In a cosmic coincidence, both the Mid-Autumn Festival and China’s National Day fell on the same date this year. According to legend, it is only during the Mid-Autumn Festival that the beautiful Chang’e and her husband Houyi are reunited. This brief encounter is the foundation of an enduring relationship that persists even though they are forced to separate again until the next Mid-Autumn Festival.
It is doubtful that the Mid-Autumn Festival will provide the same opportunity for China to meet on friendly terms with its trading partner the United States, on its 71th National Day. Rather than a friendly meeting under the full October moon, present conditions suggest a worrying increase in the already tense relationship.
The tense relationship has three aspects — attack, coercion and exclusion — and they all rest on unjustified and unsubstantiated security allegations. Unjustified because the foundation of all e-commerce activity is the collection of personal data. It is the lifeblood of Facebook and all social media. Unsubstantiated because in 2018, the CLOUD Act subjected US tech companies to the same legal requirements of cooperation as China’s 2017 National Security Law.
The objective of sustained attack on Huawei was to drive it out of the global market.
This was followed by the coercive destruction of competitors to US companies. This strategy is not about decoupling from China. This coercion recognises that the only way for the US to catch up with China’s technological innovation is by banning or sabotaging superior products.
TikTok is the first successful test of a strategy where politics, not the market, is used to kill business competitors. Every company that competes with American business, Chinese or otherwise, is now under threat.
The WeChat ban is a direct exclusion attack designed to degrade WeChat functionality and ultimately to destroy the service delivery in the US. In part, this is achieved by marshalling the SWIFT and CHIPS dollar-transfer systems to prevent WeChat-enabled payment transactions.
WeChat’s parent company Tencent derives one third of its revenue from gaming and this includes major holdings in games like Fortnite and World of Warcraft. The WeChat ban opens a new front with the weaponisation of transaction protocols. It is consistent with Apple’s suspension of Fortnite from the Appstore because Fortnite wanted to avoid paying Apple’s extortionate fees. It is perhaps no coincidence that the Fortnite ban immediately preceded the exclusion of WeChat.
Post-Covid recovery will rest on the expansion of digital services. This inevitably leads to the collection of personal data and an increase in financial transaction activity. This presents many opportunities for established and emerging companies. These investment opportunities may be hampered if US policy is unilaterally applied to attack, coerce or exclude. These templates do not just apply to China. They can be applied to any competitor or product, including any relationship with Chinese partners.
No mooncakes for President Trump this year and little opportunity for investors to relax under the full moon. Instead investors watch the fall in the US market, the recovering US dollar and the behaviour of the Shanghai Index. They also take time to reflect on the impact of attack, coerce and exclude on their investment portfolios.
Technical outlook for the Shanghai market
The Shanghai Index remains below the long-term uptrend line and the lower edge of the long-term Guppy Multiple Moving Average (GMMA). The rebound rally has failed, and the index again tested the lower edge of the long term GMMA and this has failed as a support feature.
The index has the potential to develop a weak support level near 3,210. What do traders need to see to prove this is just a temporary retreat prior to the resumption of the uptrend?
The first item of proof is the ability of the Shanghai Index to rebound and close above the value of the upper edge of the long-term GMMA. This rally failed.
The second item of proof is when the value of the lower edge of the short term GMMA moves above the upper edge of the long term GMMA. The rebound rally dragged up the shortterm GMMA, but it failed to move above the upper edge of the long term GMMA. This is a bearish signal.
It is more possible that the Shanghai Index is developing a broad consolidation pattern with resistance near 3,440 and support near 3,210. The pattern is proved when the index again successfully tests 3,210 as a support area.
The evidence for the failure of this pattern is a sustained move below the support area near 3,210. This sets a downside target near 2,980. This is near to the historical resistance and support features.
Weak support is located near 3,190 but this is based on the series of spike lows in July and August. These were weak rebound points that had no historical support activity.
Using the weekly chart, the next strong support level is near 3,040. This is also not a well-defined support level so traders will wait for proof this level can hold before they come back into the market.
