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US malaise unfairly blamed on China

Daryl Guppy
Daryl Guppy • 6 min read
US malaise unfairly blamed on China
In two weeks, President-elect Donald Trump formally moves into the White House. His attitude towards China and trade is hinted at in a variety of tweets. Trump has announced the appointment of Peter Navarro as assistant to the president and director of tr
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In two weeks, President-elect Donald Trump formally moves into the White House. His attitude towards China and trade is hinted at in a variety of tweets. Trump has announced the appointment of Peter Navarro as assistant to the president and director of trade and industrial policy. Navarro is the author of Death by China, which may give some insight into Trump’s policy.

The book is filled with half-truths knitted together to form a narrative that ignores the technological change that has transformed our economies and lays the blame for the US’ social and economic dysfunction almost entirely on China.

It is tedious and mind-numbing to counter each half-truth, to unravel every fabrication and to expose each outright lie. One example will suffice.

The book starts by saying that on the consumer safety front “unscrupulous Chinese entrepreneurs are flooding world markets with a range of bone-crushing, cancer-causing, flammable, poisonous and otherwise lethal products, foods and drugs”. The author fails to note that many of these products carry American brand names and have been produced to US company buyers’ specifications that sacrifice quality for price.

The author fails to mention that if faulty products are available in the market, the US regulatory authorities, the Food and Drug Administration and others must accept some responsibility for the importation and use of these unsafe products. He might do well to remember Ralph Nader’s seminal 1965 consumer protection book, Unsafe at Any Speed, which detailed the US’ production and export of shoddy products at a time when the country was at a similar stage to China’s current economic development.

In almost the next breath, the author complains about Chinese products “moving up the value chain and producing high-quality automobiles, computers, electronics, aerospace and advanced medical devices that successfully grab market share from America and depriving Americans of jobs”.

These illogical leaps and contradictions abound. It is easier to sell a simplistic victimology than it is to carefully identify the complex causes and necessary solutions.

Each chapter in the book expands this cocktail of Twitter-like alarmist headlines and scantily clad factoids. In this universe, it is apparently alarming that China is the world’s third-largest tea exporter.

Navarro spares a chapter and invective for the America Corporate Turncoats without mentioning the offshoring capital theft encouraged by the US taxation system that makes it more profitable to have Apple listed on the New York Stock Exchange but based in Ireland.

It is difficult to know where to start in assessing the arguments in this book because they are more visceral than reasoned; more idiomatic than logical; more fragmented than cohesive. The mash-up of Twitter-like extracts acquires a twisted logic of its own that leads apparently inevitably to unsound conclusions.

Surprisingly, the final chapter offers some sound solutions to the mountain of problems constructed as shoddily as the second-rate Chinese goods Navarro derides earlier in the book. The solutions are related to the foundation chapters in name alone and have scant logical links.

The danger is that people remember the populist hysteria fuelled in the first seven chapters of the book and draw their own conclusions more logically from these chapters. The policy action gap between created hysteria and sound policy is not easily maintained.

The lack of logical and sound reasoning, the disconnect between argument and conclusions and the promotion of insignificant facts as a substitute for deeper understanding are a concern if this approach is used to drive US policy towards China. However, the prospect does not seem to unduly worry the Shanghai market.

The Shanghai Index has strongly broken out above the upper edge of the consolidation band. There is also a change in the Guppy Multiple Moving Average (GMMA) relationships. Investors watch for a pullback and retest of the upper edge of the consolidation area. A rebound rally after the pullback is confirmation of a change in trend direction and a “buy” signal.

The consolidation area is also the target level for the small head-andshoulders trend-reversal pattern. The downside target for this chart pattern is near 3,090, and this level was successfully tested several times.

The Shanghai Index developed consolidation between 3,090 and 3,140. The continuation of the consolidation behaviour for one month suggested the consolidation signalled the end of the downtrend that started from the high of 3,301 on Nov 29, 2016. The support near 3,090 and the resistance near 3,140 were a consolidation trading band in October 2016. This area is acting as a trading band consolidation area.

The successful breakout form this consolidation pattern is very bullish. Investors watch for a sustained close above 3,140 because this confirms the support consolidation behaviour and also confirms the potential to develop a new uptrend continuation. The breakout pattern is often a breakout rally, followed by a retreat and retest of support, and then a new rally that is the beginning of a sustainable uptrend.

There are three resistance features to overcome before the rally breakout becomes a sustainable uptrend. The first resistance feature is a combination of the recent resistance level near 3,140 and the long-term GMMA. The 3,140 level is the upper edge of the consolidation trading band. The value of the lower edge of the long-term GMMA is also near 3,140. The strong rally breakout has overcome this combined GMMA and resistance level feature.

The second resistance feature is the value of the upper edge of the long-term GMMA. This is near 3,140. The long-term GMMA is showing very good compression and has turned upwards. The compression and upturn show investors are becoming more confident. This confidence is confirmed because the short-term GMMA is also compressed and has turned upwards.

The third resistance feature is the long-term uptrend line that defines the development of the trend in the Shanghai Index. The index moved strongly below this line on Dec 16. In the future, this trend line will act as a resistance level for any rally rebound. The uptrend rally can continue to move upwards using the uptrend line as a resistance feature. The current value is near 3,275.

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.

This article appeared in the Capital of Issue 761 (Jan 9) of The Edge Singapore.

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