(Apr 29): Over the next few days, China’s President Xi Jinping is hosting a global Belt and Road Initiative conference in Beijing for political and business leaders. The BRI captures a number of policy initiatives such as infrastructure builds, social objectives, poverty alleviation, trade facilitation, capital market reform and the development of IT and artificial intelligence.
The BRI represents the transformation of China from a regional power into a global one. Many argue that China is not setting out to destroy the Western-led world order, although this is the view often adopted by the US and some of its allies. The initiatives in the areas of finance, currency, trade and security are meant to provide China with alternatives and so reduce its dependency on the current order without lessening its support for the order. However, it remains clear that China wants to see the international order adjusted in a way that allows it to have a degree of influence that reflects its economic position. The BRI is part of this process.
This is not a repeat of the Cold War with the Soviet Union because even at its height, the Soviet Union could not lay claim to any significant economic clout. It was a military state that struggled to feed its own people. China is a global economic power and its attention is primarily focused on trade relationships.
There are five dimensions of the BRI. They are:
• Policy coordination, in which China attempts to find common ground with different national development policies;
• Transport infrastructure, as this facilitates the growth of trade. High-speed rail connections, including those into Malaysia, are a key component;
• Removal of trade barriers and standardisation of trade regulation. China is leading the way in many areas, such as blockchain customs -clearances. Despite this, it supports the World Trade Organization as the primary mechanism for resolving trade disputes and, unlike the US, abides by WTO decisions;
• Currency integration as a precursor to the growth of China capital markets. Further opening up of the capital account and liberalisation of investment conditions are part of this process. The trade war discussions have helped accelerate progress towards some of these objectives; and
• Encouraging greater engagement between people.
At its core, the BRI has the concept of shared prosperity that recognises and accepts the diversity of political structures. This concept sounds insincere to Western ears, accustomed as they are to the Machiavellian idea that all foreign relations are about power, conquest and submission.
The implementation and completion of the BRI are inevitable. Some observers have significant concerns about aspects of the BRI, but this often rests on a one-dimensional view most often projected by military and security agencies. More informed engagement with the BRI is essential, and this is the key focus of Xi’s global BRI forum. Just what shape that engagement takes is the primary focus for investors because it will frame the global investment environment.
Technical outlook for the Shanghai market
The Shanghai Index is consolidating around the 3,210 level, which is one of the critical levels. The index encountered resistance near 3,280 and developed a sideways consolidation pattern. This sideways pattern is similar to the behaviour of the index in March, when the index oscillated around the resistance level near 3,040. Traders prepare for a test of support near 3,150 and the upper edge of the long-term group of averages in the Guppy Multiple Moving Average indicator.
The index has developed a Relative Strength Indicator divergence pattern. This is a reliable bearish pattern when applied to the Shanghai Index. The RSI divergence appears when the trend line connecting peaks in the Shanghai Index moves in the opposite direction to the trend line joining the peaks on the RSI. This is shown as trend line A. They cover the same period of time, but the trend lines move in opposite directions.
This RSI divergence shows weakness in the current uptrend, but confirmation is needed from other chart features before this trend weakness can be described as a trend change.
These behaviours mean the RSI divergence is treated as a temporary weakness in the trend:
• Continued sideways movement as the index moves towards the upper edge of the long-term GMMA;
• Continued wide separation in the long-term GMMA group of averages;
• A rebound rally from the upper edges of the long-term GMMA; and
• An increase in the RSI values and a test of the RSI trend line.
These behaviours suggest that the RSI divergence is a signal of a major trend change:
• A rapid index fall into the value of the long-term GMMA;
• A fall below historical support near 3,040;
• Index dips that test the lower edge of the long-term GMMA;
• Fast compression in the long-term GMMA; and
• A fall in RSI values to below 20.
Traders watch carefully for confirmation of these behaviours. The current level of development suggests the consolidation is temporary, and this will be confirmed by a new test and breakout above resistance near 3,280.
The upside target for a bullish breakout is near 3,420. This was a major resistance area in 2014, 2015 and, again, in 2017. Traders and investors can anticipate strong consolidation around this area following any breakout above 3,210.
The weekly Shanghai Index chart shows a strong and well-defined GMMA breakout. The long-term GMMA has compressed and turned upwards. The final bullish feature is the continued strong separation in the long-term group of GMMA averages.
The short-term GMMA is well separated. The lower edge of the short-term GMMA is above the upper edge of the long-term GMMA. Currently, the long-term GMMA is widely separated and has not developed any indication of compression in reaction to the index oscillation around 3,210.
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.