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China watching warily as the US continues to ramp up its attack on Chinese trade practices

Daryl Guppy
Daryl Guppy12/25/2017 08:00 AM GMT+08  • 5 min read
China watching warily as the US continues to ramp up its attack on Chinese trade practices
SINGAPORE (Dec 25): The US tax changes are aimed squarely at the domestic US audience and President Donald Trump’s support base. ­However, the international collateral damage is significant to both friends and rivals alike.
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SINGAPORE (Dec 25): The US tax changes are aimed squarely at the domestic US audience and President Donald Trump’s support base. ­However, the international collateral damage is significant to both friends and rivals alike.

For friends, the tax changes apply political pressure to lower tax rates, which in turn erodes the revenue base. The US policy has signalled a race to the bottom in an attempt to retain foreign business investment and increase the competitiveness of US products.

For rivals, and that means China, the tax changes are another part of a complex set of policies that is intentionally or unintentionally designed to attack or disrupt the country’s economic rise.

Rising US interest rates and a lower US corporate tax rate pose a twin threat. Beijing is concerned that if corporates and wealthy Chinese decide that the US is now a more attractive place to invest, this will lead to increased pressure on the capital account with capital outflows. This is part of the context for the recent moves to tighten approvals for Chinese corporates and state-owned enterprises investing overseas.

Stronger capital outflows could result in renewed downward pressure on the renminbi — an outcome that is not welcomed by the US.

One concern is that the reduction in the US tax rate could encourage manufacturers to expand their US ­operations and reduce their presence in China. It is not a significant concern as the mandated rising wages in China have driven low-end manufacturing out of the country and into Vietnam, Bangladesh and other developing Southeast Asian countries. The focus is on the potential to shift higher-end service and tech industry jobs back to the US. The unintended effect may be to increase the momentum of China’s efforts to become a world leader in artificial intelligence and other areas of high tech.

China is watching warily as the US continues to ramp up its attack on Chinese trade practices. This includes launching a formal probe into allegations that China unfairly pressures US high-tech firms to hand over intellectual property and enacting bills to limit foreign investment in US technology companies and infrastructure on national security grounds.

Trump’s chief trade adviser, Robert Lighthizer, delivered a blistering attack on the World Trade Organization, accusing it of losing its focus on trade negotiations in favour of litigation, and failing to enforce its existing rules. This was a thin cover for the US to cherry-pick the rules it would abide by and those it would ignore.

China is concerned with the rather hysterical rhetoric around allegations of Chinese soft-power in Australia. The Australian ambassador to China has been called in for a formal complaint. The Chinese ambassador in Australia has taken the unusual step of making several public comments and during the week, issued a reminder to Chinese students in Australia to take additional care.

China’s larger concern is with the echoes of this Australian hysteria, which are sounding in the US.

The primary purpose behind the tax cuts is to deliver on domestic political promises, but business cannot ignore the impact on other economies and the way this weaves into a broader China policy.

The Shanghai Index is developing a consolidation pattern. The wide separation in the Guppy Multiple Moving Average (GMMA) indicator suggests this as a temporary consolidation rather than a change in trend.

The Shanghai Index appears to have developed a double-bottom ­trend-reversal pattern with the low of 3,255 on Dec 6 and another low on Dec 18. This is a very narrow pattern, with the lows separated by just five days of index activity. Narrow double-bottom patterns are less significant than double-bottom patterns, where the low points are separated by several weeks of activity.

This narrow double bottom confirms the current consolidation is most probably a short-term development prior to a continuation of the downtrend.

This recent rally was a temporary one in the context of a well-established downtrend. The rally and the current rebound activity did not move above the upper edge of the short-term group of GMMAs.

The support level near 3,265 has been broken with intraday lows. The index has closed at or above 3,265 following these intraday lows; however, the behaviour suggests 3,265 has become less powerful as a support level. Traders will carefully watch for the ability of this level to continue to provide support as it is tested again. Failure of support near 3,265 confirms the lower downside targets near 3,235 and 3,200.

The GMMA relationships do not suggest a trend change is developing. The short-term GMMA remains well below the long-term GMMA and remains widely separated. The upper edge of the short-term GMMA is consistently below the lower edge of the long-term GMMA. There is no indication of any change in the degree of separation between the short- and long-term groups of averages. This remains bearish.

The long-term group of GMMAs have turned down, developed a crossover and are now beginning to expand. The expansion shows increasing investor pessimism.

The Shanghai Index chart provides two methods to calculate the potential downside target in this trend change. The first is the support-and-consolidation band between 3,265 and 3,290. This level continues to be tested. A fall below the support band is bearish.

The second method uses the head-and-shoulders chart pattern. This pattern normally develops over several months. On the daily chart, there is a short-term head-and-shoulders pattern that developed over five weeks.

The distance between the neckline and the top of the head of the pattern is measured and gives a downside target near 3,235. This is a minimum downside target because the 3,235 target is not near any established historical support level. The next support level is near 3,200.

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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