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Shanghai Composite builds on support base

Daryl Guppy
Daryl Guppy • 6 min read
Shanghai Composite builds on support base
SINGAPORE (Oct 8): U S President Donald Trump makes it appear as if he has triumphed with the revised Canada-US trade deal, whereas it is more like a fiddle around the edges of the old North American Free Trade Agreement, with some elements of the previou
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SINGAPORE (Oct 8): U S President Donald Trump makes it appear as if he has triumphed with the revised Canada-US trade deal, whereas it is more like a fiddle around the edges of the old North American Free Trade Agreement, with some elements of the previously rejected Trans-Pacific Partnership added. Some see it as an omen, however, for the future of negotiations with China.

This is an inaccurate translation of one trade outcome being projected onto another trade dispute. China is not Canada. It is much, much larger in terms of economic strength. Canada also shares a common language with the US and this avoids misunderstandings. The room for translation error in the US-China negotiations is substantial. In global politics, as with a business level discussion, poor translation can cause unnecessary problems.

For many years, some Western media consistently mistranslated the meaning of “an quan” when it came to understanding Chinese attitudes to food. In Chinese usage, it means “food safety” — as in food that is safe to eat. In the Western mistranslation, it was taken to mean “food security” — as in securing supplies so others could not use it.

This mistranslation provided a foundation of both a fear campaign and government policy towards foreign investment. The damage is ongoing.

The difference in translation is important in several ways. It highlights the importance of the quality of translation and interpretation to capture the correct meaning.

Recently in Beijing, I worked with an excellent interpreter. A poor interpreter can do more damage than good. So, finding a quality interpreter is important.

How do you know whether the translation is good? The first method is to accept the recommendations of others who have worked with the translator. The second method is to listen to the flow of the translation as you speak. If the translation is smooth, then there is a good chance the translator has fully understood you, and is translating effectively and smoothly.

The third way is to follow the questions. If questions repeatedly come back to the same issue or concept, then there is a higher probability that the original translation was not correct. Or your original explanation was unclear.

The fourth method is useful only if you have a smattering of Mandarin. You can follow parts of the translation and verify they are correct. Why use a translator if you can do this? First, because the translator will always be better than you unless you are very skilled. Second, you are often hosted as a foreign guest or expert, so it gives face to your host if you speak in English.

A few days after Beijing, I accompanied a business delegation. The translators were good, but the attitude of some of the business people left a lot to be desired. In Shenzhen, I spoke with representatives of a small and medium-sized enterprise that was thinking of expanding into China. They were very confident of their company’s appeal. It had an established brand in its home country and the representatives believed its service would appeal to Chinese customers. Although, by the standards of its home country, it is a well-established and reasonably sized SME, this does not transfer well in the Chinese environment. Their entire staff size is the equivalent of the full staff in a small branch office of a Chinese company in a Tier-3 city.

It will take a lot for a much larger Chinese partner to consider developing cooperation with this smaller SME. The task is not impossible, but the way the SME needs to go about attracting the interest of a cooperation partner and then developing a cooperation agreement is very different from the way it imagined. Its value is not self-evident and the features it thinks are of value may be of little interest to the prospective partner.

Success means understanding how you can contribute to the Chinese partner, because it is they who are doing you a favour by working with a much, much smaller company. Working with a good interpreter is the first step in the process, be it business or politics.

Technical outlook for the Shanghai market

The Shanghai market is closed for the National Day, or Golden Week, holiday. It is a good opportunity to step back from the market and take a longer-term look. It provides a different translation of the market context. We use a weekly chart with just three critical lines.

The first important line is the horizontal support level near 2,630. This was the low point of the index fall in January and March 2016. A fall below this level is particularly bearish and takes the index back into the region of 2,200. On the other hand, a successful test of the 2,630 support level signals the potential for a new uptrend to develop. There is no indication of how this recovery would behave. It may be a fast rally, or a slow steady uptrend. Given the ongoing tariff wars, it is more likely to be a slow trend reversal.

The second important line is the down sloping trend line 1. This is anchored from the high of February 2018. This acted first as a resistance point, and then later as a support feature.

The third line is the down trend line 2. This has acted as a resistance level up until two weeks ago. The current rally has moved above the value of trend line 2. This is a significant breakout because it develops near the long-term support level and near the point where trend line 2 intersects with the support line. This suggests a change in investor sentiment.

Every market has distinct characteristics. The Shanghai Index has the characteristic of developing a fan trend reversal pattern. This is not an Elliott Wave fan. It is a pattern of trend line expansion created by multiple trend lines anchored on a common starting point. There are usually between three and five trend lines that form the pattern. It is a long-term trend reversal pattern that takes months to develop and leads to strong new trends.

The pattern can be observed in the charts of gold, the Nikkei, USD/JPY and others.

It is too early to plot the position of the third line in this fan pattern, but traders are alert for the first anchor point created when the current really develops a pullback potentially around the 2,890 level.

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.

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