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How to effectively engage China

Daryl Guppy
Daryl Guppy • 5 min read
How to effectively engage China
SINGAPORE (Mar 4): Engage, exclude or enrage? The 3Es summarise policy approaches to China. Australia adds a dangerous fourth E to the list — entitlement — and this impacts companies that have been foreign investment portfolio favourites.
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SINGAPORE (Mar 4): Engage, exclude or enrage? The 3Es summarise policy approaches to China. Australia adds a dangerous fourth E to the list — entitlement — and this impacts companies that have been foreign investment portfolio favourites.

Exclude is an apt description of the political pressure applied to nobble competition. This includes suggesting that superior Chinese development in fields as diverse as artificial intelligence (AI), 5G, the Internet of Things and solar technology is a result of IP theft, and that this poses an ill-defined security threat. Many business leaders regard the concerted attack on Huawei Technologies as motivated primarily by commercial, not security, considerations.

US President Donald Trump has indicated he may drop the charges against Huawei’s detained executive, and that he may even lift the government ban on the use of Huawei products, if China trade negotiations go well.

Enraging China is an inevitable result of the demand that China change its industrial and economic model — and change it in a way that is disadvantageous to China. This includes demands
that China restructure its economy to stop the activities of stateowned enterprises on the false assumption that this is the Chinese business model. In fact, more than 90% of Chinese business is privately owned.

These demands trigger memories of the century of humiliation where China did give in to demands from foreign countries. To accede to these modern-era demands would mean that the millions who aspire to middle-class status in China would not be able to achieve it.

Some Australian businesses in Asia have developed a growing sense of entitlement in their approach to China export markets. Entitlement means that Australia thinks China is obligated to import Australian coal, or beef, or iron ore, or vitamin supplements or milk, no matter the quality of the product Australia chooses to send. This assumption has helped scuttle the price of Blackmores, the health supplements provider. The same applies to investment in some Australian coal producers. China is slowing the coal unloading process by applying better testing to verify specific quality and acceptable contamination levels.

Engagement with China means more open and less confrontational discussion. It includes participation in policy forums, being involved in the Belt and Road Initiative global forum in April and developing intellectual exchanges. This creates a better and more nuanced understanding of the policy environment and encourages the development of more sophisticated policy responses to China. This in turn means that businesses can engage with China business in a more stable and effective manner. Singapore has pursued an effective engagement strategy with China. Some other countries in the region have been less successful. These sovereign policy approaches need to be factored into investment portfolio decisions.

Engagement does not mean agreeing with everything that China does, but acknowledging that more is achieved through open, considered and ongoing dialogue.

Keeping to the theme, engagement delivers a fifth E — competitive edge. It brings an edge not just to government-to-government relationships, but also to business-to-business connections. These are approaches investors need to consider when constructing investment portfolios designed for exposure to China business.

Technical outlook for the Shanghai market

The Shanghai Index move above the historical resistance level near 2,820 is very fast and very bullish. This is significant because 2,820 formed the upper edge of an extended sideways trading band that dominated the market activity from June 2018 until October 2018.

The Shanghai Index breakout rally is not sustainable. The very strong breakout has delivered very good profits since the beginning of February, but the rally needs to consolidate before the breakout can be described as a trend. Consolidation can occur at two levels. The first, and most common, is a pullback consolidation that tests a previous lower support level. With the Shanghai Index, this support area is near 2,820. A retreat to this level means the index remains inside the value of the short-term Guppy Multiple Moving Average (GMMA). A retreat to 2,820 remains consistent with a continuation

of the uptrend. The second level for consolidation is around the upper resistance level near 3,040. In this situation, the rally continues until it reaches resistance and then pauses and consolidates around the 3,020 level. This gives a good result for traders, but it is also a call for caution because it rests on a strong rally continuation.

A rally is a rapid upwards move where most trading days are up days defined by large daily moves. Any down days are small minor moves. The slope of the rally is also very steep. A rally is evidence of a great deal of speculative money coming into the market. When this money flow stops, then the rally fails, sometimes with dramatic falls.

A rally is good for traders, but it does not create a stable trend. Trend behaviour is defined by a series of rises and falls. This creates a series of lows, which become future rebound points. These lows form the anchor points for an uptrend line. A trend is more sustainable and usually continues for many weeks or months.

Trend continuation must meet four conditions. The first is a strong move above the value of the upper edge of the long-term GMMA. This has developed decisively.

The second condition is confirmation of trend strength as the long-term GMMA expands. The third is sustained separation in the short-term GMMA, but the separation is now very wide. This signals rally caution. The index remains clustered along the upper edges of the short-term GMMA and this is a bullish signal.

The fourth condition is a sustained separation between the long- and short-term groups of GMMA averages.

The confirmation of these four features confirms the development of a longer-term sustainable uptrend.

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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