The poster child for technical innovation in China is the DCEP, or sovereign digital currency. The DCEP is designed to remove trade settlement and cross border remittances from the group of the US dollar-based SWIFT settlement system. SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a network used by banks around the world to send and receive information about financial transactions.
However, having an alternative transfer system in place removes a significant vulnerability of Chinese trade relations because trade settlement cannot be easily blocked by a US Presidential tweet. Business is beginning to factor in these changes, but this is just the public facing aspect of this process.
The foundation of the DCEP is even more important. If we do not have faith in this foundation, then the DCEP will fail because in the final analysis that it is a fiat currency just like the US dollar. Fiat currencies are those backed by confidence in government and are not backed by gold reserves. To be sure, China has been increasing gold reserves in recent years, but at heart, the DCEP remains another variation of a fiat currency so sound foundations are vital.
The DCEP rests on block chain connectivity and this is enabled through the Blockchain Services Network (BSN). The BSN is a national initiative to integrate adoption of blockchain technology across government, big business and emerging markets. It is the backbone infrastructure of interconnectivity throughout mainland China. It encompasses city governments, private businesses, and individuals. This network is the Digital Silk Road, facilitating links to China and its trading partners globally.
Most of us do not really want to go into the arcane details of blockchain and networks. However, these will become vital to our ability to trade and settle trades so it’s worthwhile having at least a basic understanding of what is involved.
China is the leader in blockchain development, with 45% of all blockchain projects coming from the mainland. Chinese companies recognise the power of blockchain-based enterprise applications as they allow large scale data tracking and authentication in a secure environment.
The BSN consortium includes the State Information Centre affiliated with the National Development and Reform Commission, China Mobile, China UnionPay along with the main blockchain architect for the BSN, Red Date Technologies.
They say: “The BSN is a one-stop shop for App developers to deploy and manage any permissioned or permissionless blockchain applications. We have built entire operating environments and shared nodes on BSN’s public city nodes (PCN) around the world. Developers only need to choose which PCN to connect and upload smart contracts.”
BSN is a common protocol between public, private and government blockchain databases. The objective is to roll out 200 city nodes across China over the next year, and dozens more internationally.
BSN enables small and medium-sized enterprises to develop blockchain capabilities. The BSN also lowers the costs of deploying a blockchain service. In particular, this includes a pathway for international decentralised services to be accessed in China and vice versa.
This new network will unite producers globally, particularly those within the Belt and Road areas of influence. Non-participation will leave business without access to Chinese and emerging market consumers.
Business choices made now will be critical to long-term success. It is not just using DCEP but developing BSN compatible applications that will provide new opportunities. These are issues IT departments need to actively consider because they are at the foundation of new cross border transactional models.
Technical outlook for the Shanghai market
The Shanghai Index rebound rally is retesting the strong double top pattern near 3,457. The retreat, rebound and retest are part of the continuation of the uptrend. This has created a broad upward sloping triangle pattern. These are usually bullish patterns. The pattern is not perfect because it’s difficult to place the upsloping trend line. However, the behaviour provides a method to set a potential upside target. The base of the pattern is measured and projected upwards. This gives a longer-term upside target near 3,780.
A very bullish breakout will develop if the index can move above 3,457 resistance in the next few days. This is a long-term target.
Alternatively, the index may retreat from resistance and retest the support at the upper edges of the long-term Guppy Multiple Moving Average (GMMA) group of averages.
The Index has successfully tested the upper edge of the long-term GMMA indicator as a support feature on three occasions. The upper edge of the long term GMMA is also useful for defining the uptrend. This is the value of the 30-day exponential moving average.
This rebound rally suggests the uptrend is continuing. The first upside target after the breakout is near 3,560. This is also near the highs reached in February 2018. This is the lower edge of a small resistance band between 3,560 and 3,650. There is a good probability that any breakout will consolidate inside this resistance band.
The uptrend continuation is confirmed by using the GMMA relationships. The long-term group of averages in the GMMA is well separated. This steady and consistent separation is usually associated with a strong and sustainable trend.
The index fell to the value of the upper edge of the long term GMMA and then developed the rebound rally, so the index remains in a strong uptrend. The pullback on July 27 and again on Aug 12 both used the upper edge of the long term GMMA as a support rebound area.
A sustained fall below the 30-day EMMA is a warning of a potential reversal of the uptrend. A fall below the value of the 30-day EMA has additional support at the value of the long-term uptrend line A. The value is currently near 3,346.
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.
