reality, these are Chinese businesses in China. The tariff wars have no impact on the price of a Big Mac in Haidian and there is no drop-off in customers. There is a political risk here if a Boycott American Products movement develops, but for now the primary consumer concern is not trade wars, but the increasing price of the humble jiaozi.

Technical outlook for the Shanghai market

The Shanghai Index consolidated near the resistance level of 3,040 and then developed the anticipated retreat. This is the third section of the Guppy Multiple Moving Average (GMMA) trend breakout pattern. The retreat away from resistance is a normal part of the long-term uptrend breakout pattern.

The potential future development of the breakout pattern is shown by the thick lines on the chart. The pullback may test the support areas before developing a new rebound rally and retest of resistance near 3,040. Additional support may come from the value of the long-term group of averages in the GMMA indicator. This support may develop at a slightly higher level than the historical support level near 2,920.

The trend breakout is confirmed when the index hits this support area and then develops a rebound rally that is able to move above resistance near 3,040.

This is a GMMA indicator breakout pattern with three tests of downtrend strength. The first part of the pattern is a fast rally following a significant downtrend (1). Traders wait for a retreat from the upper edge of the long-term GMMA (2). These retreats were small.

The second rally carries the index above the upper level of the long-term GMMA to the resistance level near 3,040. The index consolidated near this level before developing the current retreat pattern. The short-term GMMA also moved above the longterm GMMA and expanded. This shows strong trader support for the breakout. The long-term GMMA shows rapid compression and has turned upwards.

The long-term GMMA is slowly expanding. This confirms that investors have entered the market as buyers and are supporting the new uptrend.

The third part of the breakout pattern (3) is currently developing. This is when the second rally retreats and tests the support features. The index bounces away from this level and again moves decisively above the upper edge of the long-term GMMA. This rally has a high probability of moving above the resistance level near 3,040 and towards the longerterm resistance target near 3,120.

This breakout into a new sustainable uptrend is confirmed when the long-term GMMA increases the degree of expansion. This indicates strong buying by investors as they join and support the developing uptrend.

Aggressive traders took long positions as the index rebounded from the lower edge of the longterm GMMA around 2,890. Conservative traders and investors are now waiting for a new pullback to test support features. This is point (3) on the chart. Their activity in this rebound buying will be seen in the expansion of the long-term GMMA.

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.