When it comes to China, Australia seems determined to make a bad situation worse. That is a serious concern for investors who have used Australian stocks as a way to tap into China’s growth and markets.
China is not happy with the Australian relationship because of the increasingly vigorous vilification of China in Australian media and politics. This also includes several recent policy decisions which are clearly aimed at China. The recent rejection by the Australian Treasurer Josh Frydenberg of a A$600 million ($596.5 million) investment by Mengniu Dairy is seen as an arbitrary decision because the investment had been approved by all the relevant Australian regulatory authorities.
It is this sort of decision that has contributed to a 47% decline in Chinese investment in Australia in the year before Covid-19. When investment retreats, so will trade.
In January, Australia also broke Vienna conventions on diplomatic and consular relations when Australian Federal police accessed Chinese diplomats’ emails and messages in January and June.
Investors in Australian commodity services such as GrainCorp and investors into Australian food exporters such as Treasury Wines and A2 Milk have good reason to be concerned. For the time being, investors in the Australian iron ore industry have less reason for concern as this is not a product that can be easily substituted.
The media focus has largely been on China’s application of trade enquiries. This has included referrals to the World Trade Organization (WTO) about the dumping of barley and wine on the Chinese market. The imposition of new tariffs on barley was the result of a 12-month WTO investigation. The wine investigation has just commenced.
Several abattoirs had their export licences suspended after months of repeated violations of labelling requirements.
In the latest move, China has identified unacceptable levels of weed seed contamination in shipments resulting from different measurement standards. Again, this is not a new issue but it has been more recently highlighted.
Are these issues connected? Are they part of a braider disengagement from Australian trade by China or are they just part of the normal up and down of trade relationships? If they are the normal to-and-fro of trade, then the temporary weakness in impacted companies is a buy opportunity. The official Australian government position is that this is the normal part of the ebb and flow of trade relationships.
If these issues are connected, then it suggests further falls in impacted companies and the need for investors to watch for longer term buying opportunities. Connected problems are most likely to see a ‘connected’ resolution as the overall Australian-China trade relationship is restored and improved. This is the interpretation favoured by Australian business. It is also the general market consensus.
This calls for an entirely different investment response if these issues are part of a broader Chinese disengagement from and a substitution of supply. This situation leads to the destruction of the Australian export industry business model as new substitute markets cannot be found quickly. If this interpretation is correct, then investors will look to cash out and protect profits.
Some evidence supports this gloomier picture. The US demands in the China-US trade agreement require China to increase imports of beef and grain and much of this will be at the expense of the Australian market share.
Investors who believe the tariff and other actions can be set against this increasingly poisonous background will take early action to reduce their exposure to Australian stocks that rely heavily on the China market.
Technical outlook for the Shanghai market
The Shanghai Index has dropped below the long-term uptrend line and the lower edge of the long-term Guppy Multiple Moving Average (GMMA). This combination of features is often an indication of a change in trend.
What do traders need to see to prove this is just a temporary retreat prior to the resumption of the uptrend? The first piece 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 is currently near 3,320.
The second piece 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. This can also be described as a crossover of the 15 and 30-day exponential moving averages.
Even if this rebound does develop the rally is limited by the value of the long-term trend line A which will now act as a resistance feature.
The more probable outcome is a continuation of the downtrend after a short term rebound rally.
It is difficult to locate strong support features in the recent activity of the Shanghai Index. 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. This means they cannot be relied upon for strong support in the coming weeks.
The Shanghai index developed a very strong trend with the breakout in June. This offered good trading opportunities, but it did not develop any consolidation areas in the fast and strong rally. It is consolidation areas that help locate potential support levels when the index retreats. 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.
