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No logic in US-China trade wars

Daryl Guppy
Daryl Guppy • 6 min read
No logic in US-China trade wars
SINGAPORE (Feb 25): At times, there seems to be little logic in the trade war strategy employed by the US against China. This apparent lack of consistent strategy makes it difficult to implement sound investment decisions.
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SINGAPORE (Feb 25): At times, there seems to be little logic in the trade war strategy employed by the US against China. This apparent lack of consistent strategy makes it difficult to implement sound investment decisions.

The most recent demand that China stabilise its currency is an example of these contradictions because it runs counter to the demand that China make its currency responsive to open international trading in the same way as other major currencies. If China is to stabilise its currency, presumably by market intervention, then it leaves itself open to the charge that it is a currency manipulator. On the other hand, if it allows its currency to react fully to market forces, then it is most likely we would see further weakening in the currency.

US farmers are among the most protected agricultural producers in the world. This creates a contradiction when US trade negotiators complain about China support for some Chinese market sectors.

Consistency is not a feature of the Trump administration’s approach to any foreign policy issue, be it economic or defence related. This signals the need for extreme caution when assessing both existing and potential investments in industries that are subject to changes in foreign trade activity.

More deeply concerning from a Chinese perspective is 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 state-owned enterprises on the assumption that this is the Chinese business model. In fact, more than 90% of Chinese business is privately owned. These demands trigger so many issues that it simply consolidates China’s response to not give in.

It triggers memories of the century of humiliation when China did give in to demands from foreign countries.

To accede to these demands would mean that the millions who aspire to middle class status in the country would not be able to achieve it. To give in to this foreign interference would mean that China would no longer be able to participate in the advances in technology, many of which it is currently leading. The sustained attack on Huawei is seen as an attack on China’s right to progress. It is also an attack on the country’s right to build privately owned global businesses that provide strong competition to Western competitors.

It is difficult to see why such unrealistic and insensitive demands are made. For investors, the opportunities to participate in China trade are made more challenging. Just how stable are companies exposed to China, such as Australia’s a2 Milk Co and Blackmores? Like many others, their business models rely on open access to China markets and if this is disrupted, the investment becomes a less attractive component of a portfolio.

Bullying China is no substitute for engagement with China. The comfortable assumptions that originally underpinned the inclusion of some companies in an investment portfolio have changed. Recognising that there are few obvious logical choices in this inconsistent trade war environment is an important first step in securing better investment returns. It is an issue I will discuss at the MetaStock Singapore Traders Summit in Singapore on Feb 23.

Technical outlook for the Shanghai market

The Shanghai Index breakout continues to gather strength, as shown by the Guppy Multiple Moving Average relationships. The rapid momentum has slowed, with some consolidation activity. However, the index remains clustered around the upper edges of the short-term GMMA. Additionally, it remains above the previous resistance level near 2,690. The upside target for the breakout trend remains close to historical resistance near 2,820.

This trend reversal is an outcome of the double-bottom pattern that developed between last October and January this year. The pattern is used to calculate an initial upside target near 2,940. However, historical resistance near 2,910 is the most probable consolidation area for the breakout.

To achieve the longer-term targets, the index must move above the historical resistance level near 2,820. This is a significant barrier because 2,820 formed the upper edge of an extended sideways trading band that dominated market activity from June until October 2018. This means there is potential for the Shanghai Index to develop a sideways trading pattern between 2,690 and 2,820. However, the strength of the breakout trend suggests the uptrend will continue.

A consolation in the 2,820 area will provide the anchor point for the placement of a new trend line and this will be used to define the longer-term uptrend behaviour.

A sustained uptrend 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 compression in the long-term GMMA group of averages and a move upwards. This has developed. Trend strength is confirmed when the long-term GMMA starts to expand, as this shows increasing investor support for the new uptrend.

The third is a sustained separation in the short-term GMMA, because this shows strong investor support for the trend. The index has 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. This sustained separation continues even when the index corrects and tests the lower edge of the short-term GMMA. Investors will watch for this development as the index approaches resistance near 2,820.

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

Aggressive investors entered the market when the breakout above the trend line was confirmed by a successful rebound rally from the lower edge of the long-term GMMA. This has created the compression in the long-term GMMA. An expansion in this group of averages provides support for the uptrend and indicates increasing investor confidence.

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.

This story appears in The Edge Singapore (Issue 870, week of Feb 25) which is on sale now. Subscribe here

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