Australian Foreign Minister Penny Wong delivered a major speech to the Press Club in Canberra. Her speech is relevant to Singapore because it more clearly framed the operating environment for all businesses in the region.
She was at pains to confirm that China had a role to play in the region but she was equally clear that Australia would not be played on China’s terms. She indicated strongly that China’s participation in the region was welcome but only if China conformed with the global rules-based order as defined by the United States. If China did not conform with what are essentially US directives, then there would be conflict, China containment and sanctions.
Wong did not put it as starkly as this but despite her diplomacy, this was the clear message. It is important for business in two respects because China has made it quite clear that it believes the global rules-based order is tilted strongly in favour of the United States and that it works against China’s legitimate interests.
First, this view suggests that Australia will be a willing partner in applying sanctions and participating in US-led actions that may further destabilise the region. This broader commitment threatens to further disrupt the regional relationship with China, making some business activities virtually impossible and rendering others more difficult.
The destruction of the free trade in computer chips is a precursor example of the type of disruption that could be inflicted on other industry sectors. At particular risk are the so-called dual-use products and services.
These are operational risks that businesses must begin to factor into plans for China engagement. They are factors that investors must also consider in longer-term investment decisions.
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Second, this view suggests that Australia’s business with China is provisional and dependent upon China’s “good” behaviour. Wong specifically advised Australian businesses to reduce their level of engagement with China and to seek alternative markets.
This impacts Singaporean investors who use resource and commodity players like Fortescue Metals and New Hope as a proxy for participating in China’s recovery and growth. It’s been a safe way to participate as it rests on the stability and regulatory certainty of the Australian stock market.
While there is no immediate indication of a threat to Australia’s iron ore exports to China, there is the not-so-remote possibility that in times of increased tension pressure will be bought to bear to reduce or suspend these shipments.
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At a recent conference in Darwin, Australian Resources Minister Madeline King spoke of restricting the supply of strategically significant minerals to like-minded friends. She was speaking about rare earth metals, but the same logic can be applied to the supply of other mineral resources which are vital to the Chinese economy. This may include restrictions on the exports of metals such as copper and nickel at times of heightened tension.
Wong’s speech foreshadows a changed environment. Businesses involved in trade with China cannot assume that the environment will return to pre-Covid conditions. The environment has irrevocably changed and it brings new risks to what was considered to be normal business activity. Investors in China-exposed companies must also make new risk calculations.
Technical outlook of the Shanghai market
The rapid retreat in the Shanghai Index failed to find support near 3,280. The collapse moved strongly below the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. The index fall has tested the lower edge of the long-term trading band near 3220.
These are all bearish conditions and suggest the end of the uptrend that started six weeks ago.
The key questions are these; Does this retreat signal a return to the longer-term sideways trading band that dominated the market for much of 2022 and again for the first few months of 2023? Or does this rapid retreat suggest that the market is entering a new downtrend with downside targets near 3,150 or lower?
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It is too early to know the answers to these two questions but we can establish the conditions that will confirm the correct answer.
A return to the sideways trading band is signalled by a successful retest of long-term support near 3,220. This successful test may include some overshoot activity as the market dips below this level. However, the important guidance comes from the close which should remain at or above 3,220.
Confirmation of a new downtrend starts with sustained closes below the lower edge of the trading band at 3,220. A change in trend will include temporary rebounds from 3,220 followed by new moves and closes below 3,220. This rally and retreat behaviour is part of a trend development as distinct from a fast rally or market collapse.
The initial downside target for this type of trend change is set by measuring the width of the trading band and projecting this downwards. This gives a target near 3,150. This has acted as a relatively weak support and resistance feature in the previous two years.
Applying the same projection technique, the next stronger support level is near 3,090.
Currently, there is a stronger probability that the index will return to the sideways trading band between 3,220 and 3,280. However, there is also a higher probability of some substantial temporary dips below 3,220 support.
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 former national board member of the Australia-China Business Council
