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Riding the yuan train

Daryl Guppy
Daryl Guppy • 5 min read
Riding the yuan train
Bank attendants help residents set up digital yuan accounts on their smartphones in Beijing, China. A trade settlement system based on the yuan brings substantial trade benefits for those trading with China. Photo: Bloomberg
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Companies face new levels of risk in transacting business with China in 2023. It is common to highlight the risks of China business in a neat bundle which includes operational, regulatory and governance risks.

Of these, the last two risks apply to business in every foreign jurisdiction and are not unique to China.

2023 brings a new business risk: Currency risk, which comes from weaponising the Swift (Society for Worldwide Interbank Financial Telecommunication) trade settlement system, which includes several US chokeholds. It has been suggested that Xi Jinping views reliance on the American-backed global financial system as a chronic weakness for China. Recent events have increased China’s concerns, which has accelerated the development of solutions designed to reduce this reliance and open new avenues of cross-border trade settlement.

In 2014, China began developing a ‘‘central bank digital currency’’ (CBDC) or the e-CNY (Digital Currency Electronic Payment). As expected, the initial development and rollout were domestic and underpinned China’s transition to a robust digital economy.

Post-Covid-19, the CBDC is moving towards an international rollout, a significant challenge to the US dollar’s status as the global reserve currency.

CBDCs deliver more efficient payments with dramatically faster international currency transfers and the ability to curtail illicit activities such as drug dealing, money laundering and human trafficking.

See also: Xi's big economic meeting shows party bracing for slower growth

The developments are of interest to businesses for two reasons: Opening new opportunities to speed up trade settlement and reduce counterparty risk and the risk of external thirdparty pressure not using these new opportunities.

Foremost amongst these risks is the US Foreign Corrupt Practices Act (FCPA) and the way this is being re-interpreted and applied. The US Department of Justice has called sanctions and export controls the “New FCPA.” Businesses need to think of this in terms of the new CHIPS act. It casts a vast net and has consequences for the third-party export of US components to China.

It is possible that using CBDC to settle cross-border transactions may breach the FCPA and see a range of punitive sanctions applied to the companies involved. In past instances, this has included denial of access to the US banking system and Swift.

See also: China’s renewable energy shift is altering the investment landscape

The US enjoys ‘exorbitant privilege’ from the currency that the world uses and its domination of the Swift international currency settlement system. The rise of China’s CBDC will not go unchallenged. Companies and their boards can either prepare for this possibility and take action accordingly or ignore this and get blindsided by the new geopolitical realities.

A more efficient trade settlement system based on the yuan brings substantial trade benefits for those trading with China. Realising those benefits is not a clear-cut outcome.

Technical outlook for the Shanghai market

The Shanghai Index has retreated into the broad consolidation band between 3,220 and 3,280. The move above 32,80 was unsustainable but suggested an underlying momentum that can continue to drive the resumption of the uptrend.

The short-term target is 3,415, with the peak of the breakout in July 2022. Historical support and resistance features are essential. The consolidation band between 3,220 and 3,280 dominated market activity for three months in 2022 before breaking downwards. There is a reasonable probability that a break on the upside will follow the current consolidation.

The first group of strategic reasons for this is that the current uptrend is part of developing the long-term fan pattern and a double-bottom rebound.

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

The index activity is part of a long-term trend reversal double bottom rebound pattern. The depth of the double bottom pattern is measured, and then this value is projected upwards. The very long-term target for the pattern is around 3,860. Remember, this is a long-term pattern target and may take many months to develop. The index must also reach this target above solid resistance near 3,700.

The fan pattern signals a long-term trend change. The fan starts from a single point, shown as point 1. It consists of a series of trend lines, shown as lines A, B, C and D. The fan pattern is often associated with long-term breakout patterns that develop over many months. The current index activity confirms this development.

The second reason is the Guppy Multiple Moving Average indicators — the long-term averages are well separated and usually associated with solid trend support and stability. This suggests investors are buyers whenever the price dips.

The short-term group of averages shows a pullback, but this is a normal part of trading activity as traders take short-term profits. The critical factor to watch is the development of any compression and crossover in this short-term group of averages, as this suggests a strong sell-off.

The most important indication of a trend continuation towards the 3,415 targets is a sustained move above resistance near 3,280. Once this breakout develops, the market will probably see a surge in investor buying that will sustain the uptrend.

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 two decades. 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. The writer owns China stock and index ETFs

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