SINGAPORE (Feb 5): Winning the Chinese game of Wei-chi, sometimes known as Go, depends on the control of empty space — a truly Taoist challenge. The principles can be applied to the State of the Union address by US President Donald Trump, where what was not said was as important as what was said.

It said exactly what the US’ major trading partners had been dreading, although surprisingly and left largely unsaid: China was not front and centre as a trading target.

Trump proclaimed that “the era of economic surrender is over”. He said the US had “finally turned the pages on decades of unfair trade deals that sacrificed our prosperity and shipped away our companies, our jobs and our nation’s wealth”.

It is clear that Trump is now intending to follow up his inflammatory rhetoric with an increasingly protectionist stance on trade. This heightened talk of a trade war will spook markets outside the US, but it is unlikely to add more than a temporary hiccup to the US market indices until the full implications of this rhetoric show up on company bottom-line reports.

Trump suggested he was preparing for a confrontation with Europe and Germany over trade but made no such statements in relation to China. This, however, is no cause for complacency in Beijing, as this is like a loaded gun in the hands of someone untrained in its use.

A trade war will produce casualties in US business. Apple is a case in point, as components and assembly are all sourced offshore. Any imposition of tariffs has broader supply chain implication, for both the region and China.

The Apple supply chain includes Samsung Electronics, Murata Manufacturing, TDK Corp, Kyocera Corp and Taiwan Semi­conductor Manufacturing Co. All of these associated companies will take a hit, along with Apple, in any trade war that raises tariff barriers.

The impact on China will be less than it would have been prior

to 2008. The mandated growth of minimum wages in China has pushed lower-end manufacturing out of China and into Vietnam, Indonesia and Cambodia.

The ongoing supply-side reforms that began several years ago have been successful in cleaning up the steel, coal, cement

and other industries that were suffering from overcapacity and low profitability.

Regulatory reforms have brought the shadow

banking sector under greater control and have effectively addressed the biggest risks that were endangering China’s banking system and its economy.

China now has a significantly de-risked financial system and a more resilient economy, where dynamic, entrepreneurial private enterprises make up 80% of employment. Growth continues at more than 6%.

Unlike Europe, which continues to struggle to throw off the impact of the global financial crisis, China is a much stronger economic opponent than it was a decade ago. A trade war will inflict collateral damage, but the outcome is not as predictable as Trump would like to suggest. Catching a fish in these muddy waters will, however, require a more nuanced investment analysis than that which is commonly applied to the China story.

Technical outlook for the Shanghai market

The Shanghai Index has a history of rapid rally breakouts followed by a retracement and brief consolidation before a continuation of the uptrend. The current Shanghai Index behaviour is consistent with this historical behaviour.

The Shanghai Index rally has retreated substantially. The uptrend line started in May 2017 and acted as a support feature until November, when the index moved below the trend line. The trend line was tested five times as a support feature, so it was expected to have a powerful influence on the market. But the retreat did not use the long-term uptrend line as a support feature.

The index gapped quickly below this level.

This uptrend line may act in the future, however, as a resistance level for any rebound rally.

The index retreat also did not find any support near the lower edge of the short-term group of averages in the Guppy Multiple Moving Average indicator. The index is now testing the upper edge of the long-term GMMA

The retreat has two groups of support features. The first group is the combined influence of the upper edge of the long-term GMMA and the historical support and resistance level also near 3,440. These support features are currently being tested.

The second support feature is the lower edge of the long-term GMMA near 3,400. The long-term GMMA provides an indication of the way investors think about the market. The long-term GMMA tracks the sentiment of investors as turned up and expanded. If they are confident about the future of the trend, they will absorb the selling pressure and buy as the market falls. Evidence of this is the way the long-term GMMA remains well separated as the index retreats.

Investors’ strength is confirmed when the long-term GMMA begins to expand. Investors remain bullish. They have not joined the selling of the index but they have not yet become strong active buyers.

If the long-term GMMA begins to compress in response to the market fall, then it shows that investors have joined the selling. This creates a very bearish environment and signals the development of a downtrend.

This has not happened with the Shanghai Index, so traders and investors watch for a rally rebound to develop.

A rally rebound from the level near 3,440 has a long-term historical resistance target near 3,650. To reach the historical resistance target, the index must move above the value of the long-term uptrend line, currently near 3,520.

The pattern of rally, retreat and rebound rally will set the first anchor point for a new uptrend line. When this is established, it will be possible to set more accurate index targets.

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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.

Trade war will cause casualties in US business

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