SINGAPORE (May 7): A recent research report on China’s Belt and Road Initiative (BRI) features a cover photo of a pair of worker’s boots covered in tar and, in the background, a large machine laying asphalt on a freeway.
It is a perfect summary of the way China’s BRI is most often viewed. The report asks if this is the world’s largest venture capital project and goes on to provide an answer filled with figures, estimates and projections. But in many ways, the report — and others like it — raises several important questions.
The first question that begs to be answered is: What are the funding mechanisms? There is a hidden assumption that this is all denominated in US dollars. The report dismisses the idea that BRI is intimately connected with the progress towards renminbi internationalisation. These reports often suggest that renminbi internationalisation is desirable but unlikely, and confidently conclude that these BRI projects will be primarily priced in US dollars.
These reports fail to appreciate how central renminbi internationalisation is to the entire BRI strategy. Investment of this scale cannot succeed without seamless renminbi convertibility. That means greater opening of Chinese capital and debt markets. The creation of the cross-connect trading platforms between the Chinese equity markets and the Hong Kong stock exchange was one of the first steps in this process. The creation of bond-connect markets is the next step along a path leading to increasingly sophisticated Chinese capital markets.
The momentum in this area has increased as China prepares to insulate itself from the damage caused by US President Donald Trump’s trade and tariff policies. The counter to Trump’s policies is not capital isolation but global capital integration. Adjustments in these areas are the key opportunity focus of many financial services providers.
The second question that begs to be answered is: Are there any other objectives in BRI? This question is often fobbed off with a comment about an extension of China’s soft power through “good works” and soft loans. Others take a security approach and point to a military threat, citing the South China Sea. Both are misleading or partial answers.
These reports rarely look beyond the infrastructure build to assess the impact of the metaphysical infrastructure build. The push into artificial intelligence and development network systems standards is also an integral part of BRI. At a visceral level, Trump understands this, but his understanding is not particularly sophisticated.
When the BRI infrastructure build incorporates elements of the metaphysical infrastructure build, that is, nodes that enable driverless cars and so on, then that sets the rules and standards of the game... and it’s a new game.
The e-silk road BRI component has potentially a much greater impact than the horse and carriage-style roads and bridges infrastructure. Roads that cut across borders enable trade but also demand a change in cross-border transaction processes to improve efficiency. Blockchain applications in non-financial areas are fundamentally altering the processes of business and cross-border trade. These are providing a competitive advantage.
Exploring these questions and developing answers is why we are hosting a major BRI conference in Darwin in July. The conference brings together Chinese and Western BRI experts so delegates can develop a more sophisticated understanding of what BRI means for business and investment.
This particular report cover sums up the need for better analysis. It is a picture of dirty boots at a time when the BRI policy is looking up into the sky.
Technical outlook for the Shanghai market
The Shanghai Index continues to pound out a consolidation pattern that includes high volatility. This is a broad trading band between 3,063 and 3,120, and the index is moving rapidly between the lower and upper levels of the band.
The behaviour of the Shanghai Index further confirms the potential for the development of a long-term, double-bottom reversal. This pattern has developed further over the past week.
The first reference point for this double-bottom pattern is the low of 3,063 on Feb 9. This was a pivot-point low for the downtrend that started on Jan 29. The pivot-point low defines the end of a downtrend and the beginning of a new rally rebound trend.
The current retreat in the Shanghai Index has clustered around this 3,063 value, suggesting that this may be a new support level. There continue to be a few intraday lows below this 3,063 level, but the Shanghai Index has closed consistently above this level since April 17. No closes below 3,063 suggest support is found near 3,063, and this increases the probability that 3,063 will become a base for a double-bottom trend reversal.
If this double-bottom trend reversal develops, then the first upside target is near 3,320. This double-bottom trend reversal is sometimes called a W-bottom reversal.
A trend reversal and rally is restrained by three significant resistance features. The first is the value of the lower edge of the long-term Guppy Multiple Moving Average near 3,150. The second is the value of the upper edge of the long-term GMMA near 3,210.
The third is the wide separation in the long-term GMMA, currently around 60 index points. This wide separation shows investors are not confident a new uptrend will develop quickly. The wide separation shows investors will sell into any rally. This selling by investors will absorb the upward momentum and lead to a rally retreat as buyers are overwhelmed by sellers.
After such a heavy fall from 3,587 in January to 3,063, it will take a longer time for the Shanghai market to recover and develop a new uptrend. Investors are alert for the development of a GMMA test, retest and breakout pattern. The rally to 3,221 on April 11 could be the first part of the pattern. Investors will closely watch how any new rally develops to see whether the rally can challenge the upper edge of the long-term GMMA before a retreat develops.
A sustained close below 3,063 is bearish for the Shanghai Index.
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.
