Continue reading this on our app for a better experience

Open in App
Home Views Commentary

Renminbi use will grow with Belt and Road

Daryl Guppy
Daryl Guppy • 6 min read
Renminbi use will grow with Belt and Road
(Sept 18): The depth and complexity of China’s Belt and Road initiatives continue to evolve. Last week, I addressed the Silk Road International Chambers of Commerce meeting in Xi’an and the Asean conference in Nanning. The focus is on the way the Silk
Font Resizer
Share to Whatsapp
Share to Facebook
Share to LinkedIn
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

(Sept 18): The depth and complexity of China’s Belt and Road initiatives continue to evolve. Last week, I addressed the Silk Road International Chambers of Commerce meeting in Xi’an and the Asean conference in Nanning. The focus is on the way the Silk Road Initiatives are reshaping the trade environment, not just in Asia, but across Europe.

The New Silk Road policy was announced by President Xi Jinping in 2014. Since then, it has morphed into a New Maritime Silk Road component, followed by One Belt, One Road (by which it is most commonly known). Is it now officially known as the Belt and Road Initiative.

It is a complex of policies that fills five objectives:

  • Trade, and free trade — ensures continued Chinese economic prosperity through trade expansion;
  • Deployment of foreign reserves — places foreign reserves in a more friendly environment where they work in the interests of China;
  • Historical appeal to a domestic audience to restore China’s world standing — this strengthens Xi’s power base;
  • Foreign policy objectives in extension of soft power — consistent with China’s historical basis of international stability based on benign trade relationships rather than military aggression; and
  • Explicit inclusion of marginalised economies into a trade policy framework — this applies parti cularly to Eurasian countries in central Asia, and also to the emergent econ omies of Laos, Cambodia, Myan mar and so on.

The Tang Dynasty gave birth to the ancient Silk Road. It was a sophisticated society with unmatched achievements in poetry and civilisation. It was the source of Chinese goods flowing into Europe and Asia. Admiral Zheng He of the early Ming Dynasty further expanded the concept of this international network of trade routes by expanding the maritime Silk Road.

There is one important difference between the modern and ancient versions of the Silk Road.

In the Tang Dynasty, it was a difficult process to change Chinese currency for Greek drachmas. There were no China towns in Rome or Athens. The ancient Silk Road was mainly about trade in physical goods: exchanging silk and tea for silver and pearls.

The modern One Belt, One Road policy is very different because it is based on the increasingly free ex change of capital and services. The internationalisation of the renminbi is an important foundation of the new Silk Road and the maritime Silk Road. This is an important step that recognises China’s importance and significance in the structure of world trade.

Internationalisation of the renminbi is also an essential foundation of the Asia Infrastructure Investment Bank, which is used to fund developments that support the One Belt, One Road concept within the region. It is this effective and practical use of China’s foreign reserves that breathes life into the One Belt, One Road concept and makes it truly modern. This new capital relationship is the foundation of economic development potential.

The internationalisation of the renminbi also enables more effective investment because capital is not at risk of currency fluctuations. Investment no longer has to be transferred into a third intermediary currency. The issuance of renminbi-denominated bonds and investment instruments underpin the One Belt, One Road strategy and the economic success. This is not just trade; it is not just project investment. It is sophisticated capital investment designed to manage and diversify risk.

The modern One Belt, One Road policy environment enhances econ omic development because it recognises that trade is about the free flow of capital, and not just the free flow of goods.

The Shanghai Index breakout has continued to pause and develop the bullish consolidation. It is bullish consolidation because the index has successfully tested and retested the support level near 3,360. The momentum of the uptrend has reduced but it has not failed.

The consolidation remains bullish because the short-term Guppy Multiple Moving Average indicator remains well separated. The trend is bullish because the upper edge of the short-term GMMA is above the resistance level near 3,360 and the lower edge of the short-term GMMA is near the 3,360 level. This shows traders remain very confident about the future of the trend.

Three other bullish features continue to suggest this uptrend will continue. The first is the steady degree of wide separation in the longterm GMMA. This shows investors are also very confident about the future of the trend.

The second is the way the upper edge of the long-term GMMA has moved well above the resistance level near 3,290. The degree of separation in the long-term GMMA also remains steady.

The third feature is the steady degree of separation between the longand short-term group of averages. These are all bullish features that confirm the Shanghai Index has a stable uptrend.

Investors watch for the lower edge of the long-term GMMA to move above 3,290. This will add extra support features for the trend.

The first upside target was near 3,360 and this has already been achieved and successfully tested as a support level. The longer-term upside target is near 3,640 — a previous long-term resistance level created in November 2015 and January 2016.

The resistance level developed because many people previously entered the market near the 3,290 level. When the market retreated from this level, many people did not sell. When the index gets near the 3,290 level again, these people sell so that they can get a breakeven result. This selling happens every time the market gets near the 3,290 level and it creates the resistance level.

When most of the people who entered the market near 3,290 have sold, then the resistance level is broken because there are no more sellers near 3,290. This helps establish a new uptrend.

The uptrend breakout is confirmed and the nature of the new trend is developing. This is a steady, low-momentum trend where the index is clustering around the upper edge of the short-term GMMA. Traders now watch market behaviour as the index moves towards the next resistance target near 3,640.

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.

×
Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
© 2024 The Edge Publishing Pte Ltd. All rights reserved.