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Belt and Road policy sparks global change

Daryl Guppy
Daryl Guppy • 6 min read
Belt and Road policy sparks global change
SINGAPORE (July 3): Several weeks have passed since the anniversary of the June 6 D-Day landings in Normandy, and it is easy to forget the way the defeat of Germany morphed into the beginnings of the prolonged cold war between the West and Russia. While o
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SINGAPORE (July 3): Several weeks have passed since the anniversary of the June 6 D-Day landings in Normandy, and it is easy to forget the way the defeat of Germany morphed into the beginnings of the prolonged cold war between the West and Russia. While our focus is on the growth of nuclear arsenals, clandestine wars fought at arm’s length and direct political interference to ensure regime change in small countries, we also forget the attempts to reshape Europe in the American image.

The Marshall Plan, which was essential in rebuilding Europe and a shattered Britain, was a deliberate strategy to create an economic bloc beholden to the US concepts of trade and its particular brand of democratic capitalism. By and large, it was successful, and it certainly provided the dominant structure of trade relationships for the next 60 years. It was heavily weighted in favour of the small group of countries that set the rules.

It was an uncomfortable change, not universally supported in Europe with then French President Charles De Gaulle being a notable recalcitrant participant. The change created discomfort with colonial powers within the region and changed alliance structures.

Now, like it or not, we are entering another period of globally significant change and the equivalent of the Marshall Plan is a leading component. This is the Belt and Road, a policy strategy that has morphed from China’s New Silk Road and Maritime Silk Road into One Belt, One Road, and now Belt and Road. The complex of strategies is similar to the Marshall Plan, but it also contains some important differences.

It has come about largely because the world’s second-largest economy has been refused an appropriately sized seat at the tables where international rules and regulations are determined. China sits at these tables, but its voting quota more closely resembles that of small economies such as Sweden rather than that of the world’s third-largest economy, Japan. It is the reluctance to recognise the significance of China that has pushed the country into setting up its own tables. In this sense, former US President Barack Obama was correct. China is determined to have an appropriate say in the setting of new international rules.

The complex of economic instruments in this policy framework includes the Asian Infrastructure Investment Bank, the Silk Road Fund and other finance pools. Many of these are the same as the soft loans delivered under the Marshall Plan.

But here’s the significant difference. The Marshall Plan carried with it a desire to reshape European countries in an American image and the impact of American culture, from Coca-Cola to Hollywood, was strong. The Belt and Road policies do not carry this component. There is no component that pushes countries to become like China or to adopt Chinese political practices. There is a component that encourages better understanding of China, in the hope that this will reduce the criticism levelled at it by some western countries. These people-to-people relationships are as central to Belt and Road as the direct economic components.

The question of whether China is large enough to be taken seriously has been asked and answered long ago. The relevant question now is how we will accommodate this reality. This is not fake news nor alternative facts. It is the hard reality and we can assist in shaping the future, or we can be shaped by it. Rather than complain about old and disappearing investment opportunities, it makes more sense to identify and grasp the new investment opportunities.

The Shanghai Index rally has paused just below the target level of 3,200. The double-bottom breakout pattern in the Shanghai Index has developed successfully. The breakout pattern is also sometimes called a W pattern. The upside target for the W pattern is near 3,200 and the index is consolidating near this level.

The W pattern is a trend-change pattern, so investors expect the index to move higher. The next upside target is calculated using trading band projection methods. The Shanghai Index has developed two trading bands that are about equal in width. The width of the trading band is measured and projected upwards. This sets an upside target near 3,265. This is not an exact measurement and the 3,265 level is used because this is also a previous resistance level.

These pattern projection targets do not show how the new uptrend will develop. The rise could be slow and smooth, or very rapid, or contain periods of retreat and consolidation. The key features are the Guppy Multiple Moving Average relationships because this provides a guide to the strength of investor sentiment and the confidence of traders.

The long-term GMMA reflects the thinking of long-term investors. The long-term GMMA has compressed and is turning upwards. This shows that investors are becoming more confident about the future direction of the Shanghai Index. The compression shows that investors are more active as buyers. When the index retreats, the investors enter the market to buy. In the future, investors will watch for an expansion of the long-term GMMA group of averages because this confirms strong investor confidence in the new uptrend.

The Shanghai Index has developed a classic GMMA breakout, retreat and rebound rally pattern as the longer-term index uptrend develops. The first rally in the first week of June carried the index above the value of the upper edge of the longterm GMMA. The retreat successfully tested the lower edge of the longterm GMMA as a support level. The recent rebound rally moved above the upper edge of the long-term GMMA and confirmed the development of a longer-term uptrend.

The behaviour of the short-term GMMA shows that traders are also becoming more confident. The shortterm GMMA reflects the thinking of traders. The current activity in the short-term GMMA shows wide separation and that traders are more aggressively buying. A retreat and consolidation is normal behaviour for this type of trend breakout. This will lead to some compression in the short-term GMMA followed by an expansion as traders move into the market to take advantage of temporary lower prices.

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.

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