SINGAPORE (Apr 16): Big money did not get big by being stupid, but big money can be remarkably dumb at times. The collective sigh of relief from markets over Chinese President Xi Jinping’s comments at the Boao Forum for Asia Annual Conference 2018 held from April 8 to 11 reflects a poor understanding of the speech. The narrative in the US and much of the Western media is that Xi has backed down in the face of the threat of a trade war initiated by the US. A closer reading of the speech suggests this is not quite correct.
It is true that Xi did nothing to ratchet up the trade war rhetoric, matching bellicosity with bellicosity. It is also true that Xi announced a range of measures on tariffs, intellectual property and capital markets that appeared to be a direct response to and appeasement of US President Donald Trump’s strident demands. It is these aspects that the Western markets latched on to as proof that Trump is winning the trade war and that China was not going to escalate the situation.
As is often the case in China, it is what is not said that is more important than what is said. What was not said included any new policy announcements in relation to tariffs, capital markets and intellectual property protection and development. All of Xi’s comments in these areas have already been foreshadowed in previous policy announcements. Some aspects have been moved forward, but this is a change in appearance, not a change in substance.
Xi did not back away from the implementation of the Belt and Road Initiative. He did not shift from the objective of making China a world leader in artificial intelligence and advanced technological development. Xi did not retreat from the need to open the capital account as a means of improving China’s position within international capital markets and facilitating cross-border trade that underpin the Belt and Road Initiative. Xi continued to commit China’s support for the global rules based trade order built around free trade and the World Trade Organization (WTO) — a policy that is in direct opposition to the current policy pursued by Trump that is hell-bent on undermining this order.
It is not that these responses are characteristically Chinese, although they are framed within the tradition of the 36 Strategies. The speech was a strategic combination of “Tossing Out a Brick to get Jade” and “Releasing an Enemy to Recapture Him Later”.
These responses are delivered in a Western context and reflect a new level of strategic thinking within China’s leadership. Xi’s chief economic adviser, Liu He, now occupies the vice-premier position. Yi Gang was appointed head of the People’s Bank of China. Many others in the top economic policy leadership group are English-speaking economists educated in the US and Europe.
The policy play may be implemented in a grand Chinese tradition, but the details of the policy are constructed from a tradition of Western economics.
Xi’s speech at Boao is significant not because it was a backdown in the face of US pressure. It is significant precisely because it was not a backdown. The speech showed a clear commitment to the longer-term strategic goals of the Belt and Road Initiative. If anything, Trump’s Tweet tantrums have accelerated China’s implementation of the Belt and Road Initiative, which creates an alternative cross-border trade environment built around the established international order of the WTO. Xi’s speech means that the rally in the Shanghai market is genuine, but the rally in the US markets is based on a false premise.
Technical outlook for the Shanghai market
The equilateral triangle in Shanghai index chart has broken powerfully to the upside. The breakout is strong and has quickly run into resistance created by the lower edge of the long-term Guppy Multiple Moving Aver age. This group of averages reflects the way investors are thinking.
Chart patterns such as triangles are useful because they help to set targets for the move in the index or prices. The upside breakout from this equilateral triangle pattern has a target near 3,240. This is near the upper edge of the long-term group of GMMA. The rally has not reached this target level.
Traders and investors apply caution in this market environment. The equilateral triangle pattern is not a pattern of consolidation, so investors watch for future trend development. This suggests an upside breakout would be a brief rally followed by a retreat from resistance.
There are very strong resistance features in the index activity. The first feature is the degree of separation in the long-term GMMA group of averages. This acts like an airbag. As the index moves up, the momentum is absorbed by investors who are selling into the rally. The wide spread in the GMMA slows the momentum of the rally as more and more investors sell.M
The second feature is the trading band between 3,260 and 3,290. This trading band will act as a strong resistance level for any future index rally. The Shanghai Index consolidated in this trading band area in April, August and December last year, and again in March this year. This is a very powerful support and resistance level.
The third feature is the upper edge of the long-term GMMA group of averages. Currently, this value falls in the middle of the long-term trading band. This is an extra resistance feature that will further slow the momentum of the rally.
The rally is a bullish market feature and often precedes a change in the trend direction. However, the trend change is usually created by a series of rally-and-retreat behaviour. The index has the potential to retreat from the rally and retest the support features near 3,100. Investors watch for consolidation around this 3,100 level and will join any rebound rally from this level. Investors are alert for a classic GMMA test, retest and breakout trend change pattern.
The current rally suggests there is now a lower potential for the index to drop and retest the lows near 3,000.
In the short term, traders watch for this fast rally to develop a retreat from near 3,260. This is a good trading environment but a dangerous environment for investors.
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.
