SINGAPORE (Apr 9): How did the One Belt One Road (OBOR) policy develop? To a significant extent, it grew out of the global financial crisis in 2008. It was a response to the question of what to do with China’s foreign currency reserves. The solution dovetailed neatly with President Xi Jinping’s broader narrative around improving China’s position at the tables where global rules were formulated and administered.
OBOR is the most important bastion and defence against the debilitating effects of US President Donald Trump’s trade war tariffs.
One of the most important consequences of the answer to the above question was the diversion of investment capital. The creation of the Asian Infrastructure Investment Bank was only a small part of the solution. The diversion of capital in itself could not be achieved without a concurrent opening-up of the capital account. This diversion of capital will accelerate as a result of Trump’s tariff walls.
A more open capital account required a faster move towards renminbi internationalisation, the achievement of reserve currency status, a lighter and more transparent hand at setting the exchange rate, and an opening of equity and bond markets through the Stock Connect programmes for the markets.
Internationalisation and free convertibility of the renminbi is an essential foundation for OBOR initiatives where it is seen that the renminbi will become an investment currency rather than a pure trade currency. The expansion of Chinese e-commerce payment systems and protocols is dependent upon renminbi internationalisation. Many of these objectives have been largely achieved and those remaining are being given a boost by tariff policies, which encourages others to more actively participate in the OBOR economy. If we understand that the suite of OBOR initiatives is primarily about capital redeployment, then we can better appreciate the opportunities, and threats, within the complex of policies. Any redeployment of capital will achieve soft power influence. The suite of policies can be used to support a variety of political agendas, including Xi’s attempts to improve China’s position at the international tables where decisions are made.
This is primarily an economic and trade strategy and it is in China’s best interests to work within the framework of the World Trade Organization, as this makes the inclusion of WTO signatory countries into an OBOR framework much easier.
China has used the lessons learnt from negotiating the China-Australia Free Trade Agreement to improve the way it approaches participation by other countries in OBOR initiatives.
OBOR is not a trade agreement, nor is it a formalised treaty. Participation is by way of a memorandum of understanding. New Zealand, for instance, has signed a comprehensive MOU that enables it to more easily integrate existing trade agreements within the OBOR framework. Australia, meanwhile, has decided to work with third parties that are affected by OBOR, but not to enter into an MOU, so it remains on the edges of this emerging economic bloc.
Trade wars inevitably escalate and, at times, become real wars. Investors need to develop a greater degree of caution as this policy battle develops.
Technical outlook for the Shanghai market
The Shanghai Index is developing a small equilateral triangle pattern near 3,100 to 3,200. Equilateral triangles are patterns of indecision. There is a 50% probability that they can break upwards, or downwards. This is a small pattern and the breakout targets are near the current index activity. The equilateral triangle pattern is not a pattern of consolidation, so investors watch for future trend development.
An upside breakout has a target near 3,240. This is near the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This suggests an upside breakout would be a brief rally followed by a retreat from resistance.
A downside breakout has a target near 3,040. A downside breakout is a higher probability, as the Shanghai Index has already been unable to move above the upper edge of the short-term GMMA.
Consolidation near 3,100 appears to be temporary because this is not a historical support level but a weak one. The rally rebound from 3,100 has many resistance features to overcome before it can develop into a sustainable uptrend.
The trading band between 3,260 and 3,290 will act as a strong resistance level for any future index rally.
The value of the lower edge of the long -term GMMA is now below this narrow trading band. This adds another resistance feature that makes it difficult for any rally rebound to develop into a new uptrend. Investors have joined the selling and this is shown by the steady separation in the long-term group of averages.
The potential support targets are best seen on the weekly chart. The next support level is near 3,000. This is a long-term and reliable support level starting from around July 2016. The market has a high probability of falling towards this level before the index can find some stability. Investors will watch for the index to consolidate near this level and move sideways. Days of extreme volatility may temporarily push the index below 3,000.
There is a low probability of a rapid rebound from near the 3,000 level. However, any rebound will be initially treated as a rally rather than a trend change because the downside resistance features are very strong. In this environment, the long-term GMMA will remain well separated and this is a major resistance feature that limits any rally and makes it more difficult to establish a new long-term uptrend.
In the short term, traders watch for fast rally-and-retreat behaviour between 3,000 and 3,260. This is a good trading environment but a dangerous one for investors.
A fall below 3,000 has long-term support near 2,650. A fall below 3,000 is very bearish.
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