Does the China market offer a safe haven when the US market is shuddering and the Japanese market is collapsing? The Shanghai Index has its own problems but business exposure to China may offer a backstop to the ructions in other economies. De-coupling is a two-way street, so it is useful to consider both perspectives.
Trade and currency decoupling impacts the way we do business with China and the type of business we can do.
The rush is on to unwind the carry trade in the Japanese yen, but for months, China has been unwinding its dependency on the US.
China sold a record amount of Treasury and US agency bonds in the first quarter of 2024 and this has continued. The sales highlight a move to diversify away from American assets as trade tensions persist with both US presidential candidates pledging to increase tariffs and sanctions.
Beijing offloaded US$53.3 billion ($70.7 billion) of Treasury and agency bonds in the first quarter of the year, according to calculations based on the latest data from the US Department of the Treasury. The amount of US$53 billion is 6% of their holdings and is part of an orderly process of lowering their investment in the US. Belgium, often seen as a custodian of China’s holdings, disposed of an additional US$22 billion worth of Treasuries during the period.
The reduction is consistent with the Brics’ attempts at providing an alternative to Swift and the US dollar. This wind-down takes place alongside increasing momentum towards de-dollarisation of the global trade economy with increasing use of the yuan. There is a fear that the US could freeze assets and redemptions as trade tensions increase.
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The US is also withdrawing capital from China. A growing number of states are forcing public employee pension funds to divest from China. They are pulling out of the world’s second-largest economy because of hostility towards Beijing and fear that US assets could be frozen if conflict breaks out in the Indo-Pacific.
The Federal Retirement Thrift Investment Board, the main US federal government pension fund, announced in November that it would stop investing in Hong Kong- and China-listed stocks due to worsening US-China friction.
The US imposes risk of trade by increasing the scope of the China Advanced Computing Foreign Direct Product Rule. A key proposal would allow the US to exert control over foreign-produced items that contain any American technology. Originally designed to restrict China’s access to advanced wafer fab equipment, the expanding scope means use of US technology of any kind, in export business to China, is now a potential liability.
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Related US policy means that goods with more than 25% of China components will be subject to punishing tariffs. This applies to goods made outside of China, but which use Chinese components.
This decoupling of US trade may have the unintended effect of largely shielding China from the full impact of any Western market meltdown. China has been forced, and also made a conscious decision a decade ago, to foster better economic relations with the Global South through its Belt and Road Initiative. This is subtly different from the earlier concept of the undeveloped Third World.
The Global South are expanding economies with growing middle-class consumers. Working with Chinese business to expand in these economies is where new opportunities will develop. In this sense, China can offer a safe haven.
Shanghai Composite Index closed at 2,867.28 on Aug 6. Photo: Bloomberg
Technical outlook for the Shanghai market
The strong rally in the Shanghai Index hit the value of the downtrend line D, and then retreated. This is consistent with the development of the fan trend reversal pattern. However, the sustained fall below the support at 2,900 has invalidated the fan pattern.
The rally seemed to suggest that support near 2,900 had held, despite the small plunge below this level. This could be seen as a continuation of the fan reversal pattern, but it was treated with well-deserved caution.
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The retreat and the failure of support near 2,900 invalidates the fan trend reversal pattern and signals a downside target near 2,720.
The Guppy Multiple Moving Average (GMMA) relationships did not support the development of the trend reversal. The long-term GMMA had resumed its downward movement and had expanded its degree of separation. This shows that investors were strong sellers, so their selling activity smothered the rally.
The GMMA relationships confirm there is no immediate upside in the Shanghai market. Recovery will be difficult and potentially a long time coming. The 2,900 level is an historical support level. The next historical support level is near 2,720. There are no historical pause-points between these levels, so this suggests an unfettered fall.
The volatile behaviour of the Shanghai Index suggests there could be a rapid rebound from the 2,720 support, as happened towards the end of 2023 and nearly happened in 2024. This is the development that traders will now be on alert for.
The next support level is near 2,720, but this level is not well-established. The level is calculated by taking the width of the trading band and projecting the value downwards. This comes near to the spike low dip in January 2024, but it excludes the extreme lows in February.
The target level near 2,720 is a trade band calculation that has weak verification. That suggests there remains a good probability that the market may dip to the February 2024 lows rather than developing strong support consolidation near 2,720.
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.
