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US-China trade war will see major collateral damage

Daryl Guppy
Daryl Guppy1/29/2018 08:00 AM GMT+08  • 5 min read
US-China trade war will see major collateral damage
SINGAPORE (Jan 29): Following the 2008 market collapse, the US, intentionally or not, unleashed a currency war. China survived, thrived and arguably emerged stronger with a revamped financial system that moves inexorably towards full internationalisation
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SINGAPORE (Jan 29): Following the 2008 market collapse, the US, intentionally or not, unleashed a currency war. China survived, thrived and arguably emerged stronger with a revamped financial system that moves inexorably towards full internationalisation of the renminbi.

Now, US President Donald Trump is threatening a trade war with China. If such a war erupts, then there will be substantial collateral damage, just as there was in the post-2008 currency war. In this war, my humble Haier washing machine is potentially an early casualty, with the US already imposing higher tariffs on this and other selected items.

But, surprisingly, some of the major casual-ties may be on the US front and this has an impact for investors who favour US markets.

More than 20% of sales for companies such as General Motors, Boeing and Apple now come from China. A record 17.6 million vehicles were sold in the US in 2016, but that was far below the 24 million passenger cars sold in China. US carmakers account for one out of every five cars sold in China.

These sales are the fundamental underpinnings of success for much of corporate America. Any trade restrictions on Chinese access to the US, or tariff hikes, can be quickly met with formal and informal barriers to US companies selling in China.

Formal barriers are reciprocal hikes in tariffs and the imposition of new taxes and charges. Informal barriers come from a slowdown of administrative processing, the creation of new regulatory requirements and other bureaucratic irritants that throw sand into the gears of trade.

The fact is that China is one of the most important markets for many US MNCs because it provides access to a surging middle class with increasing buying power. The US domestic consumer market is limited by a stagnant middle class and stagnant wages, which means limited room for expansion of buying power.

This gives China immense bargaining power and multiple attack options. A cancellation of orders for Boeing passenger planes would devastate Boeing and boost the prospects of Airbus.

Trade wars based on protectionist tariffs have other unintended consequences. When the Japanese auto industry threatened the US auto giants in the mid-1970s, the carmakers convinced a compliant Congress to impose substantial tariffs in an attempt to make Japanese cars too expensive. The Japanese responded by packing more features into their vehicles so that the competition shifted from price point to quality. Japanese innovation forced US carmakers to improve the quality, safety and durability of their cars so that they could compete against the imports.

Tariffs achieved a result that consumer activist Ralph Nader had been unable to. Trade war tariffs stifle domestic innovation but encourage innovation in the foreign product.

I buy a Haier washing machine partly because of price, but mainly because of the features offered and the reliability — features that are not offered by their higher-priced competitors. Protectionist trade wars belong to the last century when quality was less important than price. Modern investors look for the opportunities and avoid the collateral damage.

Technical outlook for the Shanghai market

The Shanghai Index is clustering around the upper edge of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This is very bullish behaviour.

The Shanghai Index did not consolidate, as it hit the value of the long-term uptrend line. The index smashed through this level with a strong continuation of the rally that started on Jan 16.

The strong move above the long-term trend line is significant apart from the indication of continued bullish strength. This breakout changes the nature of the role played by the trend line. It has changed from a resistance feature to a support feature. This is a very bullish development and makes it easier to achieve the upside target of 3,650.

The key breakout is the move above the value of the long-term uptrend line. The uptrend line started in May 2017 and acted as a support feature until November 2017, when the index moved below the trend line. The trend line was tested five times as a support feature, so it has a confirmed and powerful influence on the market. The new breakout above the value of this line means it will now act as a support feature.

Traders expected the market to use the trend line as a resistance and consolidation level, but this did not develop. The rapid breakout above this level demonstrates the exceptional bullishness in the market.

A pullback is inevitable, but there is a high probability that the value of the trend line will act as a support feature and provide a buying opportunity. The Shanghai Index uptrend reversal started in January. The trend reversal anticipated the release of economic growth figures. The rally has delivered good returns for traders, but the speed of the breakout rally brings its own risk. These fast rallies do not continue at break-neck speed for many months. A pullback will develop and the nature of that pullback helps define the nature of the longer-term uptrend.

The Shanghai Index has three support features. The first support feature is the value of the long-term uptrend line. The second support feature is the historical support near 3,440. This is also near the value of the lower edge of the short-term GMMA.

The third support feature is the value of the long-term group of averages in the GMMA indicator. Wide separation in the long-term GMMA means that investor buying absorbs the impact of an index retreat and provides a base for a rally rebound.

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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