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Trade war will accelerate opening of new markets

Daryl Guppy
Daryl Guppy7/23/2018 07:30 AM GMT+08  • 5 min read
Trade war will accelerate opening of new markets
SINGAPORE (July 23): The foreign China bears are back. It does not seem to matter that they have been consistently incorrect in forecasting a Chinese economic collapse for the past 20 years. They are as determined as ever that this time, they are finally
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SINGAPORE (July 23): The foreign China bears are back. It does not seem to matter that they have been consistently incorrect in forecasting a Chinese economic collapse for the past 20 years. They are as determined as ever that this time, they are finally correct.

Former Australian prime minister Kevin Rudd warned that the trade dispute between the US and China could escalate into a currency war, which he claims China would lose.

He notes that the renminbi is Asia’s worst-performing currency, down 7% from its peak this year. The China bears nod their heads in agreement and conveniently ignore the Australian dollar, down 10%; the British pound, down 9%; and the euro, down 7.84% from their peaks against the US dollar this year. The impact of trade disputes is not confined to China and they affect economies that are much more fragile than China’s.

The renminbi, like other currencies, responds to market conditions and US dollar strength, albeit within an official trading band.

The China bears point to the 6.7% GDP growth for the three months to June, which is a decline compared with 6.8% in the previous quarter, as evidence of an emerging catastrophe. The 2Q GDP growth is consistent with economists’ forecasts and comes as no surprise.

Closer analysis of the data shows China’s economic fundamentals remain strong, owing to strong domestic demand. Domestic consumption accounted for 78.5% of GDP growth in 1H2018. Retail sales rose 9% y-o-y in June, from 8.5% in May.

China has an export component to its economic growth, but it is no longer an export-dependent economy. The China bears seem to have missed this major structural economic shift when compiling their doomsday forecasts. This strong domestic growth offers investment opportunities in soundly structured companies that feed this domestic consumption. This domestic demand is also satisfied by imports, and foreign investors favour those companies that are consistently exporting consumer products to China.

The China bears also seem oblivious to the development of alternative export markets. To be sure, the US market is currently the largest export destination for Chinese goods, but this is changing. The consistent growth of and engagement with the Silk Road countries under the Belt and Road Initiative are opening new markets for Chinese goods and services. Unlike the US market, this is a market with a growing consumer base and increasingly affluent demand. Investment opportunities come from Chinese companies servicing these BRI countries and providing consumer goods to them. The Haier washing machine is a strong competitor to the Japanese and American products. Xiaomi and Vivo, WePay and Alipay are all filling a growing demand and amassing export earnings.

China’s support for the World Trade Organization rules provides a better trading environment than the chaotic alternative of US President Donald Trump’s tariff tweets. Investment capital favours stability.

Trump’s trade war will affect some Chinese companies, but it will also accelerate the momentum towards opening new markets and investment opportunities.

Technical outlook for the Shanghai market

The Shanghai Index retreat the week of July 16 is a bullish signal for the market. It is bullish because it confirms that the rally from the low of 2,691 on July 6 is part of an emerging consolidation pattern. A sustainable reversal of the downtrend depends on a stable consolidation pattern.

Investors now prepare for the development of a trading band with support near 2,720. The upper edge of the trading band is currently defined by the upper edge of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator acting as a resistance level.

Investors watch for the development of a series of rebound rallies to confirm that the momentum of the downtrend has slowed. The current rally retreat has some of the characteristics of a consolidation pattern. The test of consolidation will be the behaviour of the index as it moves towards 2,720.

Investors continue to watch for four features to confirm a trend change. The first is a reduction in the daily volatility of the index. Volatility is measured by the daily range between the low and the high. These ranges, on average, have reduced, and this confirms consolidation pressure.

The second is the appearance of more updays in which the index rises. The structure of the market changes. The up-days move more easily and have larger daily ranges. The down-days in the week of July 16 have much smaller daily ranges and this shows that investors are less bearish. This confirms that confidence is slowly returning to the market.

The third is the behaviour of the GMMA averages. This indicator captures the inferred behaviour of investors and traders. Compression shows agreement about price and value. Agreement does not last for long in the market, so this also signals a potential for a trend change.

The short-term group of averages has compressed and this confirms a return of confidence for traders. The long-term group of averages is well separated and this shows investors are still sellers. The downtrend has not ended, but the momentum of the downtrend has reduced.

The degree of separation between the two groups of averages is slowly narrowing. This is a precondition for a change in the trend direction. These are not signals of a strong or sudden trend reversal. They are signals that the downtrend pressure is reducing.

The fourth is a sustained successful testing of the 2,720 level as a support level. This means the index stops falling and begins to move sideways. Investors watch for proof that the 2,720 level will act as a support level and a base for a new rebound rally. This behaviour will confirm the consolidation pattern.

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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