SINGAPORE (Mar 11): My youth was dominated by the Cold War and the war in Vietnam. I read as widely as I could, trying to sift the truth from the propaganda, the unbalanced reporting and, at times, the outright lies being fed to the public by politicians from both sides. The media carried war-like language and the language of war was used by Russia, the US and the North and South Vietnamese governments.
Uncomfortably, I am again hearing war-like language in the media, but with an important difference. Speaking in Sydney on March 5, respected historian Niall Ferguson claimed, “As the strategic and technological rivalry between the two sides intensifies over issues such as Huawei and the contested South China Sea, Australia really has only one choice, which is to back the US. Conflict is inevitable.”
US media talks of a new cold war and the need to stop China from achieving supremacy in quantum computing, artificial intelligence and other hi-tech areas.
The war-like language frames the US-China relationship as a stark choice between honesty and theft, between freedom and oppression and between winners and losers, but modern media coverage is missing one important feature that was found in my memories of the Cold War.
Where is the Chinese counterpoint? Put aside the Beijing-based Global Times, well recognised for its hysterical coverage of global events. Instead, listen to President Xi Jinping, and other Chinese officials at the current Chinese People’s Political Consultative Conference and the National People’s Congress. Watch the Chinese news networks, CGTN or the other domestic CCTV channels. Read the Chinese print media such as China Daily, or delve into the People’s Daily and other Chinese language print media in China. They do not use war-like language.
The mainstream Chinese response to the language of US President Donald Trump and his officials is not a language of war. It reflects a refusal to escalate any conflict. It reflects a firm determination to continue on a well-defined path to economic prosperity and participation in global affairs. This is seen in the restrained response to the so-called Freedom of Navigation exercises conducted by the US navy in the South China Sea.
On the one hand, this response provides hope of a peaceful resolution to the current trade difficulties and that has particular consequences for trade, exporters and importers as well as those who want to continue or develop business in China. It clarifies an investment path and makes for easier investment decisions.
On the other hand, there is a danger that the US and its colleagues will paint themselves into a corner, isolating themselves from this emerging power. There is increasing talk of a bifurcation that cuts across trade, operating systems, services and protocols. Its clearest example is the potential need to make a choice between Chinese 5G standards and US 5G standards. Multiply this bifurcation across payment systems, trade processes, cross-border transactions, product development and so on and investors have to make some very difficult choices.
The business and investment choice is compounded further by the opening of China’s capital markets. In time, these will create a shift of capital out of the Asean region and into the Shanghai and Shenzhen markets. Do we leave investments stranded in low-liquidity local markets or follow the lead of the MSCI indexes and increase our participation in the high-volume capital markets in China? These are increasingly difficult investment decisions.
It is too early to know just how this will develop, but the language of war from at least one side is a disconcerting signal for investment caution.
Technical outlook for the Shanghai market
Six weeks ago, we identified the double-bottom pattern breakout in the Shanghai Index prior to its current 22% rise. Now, the question has changed, and traders are looking for the answers to two questions. First, what are the next targets for this strong rally rise? Second, what conditions will signal an end to this rise and a retreat that may establish a longer-term and less steep trend?
The Shanghai Index rise is unsustainable. It is very steep, and this shows new money flooding into the market. The flow of new money will slow and this will soften the degree of slope in the trend. There will be a pullback in the trend, and this could be quite severe because the support features are well below the current value of the index.
The trend behaviour does not match the requirements of a parabolic trend, although it has some similar features. A parabolic trend collapses very rapidly under well-defined conditions and generally develops a retreat of 50% or more of the previous rise.
Although not a parabolic trend, it is reasonable to anticipate a fall of around 7% in the current trend. A fall of this magnitude would bring the index back to the value of the uptrend line and the lower edge of the short-term Guppy Multiple Moving Average (GMMA). A secondary historical support level is near 2,820.
Most often, these retreats develop after resistance targets have been achieved. The target for the current rally was set near 3,040. This is a long-term support and resistance level. Traders and investors are watching for a consolidation around this historical support level. Consolidation at this level sets the base for a further uptrend continuation with the target near 3,210. The long-term historical upside target is near 3,400. This is a remarkably strong rally, but it has precedents. The rally in 2014 from near 2,350 continued strongly and virtually uninterrupted to 3,350 over three months. After a consolidation around the 3,350 level, the index continued with a sharp rise to reach a peak near 5,100 in June 2015. This type of strong, sustained, sharp rally is a feature of Shanghai Index behaviour, so rally continuation above 3,040 cannot be dismissed.
Confirmation of trend strength comes as the long-term GMMA expands and this has developed with the current index behaviour. The value of the lower edge of the long-term GMMA is slightly above the long-term support and resistance level near 2,680. This is a bullish confirmation of trend sustainability.
In the coming weeks, investors will watch for the pullback and the potential to enter an index rebound from the lower edge of the short-term GMMA or the uptrend line.
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.