SINGAPORE (Apr 23): Former Australian Prime Minister Paul Keating was fond of quoting the Arabic proverb, “The dogs bark but the caravan moves on.” The idea is that some events are unstoppable despite the loud noise generated at any given time.
The growth of China and its inevitable move towards participation in the global political economy in a way that is commensurate with its economic strength is the caravan in this situation. The trade war rhetoric coming out of the US is a little like the barking dogs because the Chinese caravan continues to move along.
There is no doubt that the US-led trade war will inflict casualties and collateral damage. Investors will need to carefully assess where this damage will fall and adjust investment exposure accordingly. While President Donald Trump talks about protecting US industry, he seems not to understand that China is the largest market for many of the US’ largest industries. General Motors and Apple, among many others, generate the majority of their sales in China.
The focus of this physical trade ignores, however, the other essential pillars of a modern economy — services, particularly financial services. These are economic fronts that deserve closer attention. The Boao Forum for Asia held two weeks ago provided some surprising advances on this front.
China’s new central bank governor, Yi Gang, announced that foreign banks and other financial services firms would be able to own majority stakes in Chinese banks, asset management firms and funds within months. This activates long-awaited plans by Beijing to open up the country’s financial institutions to offshore investors. It shows Beijing is serious about moving swiftly on President Xi Jinping’s commitment to open up the country to more foreign investment.
This decision ultimately redirects capital flows away from the US. China’s ambition to develop financial markets in scale and sophistication to provide a global alternative to Western capital markets has taken a significant step forward.
Yi said foreign investors would be able to invest in trusts, financial leasing, auto finance and consumer finance by year-end. There would also be no ownership limits on foreign banks that set up new wealth management companies in China by year-end. Foreign banks would be able to set up branches in China and be treated equally with local companies, he said.
The cap on foreign investors’ shareholding in securities companies, fund management firms, futures firms and personal insurers would be increased to 51% in “several months”. The cap would be removed in three years.
This policy will reward foreign banks that have been involved in China and stayed the distance. Several Singaporean banks can expect to be beneficiaries of this policy change.
Other banks that made a commitment and then pulled back will find it more difficult to regain a foothold. Companies such as Australia and New Zealand Banking Group, which is in the process of exiting minority stakes acquired as part of the bank’s Asian expansion plan before the global financial crisis, will find it more difficult to reverse policy should they choose to do so. China has little time for “rice-friends” — those who are friends in the good times but who then desert you in bad times.
Technical outlook for the Shanghai market
The Shanghai Index breakout rally was part of an equilateral triangle chart pattern. This suggested an upside breakout would be a brief rally followed by a retreat from resistance.
The Shanghai Index breakout rally reacted strongly away from the lower edge of the long-term group of averages in the Guppy Multiple Moving Average indicator. This shows that investors sold into the rally and overwhelmed it. The long-term GMMA remains well separated and shows continued investor selling. This is a bearish situation.
The equilateral triangle pattern is not a pattern of consolidation, so investors remain alert for future trend development. The triangle pattern continues to provide a method for setting Shanghai Index targets. The base of the triangle pattern is measured and this value is projected up or down from the point where the index breaks out of the triangle pattern. The upside breakout on April 10 almost reached the projected target level before retreating. The downside breakout from the triangle pattern on April 16 has a target near 3,020. Investors will watch for potential consolidation patterns or rally rebounds to develop from near this level.
This upside chart pattern breakout followed by a retreat and downside chart pattern breakout is unusual behaviour.
The potential support targets are best seen on the weekly chart. The next support level is near 3,000. This is a long-term and reliable support level starting from around July 2016. The market has a high probability of falling towards this level before the index can find some stability. Investors will watch for the index to consolidate near this level and move sideways. Days of extreme volatility may temporarily push the index below 3,000.
However, any rebound from near 3,000 is initially treated as a rally rather than a trend change because the downside resistance features are very strong. In this environment, the long-term GMMA will remain well separated and this is a major resistance feature that limits any rally and makes it more difficult to establish a new long-term uptrend.
There are three strong resistance features in the index activity. The first feature is the degree of separation in the long-term GMMA group of averages. The wide spread in the GMMA slows the momentum of the rally as more and more investors sell into the rally.
The second feature is the trading band between 3,260 and 3,290. This trading band will act as a strong resistance level for any future index rally.
The third feature is the lower edge of the long-term GMMA group of averages currently near 3,180.
In the short term, traders watch for consolidation between 3,000 and 3,020.
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.