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Contradictory views distort our understanding and assessment of China’s development

Daryl Guppy
Daryl Guppy9/24/2018 07:30 AM GMT+08  • 6 min read
Contradictory views distort our understanding and assessment of China’s development
SINGAPORE (Sept 24): Often, our thinking about China is littered with contradictions. These are two opposite views that are simultaneously held by the same group or person. What is astounding is the way these two contradictory views are often not recognis
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SINGAPORE (Sept 24): Often, our thinking about China is littered with contradictions. These are two opposite views that are simultaneously held by the same group or person. What is astounding is the way these two contradictory views are often not recognised as such by those who hold them.

Recently, China hosted more than 50 African countries. China is a significant source of development funds for African countries. Put aside for a moment a discussion about the motives, ulterior or otherwise, of this foreign aid assistance, and focus on the relationship between China and the aid recipient.

At the press conference in Beijing, President Xi Jinping was questioned about China’s policy of providing aid without preconditions. This supports corrupt governments and governments with poor human rights records, according to the questions from the press.

Pause for a moment. This suggests that aid and support should be withheld until the recipient country improves its human rights record and holds honest elections. This aid-asa- stick approach is widely used by Western countries. However, this is nothing less than a demand from the West that China should interfere in the affairs of another country — something that China is at pains to avoid.

On the other hand, and near simultaneously, we demand that China NOT interfere with the policy development in other countries. In fact, this demand is so strong that Australia has introduced stringent regulations to prevent this.

According to our thinking, China should interfere in the internal politics of some countries (ones we do not support) and not interfere with the internal politics of others. This is why we demand that China influence events in North Korea but not elsewhere. It is just one of many contradictions in our thinking about China.

We see the same contradictions when it comes to China’s leading position in 5G development. At heart, the Americans are worried about this because Chinese technical advances means that China is de facto setting the standards for 5G development. The same concern is raised in relation to Chinese advances in artificial intelligence (AI).

But at the same time, there is a strong campaign against the theft of intellectual property. The subtext is clear. China is not smart enough to develop its own IP, so it must steal from the West to catch up.

One the one hand, China is too smart with 5G and AI advanced technical developments, but at the same time it must continue to steal IP secrets so that it can catch up with the world.

Sometimes, the contradiction is not so easily recognised. The foundation of US President Donald Trump’s tariff wars against China is the idea that China is stealing American jobs and American profits through its export programme.

The value of products that US companies made and sold in China was about US$250 billion last year. This is almost double the US$130 billion in products imported by the US from China. Profits are not repatriated to the US, as many US companies avoid the US tax system by running profits through subsidiaries domiciled in off-shore tax havens. The contradictions between trade figures and US company profit figures are rarely explored.

These simultaneously held contradictory beliefs distort our understanding and assessment of China’s development. It blinds us to business and investment opportunities.

These miscalculations are more than amusing contradictions because they have the potential to do real damage when they become part of national policy approaches.

Technical outlook for the Shanghai market

The Shanghai Index has rebounded above the 2,691 level. While this is a positive sign, it is not the beginning of a new uptrend. This remains a rally within the context of a well-established downtrend. The critical support level, now resistance level, is near 2,691. The strong move above this level encounters significant resistance features. The wide separation in the longterm group of averages in the Guppy Multiple Moving Average (GMMA) indicator shows there is strong selling by investors. This selling simply overwhelms any rally activity. Similar rallies have been overwhelmed with selling in July and August.

The strength of the downtrend is confirmed by three features. The first feature is the current rally, which is a rally within the context of a strong downtrend.

The second is the sustained move below the support level near 2,691. The third is the consistent separation in the long-term group of moving averages in the GMMA. This wide separation shows investors are committed sellers. There is no indication of compression, which would show that some investors are becoming buyers. This is a solid and sustained downtrend.

However, some weak bullish features are beginning to develop. These are very weak features, but optimistic traders look for further confirmation of a potential trend change.

The first feature is the rally and the rally pullback. The pullback and rebound on Sept 19 used the 2,691 level as a support level. The rally was not immediately stopped by the strength of the long-term GMMA. This is mildly bullish.

The second signal for optimistic traders is the very small degree of compression in the long-term GMMA. The proof of a potential trend change comes with further compression in the long-term GMMA and a rally test of the upper edges of the long-term GMMA. This remains a low probability.

The weekly and monthly charts provide some indication of where the next support level is located. This is near 2,400. This does not preclude the development of some rally-and-rebound activity as the index moves towards 2,400. Investors and traders have little choice but to wait out this fall because the market cannot be traded from the short side.

Traders watch for evidence of slowing momentum and weak rally rebounds. This may develop around 2,691, but it is more likely to develop near 2,400.

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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