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The threat of a less prosperous China

Daryl Guppy
Daryl Guppy • 5 min read
The threat of a less prosperous China
The Chinese economic sectors currently under US restrictions include semiconductors. Photo: Shutterstock
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US President Joe Biden has announced an executive order designed to restrict US investment in China.

It applies to US companies and citizens. It is the latest move in the strategic attack on China and it carries important implications for both investors and business. The executive order reflects a shift from containment to grey-zone conflict, because it is designed to slow China’s economic advancement.

It is a big deal, because an economically unstable Chinese economy, or less prosperous Chinese economy, is a threat to regional and global stability.

Biden’s restrictions are founded on the idea of blocking the development of dual-use technology. The sectors currently under restrictions include AI, quantum and semiconductors, because these pose a security risk as they can be used in weapons development. Not coincidentally, these are the foundations of a productive digital economy.

The idea of blocking dual-use technology casts a very wide net which can be used to inhibit or stop investment. An investment in BYD battery technology could be at risk if this was declared dual-use technology with potential military applications.

Time to declare an interest. I hold investments in Morgan Stanley China A fund, along with investments in China-focused ETFs. BYD is among the stocks held in these funds. The performance of these US-based, China-linked funds is compromised by executive orders which prohibit selected investments on nebulous “security” grounds.

See also: Navigating China's markets

BYD has developed products such as the advanced-safety and high-capacity “blade battery” using lithium iron phosphate. Potential dual-use technology? Certainly. A security threat? No more a threat than improvements in artificial rubber used in tyres for cars — which can also be used for tyres on armoured vehicles and fighter jets.

Despite the obvious overreach of the security cloak, investors will need to carefully consider their exposure to China using these types of funds.

This will also impact direct investment. I hold direct investment in Shanghai-listed Hygon Information Technology. It develops semiconductors for central processing units and AI. Applications include increasing the efficiency of electricity distribution across long distances and large networks. This helps deliver electrification to remote areas in China and Asia, but also in Australia. Potentially it could be subject to executive order bans because this may assist the military.

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

These investment restrictions go beyond financial market investment. The executive orders also limit or prohibit research, investment and cooperation, again aimed at potential dual-use technologies. By some estimates, China’s listed companies have a total of 3.08 million researchers and other staff working in R&D. Chinese carmaker BYD has the biggest R&D team of 69,697 staff, including 590 who hold doctorate degrees and 7,827 with master’s degrees.

From a business perspective, this is a research engine worth tapping into and cooperating with. This is where real advances are being made in the digital economy and business investment cannot afford to ignore it. If Biden chooses to hobble US investment, so be it. Of more concern for business in our region is any attempt to broaden this reach.

Technical outlook for the Shanghai market

As anticipated, the Shanghai Index is testing support near 3,160. It has dipped below this level but then closed at or near this support level. This is a common feature when markets test support.

The 3,160 level is an important support feature that has defined market behaviour for nearly 12 months. It acted as a support level in March and July 2022, and then as a support level since June 2023. Failure of this support level has a downside target near 3,080.

The primary support level for the Shanghai Index is near the 3,280 level. The index has oscillated wildly around this level with a bias towards the downside. The late July rally took the index above this primary support line, before collapsing below the line. This suggests that the index may return to the sideways trading pattern that has hampered much of the index activity in the first six months of the year. The key behaviour is the ability to remain above support near 3,160.

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

Historically, there has been extensive index activity between support near 3,220 and resistance near 3,280. This was a feature both of the market rise in the very early part of 2023, and also of the most recent market fall. This is the main trading band that has dominated the market activity. The upside and downside breakouts have reached their trading band projection targets, before returning to trade inside the main trading band.

The trading bands define the structure of the market, but they do not describe the behaviour of the market. The Guppy Multiple Moving Average (GMMA) indicator helps to identify this behaviour. The long-term GMMA compressed and quickly turned upwards as the rally developed.

The initial evaluation of the failed rally suggested that uptrend support was fading. This was confirmed when the long-term GMMA failed to expand. This indicated that investors were not buyers and did not support the new trend.

However, investor support for the index disappeared dramatically as the market collapsed at the end of last week. This confirmed weak investor support for the breakout. The collapse was not unexpected, but the size of the collapse was more of a surprise.

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. The writer owns China stock and index ETFs

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