Russia’s invasion of Ukraine has led to one unexpected result: China’s renminbi (RMB) has emerged as a potential safe haven. The RMB to US dollar exchange rate has climbed above 6.31. This is the highest level in four years and almost as high as the July 2013 print of 6.12. That suggests a significant shift in the way investors are approaching China’s market and assets.
It is an interesting contradiction. The People’s Bank of China is moving in the direction of more monetary easing. This usually has a depreciating impact on the currency so the currency appreciation is counter intuitive. It suggests the RMB is increasingly attractive to risk-averse investors.
This may be just a short-term reaction to the events in Europe but it remains an interesting straw in the wind that cannot be ignored.
It is a short-term reaction that is consistent with the longer-term aims of China’s journey down the path of a sovereign digital currency and the development of a trade settlement process that is not dollar denominated. This will accelerate the development and application of the Cross Border Interbank Payment System (CIPS).
In the current environment, that path will be put in the context of foreshadowed sanctions on Russia, but this ignores the longer-term imperative to break free of the dollarised Society for Worldwide Interbank Financial Telecommunication (Swift) trade settlement system.
In any case, the rapid response by Chinese banks in support of sanctions suggests it is not the primary intention of CIPS to sanction bust the current initiatives.
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Three factors supported a strong RMB in 2021. The first was strong export performance during the pandemic. The significant rise in trade surplus increased demand for the RMB. The second came from substantially increased capital inflows through foreign direct investment and equity markets. This came in response to further opening up market access and demonstrated growing confidence in China’s economic fundamentals. Finally, the third factor was the interest rate differential where RMB-denominated bonds offered one of the best risk-free rates among stable currencies.
Despite short-term volatility, the Shanghai Index offers safe-haven potential as RMB capital is deployed in the equity market in response to China’s growth recovery. These background factors underpin the short-term reactive appreciation of the RMB.
Once the situation passes, the RMB is likely to depreciate and return to its previous level but the writing is on the wall. Those that deplore the Russian invasion but who have no desire to be caught up in the impact of the weaponisation of the Swift settlement system will look to CIPS as a viable alternative. This consideration is not so much a desire to breach sanctions as it is to avoid the potential use again in the future of Swift as a tool of foreign policy.
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This is not the first time Swift has been used at the insistence of the US and that is a threat to trading systems. On March 2, the Europe Union decided to prohibit the provision of specialised financial messaging services — which are used to exchange financial data (Swift) — to Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, Vnesheconombank and VTB Bank. The situation has given an unexpected boost to CIPS and the integrity of the Belt and Road trade initiatives. Businesses will need to include this in their calculations for international trade settlements.
Technical outlook for the Shanghai market
The Shanghai Index rebound from the low of 3,357 abruptly failed following events in Europe. Trend line E had the potential to define a new uptrend as the index tests the resistance near 3,520. The position of trend line E has been adjusted to include the most recent lows. Short-term resistance has developed near 3,490. This forms an upsloping triangle pattern which is considered bullish. The pattern is weak because the projected target near 3,620 has no historical verification. Additionally, to reach this target the index needs to overcome some significant resistance features. There are two resistance features that impact both on the shorter-term and longer-term outlook for the market and the market reset develops. The first is the value of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This wide separation shows investors are still selling into the market rallies. This increases the potential for any future rally to pause near these levels. The second resistance feature is the long-term resistance and support level near 3,520. This level has been a dominant feature of the Shanghai Index for around 12 months. This is the centre point of a broad trading band that has support near 3350 and resistance near 3,625. Any long-term uptrend behaviour must achieve three objectives. First, it must break out above the upper edge of the long-term GMMA. This is more difficult if the long-term GMMA is well separated, so a trend change is signalled when the long-term GMMA begins to show compression.
The second feature of a long-term uptrend is when the index is able to breakout above the resistance level near 3,520 and then use this as a support level base for a new rebound rally. The fall below the value of the projected trend line E sets a downside target near support at line D. This value is around 3,355 and is a long-term historical support level. This is a reset level. The fall below 3,450 confirms the next downside support target near line D.
In the long-term following a reset of the market, we see that the resistance levels make it difficult for the index to easily move above 3,520. However, if this does develop then there is an unimpeded run towards the upper edge of the long-term trading band near 3,625. Currently, index activity is in the lower section of the long-term trading band. A bullish break out will return the index to trading in the upper half of the long-term trading band
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 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. The writer owns China stock and index ETFs
Photo: Bloomberg
