Just prior to the Covid outbreak, I was in the Chinese province of Xishuangbanna and then at the tiny town of Mohan on the Chian-Laos border. I inspected the earthen pad that was to become the foundation of the railway station on the high-speed, double-track railway that would link China and Thailand.
The China-Thailand high-speed railway is part of the 3,900km-long central route of the Pan-Asia rail network between China and Asean. The end station will be in Singapore, linking to Kunming and all major cities on the way across Malaysia, Thailand and Laos.
The Pan-Asia railway network will be a game-changer for regional connectivity and economic integration of the China-Asean region. It is an alternative to the marine shipping routes through the South China Sea and Malacca Strait. The previously isolated inland regions will be much more accessible for trade.
The railway network is a great vehicle for the world’s largest free trade agreement, the Regional Comprehensive Economic Partnership. The RCEP came into effect early this year, and like the railways, brings into focus the need for improved cross-border trade settlement processes. This will involve increased international use of the yuan, particularly in its digital currency form.
The Chinese yuan has become the world’s fifth most-traded currency, reflecting the continued rise of China’s economy. Notably, the yuan unseated the Australian dollar. The rapid growth in the share of Chinese yuan transactions reflects the rise of China’s economy and its growing share of global trade. China’s steps to ease capital controls has further boosted the currency’s share of global FX turnover.
China’s digital currency was the most issued, and actively transacted token in the $22 million pilot that used Central Bank Digital Currency (CBDC) to settle cross-border trades, according to a report from the Bank for International Settlements. The People’s Bank of China participation in m-Bridge represents its ambition to promote the global, wholesale use of the e-CNY.
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In March 2021, the Chinese authorities expanded a preferential currency policy trial to selected multinational corporations in Shenzhen and Beijing, allowing them to freely buy and sell foreign currencies for cross-border payments within certain limits. This trial represented a step towards further liberalisation of China’s capital account as China seeks to internationalise its currency and improve its reputation on the global stage.
China wants its currency to become one of the primary sources of payments around the world and build a reputation as a reserve currency. Progress is accelerated as a perverse outcome of recent US sanctions in relation to Ukraine.
A reserve currency status means that foreign investors see its government bonds as a very safe and liquid place to park money so that, when an economic crisis hits, they can get their money out if they want to.
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China has the world’s third-largest bond market, which makes it potentially attractive to large investors like central banks and sovereign wealth funds looking for choices other than the US market to store wealth. China’s trading partners likely see value in holding assets in yuan.
China is signalling that it will continue to open its bond market. The recently announced Swap Connect lets foreigners trade interest-rate derivatives. This is attractive to hedge funds and other investors. These digital capital “railways” are just as important as the physical railway in Xishuangbanna.
Technical outlook for the Shanghai market
How strong is the Shanghai Index rally? That is the key question facing investors and traders. The Shanghai Index is near the long-term support level near 3,050, which is now acting as a resistance feature. The index developed the appearance of a double bottom near 2,940 and this rally can be seen as confirmation of the weak pattern. The pattern is weak because the rally rebound and retreat that creates the central peak in the “W” pattern failed to move above the upper edge of the long-term group of averages. This failure confirmed the continued strength of the downtrend as investors remain heavy sellers.
The chances are that like the previous brief rebound rally, this current rebound rally is not an indication of trend change. The key change to note is the way the index retreats from the breakout above 3,050. If this again acts as a successful support level then this increases the probability of a sustainable breakout trend.
The Guppy Multiple Moving Average (GMMA) relationships continue to show strong downward selling pressure on the weekly chart. They are currently well separated and they have maintained a consistent degree of separation between the two groups of moving averages since early September. This is characteristic of a strong sustained downtrend trend. It will take several rally attempts to break this downtrend. This current rally may develop into the second significant rally that tests the mettle of investors. The important feature to watch for is any compression developing in the longterm GMMA because this signals a weakening of selling pressure.
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Investors and traders remain alert for the development of a 1-2-3 GMMA pattern seen on a daily chart. This is where the market rallies but falls short of the long-term GMMA. The next rally penetrates the long-term GMMA. This is potentially the outcome of the current rally. The third rally breaks above the long-term GMMA and is used as confirmation of a trend breakout and the beginning of a new uptrend. These are the major rallies developing over days or weeks.
The Shanghai Index has a characteristic of a sharp accelerated plunge followed by a rapid recovery. This was seen in April 2022. The current downtrend has similar characteristics and this plunge was repeated. Now, there is the potential for the rally behaviour to repeat.
The key feature to watch for confirmation is a rapid compression in the short-term GMMA and for the rally to lift the index above the upper edge of the long-term GMMA group of averages.
Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. 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
