Incoming US President Donald Trump has announced that he will impose higher tariffs on China from day one. “We will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America,” he wrote on his media platform.
Tariffs distort trade, supply chains and the global economy, often causing collateral damage to other industries and businesses. Even if the link between China and the US seems distant, it’s crucial to assess the potential impact on your business.
The first impact is the Lexus effect, which is when Chinese export products increase their quality in response to tariffs. Japan’s Lexus was so high-quality that even with high tariffs, it still represented better value for money than its US auto competitors.
This increase in quality is a new competitive threat in every country, irrespective of the imposition of tariffs. Electric vehicles are the most obvious area of this competition, but they also apply to green energy and other high-end tech products. Even though your company may not export to China or the US, delivering more competitively priced products may destroy your domestic market share.
The second, more insidious impact is on goods that rely on Chinese components in their manufacturing. Trump appears to suggest that punitive tariffs could also apply to products with any Chinese involvement, whether through components or company ownership.
His latest comments suggest he may target lower tiers of the supply chain when deciding on higher Chinese tariffs. It’s too early to tell if this is merely idle speculation on social media or a serious shift in tariff strategy.
See also: China resumes multiple-entry visas for Shenzhen to Hong Kong
The third impact is the use of sanctions in conjunction with tariffs. This is most obvious in relation to Russia, but the same techniques have been applied to companies interacting with China. It works like this: Company A in Singapore provides technology or components to companies B, C, D and others. Company B uses those components in a product exported to Russia (or China) that the US considers an offensive weapon. Sanctions are applied to company B and to company A for its role in providing components.
However, and this is the important part, the sanctions on company A may include complete exclusion from the US dollar component of the Swift trade settlement system. That means that company A can no longer settle trades in US dollars with companies C, D and others that it deals with and that have no connection with Russia (or China).
The fourth impact is the shift of global trade away from the US. The US is no longer a critical export market for China. In response to tariffs from Trump, Biden, and now Trump again, China has reduced its reliance on the US market. It is now aggressively pursuing new export opportunities and expanding in existing markets outside the US, intensifying competition in its own domestic market.
See also: Buying into China stimulus Is ‘painful trade’, Lombard Odier says
Trump’s tariffs inflict little damage on China, but they disrupt global and domestic trade in ways that are often underestimated. Businesses must brace for collateral damage.
Technical outlook for the Shanghai market
The dominant question for the Shanghai Index is how far we can adjust the uptrend line and whether we need to plot a downtrend line.
Re-plotting the uptrend line depends on the creation of a new retreat and rebound point. That is, on a new and confirmed position for anchor point C.
That can be a self-fulfilling event, so additional features are required. Chief among these are the relationships seen in the Guppy Multiple Moving Average (GMMA) indicators. The behaviour of the long-term group of averages is the critical factor. Compression in this group shows that investors are now acting as sellers as the market falls. This confirms a downtrend and signals that a downtrend line anchored on points 1 and 2 is the most appropriate way to understand the index action.
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If the long-term GMMA moves sideways, it suggests that investors remain buyers as the market weakens. This shows that support continues, and it confirms the continuation of the uptrend, although at a slower pace.
Although the two potential trend lines intersect around Dec 4, this pattern is not an equilateral triangle. This means there are no pattern projection targets.
However, the two trend lines show strong competing forces in the market, so a breakout above or below the trend line can quickly move the market to new levels.
On the downside, this signals a retest of 3,150 as a support feature. This has been a strong historical support feature.
A sustained breakout move above the downtrend line has an initial test target area near 3,450 to 3,500.
The Shanghai Index has undoubtedly lost much of its upward momentum. However, this is not the same as entering a new downtrend. A sustained move below the lower edge of the long-term GMMA will confirm that a new downtrend has developed.
Compression in the long-term GMMA will also confirm that bearish pressure is overwhelming the market and signalling a new downtrend.
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. The writer owns China stock and index ETFs
