Investors have an increasing number of China-related issues of concern that have developed over recent weeks.
They take place against a ratcheting up of the China containment strategies pursued with increasing vigour by the US and its partners. This includes this week’s announcement that Britain’s Royal Navy will establish a permanent presence in the South China Sea, its first return to the region since the withdrawal east of Suez in 1968.
The US and Japan have increased the tempo of commentary around the issue of Taiwan. It is concerning that US President Joe Biden’s China policy team lacks China experience, so they tend to frame their responses in terms of what succeeded with the Soviet Union during the Cold War.
The primary team working on USChina issues — with the exception of US Trade Representative Katherine Tai — have virtually no China experience. Neither have they lived or work in the country or possess a knowledge of China’s culture, mores or language as their experience lies primarily in the Middle East or the European Union.
On the US side of this reaction, investors have seen policy implementation range from the petty to the significant.
The directive that US athletes are banned from using China’s digital yuan during the Beijing Olympics is on the petty end of policy.
At the higher end, we see the as yet unclarified policy around the activities of US companies in Hong Kong with strong hints coming from the Presidential entourage that US companies should pull out of the island.
This is combined with the sanctions imposed on companies that may be in some way using products produced in Xinjiang, on the grounds that all Xinjiang products may have a forcedlabour component.
This impact now also extends beyond clothing companies and into high tech products including solar panels.
The threat of delisting China companies from US stock exchanges remains in play, threatening their investment value and paradoxically forcing capital out of the US and into the China bourses.
This is an unintended boost of China’s stock exchanges as new listings there attract foreign capital that would have otherwise gone to the US markets.
These reactions fly in the face of reality. China’s exports have surged this year and its products will not be replaced by alternative suppliers or supply routes any time soon.
Product substitution is time consuming and expensive. Substituting China-made drones, for example, with US-made drones is not only twice as expensive but the capability may also be lesser. It simply makes sense for businesses to use the best product on a price and service basis, no matter what the source.
It is a basic foundation of capitalism and the imposition of American regulations cannot change this capitalist imperative.
Foreign direct investment into China has also increased with funds flowing from Europe and the US, despite efforts by US regulators to stem this tide. Big money will find a way around these regulations.
Flying in the face of reality is one thing, but navigating the increasing complexities around doing business in and with China in this environment is another.
Investors will need to actively reassess their exposure both to China and to the companies they invest in that are doing business in China.
The opportunities in China continue to expand, but the ways in which these investors can access these opportunities is becoming more complicated and are carrying a higher level of risk.
Technical outlook for the Shanghai market
The upwards move in the Shanghai Index is constrained by two resistance features and the index is moving between these. The first and strongest feature is the historical resistance level near 3,580. The second powerful resistance feature was the value of the short-term trend line.
This is no longer an influence on the market because the chart price activity has moved beyond the point where trend line A intersects the resistance line.
The Index breakout failed and retreated towards support near the long-term uptrend line B. The rebound rally was first capped by the new shortterm up trend line A and later by the historical resistance level near 3,580.
It was anticipated that the rebound rally would be the start of a new longer-term rally and a continuation of the uptrend. A new trend line A was plotted to define the emerging short-term trend.
Two events developed. First the index dropped below the value of trend line A. This signals a change in the trend behaviour.
This index retreats also moved below the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) Indicator.
This was bearish and suggested the uptrend rally that started in May had come to an end. The second event was the continued tests of the long-term uptrend line B as a support feature. This feature and the horizontal resistance level have the potential to create a long-term upward sloping triangle pattern.
The fall below the lower edge of the long-term GMMA suggested a significant change in the trend behaviour. The first support feature is the value of the long-term uptrend line B, which was successfully tested and again tested this week.
The rebound from this level suggests that the long-term uptrend that started in March remains intact. This is a much slower moving uptrend.
Although the index has closed below the lower edge of the long-term GMMA there is weak compression in the long-term GMMA.
The long-term GMMA is also moving sideways. This shows that investors have not yet joined in the selling so there is a small probability that the index retreat is temporary.
The current condition of the index has the characteristics of a developing trend change so any rebound rally is treated with caution. Additional caution is required because of the resistance coming from the value of the long-term resistance level near 3,580.
This acts as significant barriers to any rally rebound. A move above 3,580 is very bullish.
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
