SINGAPORE (Apr 30): Essential to increasing the momentum of the Belt and Road Initiative (BRI) is the acceleration of reform in capital markets.
Following the announcements by President Xi Jinping and China’s new central bank governor Yi Gang at the recent Boao Forum for Asia, China is relaxing the limits on outbound investments by wealthy individuals and institutions for the first time in two years. This reflects a stable economy and stronger currency, which shows the country is more confident that it has capital outflows under control. It is also a necessary precondition to increased momentum in the rollout of BRI projects.
The approval of new quotas to a scheme that allows foreign fund managers to raise money from Chinese investors could free up billions of dollars in Chinese capital to invest overseas.
The Qualified Domestic Individual Investor schemes were launched in China more than a decade ago. They powered the first wave of private Chinese investment overseas. A second round of the programme was launched in 2015, but was unofficially suspended in 2016 in the face of record capital outflows, share market volatility and a depreciating renminbi. The new quota approval shows Beijing is more confident of its ability to control capital outflows from the private sector.
China’s State Administration of Foreign Exchange confirmed recently that it had approved a new round in the Qualified Domestic Limited Partnership programme, which applies to Shanghai residents, and the Qualified Domestic Investment Enterprise programme for Shenzhen, in the country’s south, late last year.
A new US$2 billion ($2.65 billion) Shanghai quota was filled by end-February and there is growing expectation that this quota will be increased. About US$1.26 billion of a US$2.5 billion quota for Shenzhen has been filled so far. This is evidence that China is determined to open up its onshore market further and confident about the renminbi and the way the exchange rate is being set by market forces. These and other issues will be discussed by Chinese and Western experts at a BRI conference in Darwin in July.
These are concrete steps to flesh out the bones of the statements made at the Boao forum, but investors need to be alert for the official creation of “fake” news designed to cast doubt upon the motives of China and the Silk Road project.
A good example is the story that emerged in the media recently about the Chinese-funded port facility in Vanuatu. It emerged first in the Australian media, with headlines declaring that China was building a military port in the tiny Pacific nation. Australian Prime Minister Malcolm Turnbull and others roundly condemned this idea and that is what occupied the headlines and news stories.
However, Turnbull admitted in the same news conference that there was no evidence that the Chinese had this intention, and that Australia had been assured that this was not going to happen. The prime minister of Vanuatu, Charlot Salwai, absolutely denied this story at the Commonwealth Heads of Government Meeting in London.
However, this admission did not make the lead paragraphs in the media stories, and Turnbull went on to portray this “myth” as fact during his tour of Europe. In other times and places, this use of official “fake” news has been called propaganda. Its re-emergence in the debate around the BRI makes it much more difficult to understand the true intent and purpose of the Chinese policy. For business and investors, it makes it more difficult to develop appropriate responses.
Technical outlook for the Shanghai market
The Shanghai Index is showing very confusing volatility. The upside breakout rally from equilateral triangle chart pattern failed to reach its targets before collapsing. The collapse set a potential downside target, again calculated from the equilateral triangle pattern. This target was not reached, and the Shanghai Index has rebounded in a new rally.
The behaviour of the Shanghai Index suggests that a long-term double-bottom reversal and consolidation pattern may be developing. The evidence is not strong, but it is increasing.
The first reference point is the low of 3,063 on Feb 9. This was a pivot-point low for the downtrend that started on Jan 29. The pivot-point low defines the end of a downtrend and the beginning of a new rally rebound trend.
The 3,063 value of the pivot-point low has the potential to act as a future support level. The current retreat in the Shanghai Index has clustered around this 3,063 value. There have been several intraday lows below this 3,063 level, but the Shanghai Index has closed consistently above this level since April 17. This suggests support is developing near 3,063 and this has the potential to become a base for a double-bottom trend reversal.
If this double-bottom trend reversal develops, then the first upside target is near 3,320. This double-bottom trend reversal is sometimes called a W bottom reversal.
However, there are three significant resistance features that make a trend change difficult.
The first is the value of the lower edge of the long-term Guppy Multiple Moving Average near 3,160. The second is the value of the upper edge of the long-term GMMA near 3,220.
The third is the wide separation in the long-term GMMA. This wide separation shows that investors are not confident that a new uptrend will develop. The wide separation shows investors will sell into any rally. This selling will absorb the upward momentum and lead to a retreat as buyers are overwhelmed by sellers.
After such a heavy fall from 3,587 in January to 3,063, it will take a longer time for the Shanghai market to recover and develop a new uptrend. Investors are alert for the development of a GMMA test, retest and breakout pattern. The rally to 3,221 on
April 11 could be the first part of the pattern. Investors will closely watch how any new rally develops to see whether it can challenge the upper edge of the long-term GMMA before an erratum develops.
A sustained close below 3,063 is bearish for the Shanghai Index.
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.