Last week, I discussed the potential for secondary Swift (short for the Society for Worldwide Interbank Financial Telecommunication) sanctions to impact business even though they were not directly involved with Russia. I’m sure that some readers dismissed this as unlikely to impact their business activity with China.
However, events in the past week have both exposed this vulnerability and highlighted the issue of foreign interference in the internal sovereign affairs of other countries.
Let me be very clear. I oppose what Russia is doing, but the use of very crude sanctions and Swift as a weapon has opened a Pandora’s box of collateral damage.
The US Treasury Department imposed fresh sanctions on 21 entities. This included Singapore-based telecoms electronics wholesaler Alexsong, which has “29 years of expertise in the wholesale market”. The US says the company has allegedly facilitated transactions that helped Russia evade sanctions.
The inclusion of Alexsong in the sanctions list is significant because it represents a “secondary sanction risk” that many Chinese businesses are trying to manage. Remember, the US government has also warned that Chinese companies could be sanctioned if the US believed they were helping Russian partners to evade sanctions.
Alexsong shows just how far along the supply chain these sanctions may be applied. It is difficult to appeal the unilateral imposition of secondary sanctions, and in any case, the damage is inflicted immediately and is not undone by a future decision to overturn the sanctions penalty many months later.
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Coupled with the abuse of the Swift settlement system is the freezing of assets and accounts. The US-led sanctions are a targeted de-monetisation of the world’s most globalised currency. This has significant implications for the stability of and respect for the global rules-based order. A global money that people rely upon in their crossborder transactions and investment decisions is a global public good that should not be abused at the whim of one government.
When Swift was established in 1973, the then US President Richard Nixon gave assurances that the US would never use Swift as a trade weapon. We need to acknowledge that the weaponisation of the US dollar and of the Swift settlement system is the equivalent of a weapon of mass destruction because it is applied indiscriminately and inflicts heavy collateral ‘civilian’ damage to those who are not combatants or parties to the dispute.
This becomes an attack on the sovereignty of a nation. It is not just a problem for business. The weaponisation of currencies will fragment the world economy and make it less efficient.
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Russia is the world’s 11th largest economy so imposing blanket sanctions via Swift comes at comparatively little cost. China is by many measures, the world’s largest economy. The removal of Chinese goods, manufactures and services from the shelves of Western businesses as a result of Swift sanctions is simply economic suicide. It is fanciful thinking to believe that China can be excluded from the world economy.
How will China respond to any Swift initiated sanctions? This is the key question for the future. The answer will impact significantly on how we do business with China, and how cross border transactions are initiated and settled.
The use of Swift in the sanction’s regime may suit the short-term goals of the US and its partners, but it has already started a corrosive process of undermining trust in an international public good — the ability to transact and settle international trade.
Technical outlook for the Shanghai market
The rebound in the Shanghai Index has consolidated around the 3,220 level. This is a welcome pause in the index decline, but it is not yet evidence of any sustainable uptrend. The enthusiastic bulls note that the March 28 pull-back was a temporary dip with the day closing near its highs. The following days have seen a small uptrend develop. The bulls also note that support near 3,220 appears to be holding and this may develop as a base for a new uptrend.
The bears note that the downtrend remains very strong t and shows no evidence of weakness. This is best seen with the Guppy Multiple Moving Average (GMMA) indicator. The longterm group of averages which indicate investor thinking show that investors remain very bearish. This is confirmed by the wide separation in this group of averages. Additionally, there remains a wide gap between the short-term and long-term group of moving averages.
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The Shanghai Index chart is dominated by the head and shoulder reversal pattern. The left shoulder was formed in June 2021. The head is formed by the highs in September 2021. The right-hand shoulder was formed in December 2021.
The distance between the top of the head and the neckline is measured and this value is projected downwards to set the downside target. This target was achieved with the market fall on March 16. The pattern does not indicate how the market receiver may develop.
This is a strong downtrend trend but the probability of a retest of the head and shoulder downside target near 3,050 has diminished as consolidation has developed near 3,220.
Unless there is a retest of the lows near 3,050 then the conditions for a relative strength index divergence pattern will not be met. A divergence pattern is a trend reversal signal so traders looked for this development to confirm the end of the downtrend and the potential for a new uptrend to develop.
Without the conditions necessary for this divergence pattern, traders will rely on analysis of the consolidation behaviour around 3,220 and use this as a guide to new uptrend behaviour. Until this develops, this remains a very bearish environment.
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
