The sign-off of the Regional Comprehensive Economic Partnership (RCEP) — a free trade agreement between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar,New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam — signals China’s global emergence from its Covid-19 hibernation.
The timing is fortuitous for China, as it is compatible with the accelerated development in critical areas that change the post-Covid-19 landscape for China trade relations with the world.
There are three critical areas that redefine China relations with the world and set a post-Covid-19 environment in which trade will take place.
The first of these areas is the concept of the dual circulation economy.The second is the introduction of the digital renminbi (RMB) and the way this disrupts the virtual monopoly of trade settlement.
The third, is the way these two developments enhance the Belt and Road Initiative (BRI) — an infrastructure development and investment plan aiming to connect Europe with Asia — which is also not incompatible with the RCEP agreement.
The dual circulation economy concept has two equally strong components: “internal circulation”, which refers to domestic economic activities and “external circulation”, which relates to China’s economic links with the outside world.
It signals that China wants to reduce the role of international trade in its economy and strengthen its domestic economy. China’s dependence on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) settlement system to complete trade transactions in US dollars is a point of extreme vulnerability.
China found in 2008 that its reserves held in US treasuries were suddenly at risk. US dollar exposure meant China was at the mercy of a foreign controlled trade settlement system.
Two solutions were created to break out of this choke point. The first was the New Silk Road, now it is the BRI.
The second solution was greater independence for the RMB and Chinesecapital markets. The ultimate expression of this breaking of the chokehold is the digital RMB.
The BRI to a significant extent was designed to break the dependency of holding foreign currency reserves in the bank vaults of an increasingly unfriendly country.
The second and third solutions are so closely related so we can consider them together.
The BRI is a trade engagement policy. The Chinese trade system was a system of tribute built around mutual trade and the right, but not obligation, to trade.
This is a philosophical foundation of the BRI, where the objective is to secure borders through the enhancement of peaceful trade relationships with surrounding states. Essential to these relationships is a common set of protocols and procedures for cross border transactions so trade is smooth. RCEP provides a mechanism for achieving this.
The West has focussed on just one aspect of the BRI and that’s the construction of physical infrastructure.
This focus ignores the other elements which create a soft infrastructure. When you build a high-speed railway in Malaysia, you also adopt the software to run the trains, to handle the ticketing, to manage the time-tables and maintain the tracks. All of this rests on advanced hi-tech 5G and blockchain services.
When trade settlement is conducted in US dollars, the entire trade structure is at the mercy of an unfriendly tweet from US President Donald Trump. The development of capital independence is essential if the BRI is to achieve its smooth trade objectives.
Part of that process comes from creating a sovereign currency trade settlement system that cannot be held to ransom by unilateral sanctions.
The digital RMB, currently only rolled out for domestic use, is the forerunner of an enhanced cross border trade settlement system. The success of BRI rests upon this foundation and this takes us directly to RCEP.
The RCEP is an agreement to establish agreed cross border trade and settlement procedures. China has already established the outline of those processes with many of the 15-member countries already involved with BRI.
The mechanisms and intent of RCEP are consistent with China’s new view of its relationship with the world.
Technical outlook for the Shanghai market
The Shanghai Index is retesting the resistance area near 3,388. This is bullish behaviour because the pullback last week found good support from the long-termgroup of averages in the Guppy Multiple Moving Average (GMMA) indicator.
This showed that investors absorbed the market pullback and then came into the market as buyers. This is confirmed by the way the long-term group of moving averages remained well separated.
The Shanghai Index is range bound because it is trading in a broad trading band. A trading band is defined by horizontal support and resistance lines. The lower edge of the band is near 3,220. The upper edge of the band is near 3,340.
The index behaviour inside this band consists of rallies and retreats. There is no strong trend development or directional bias.
The index developed a down sloping trend channel defined by down sloping trend lines B and C. A new parallel down sloping channel line is plotted as line D. A break above this line and above the middle point of the trading band is bullish because it takes the index into the upper half of the trading band.
This is a wide trading band. The midpoint of the band is near 3,340. Starting in September, the index has remained in the lower half of the trading band. The brief breakout above 3,340 suggested an increased potential for the index to move into the upper half of the trading band. A successful move above this centre line value of 3,340 is another factor that confirms any new rally is part of a new uptrend.
Evidence of strong trend behaviour is provided when the long-term group of moving averages on the GMMA indicator turn upwards and begin to consistently separate. This separation shows investors are eager buyers when any temporary price weakness develops. Additionally, in a strong trend the short-term GMMA also moves upwards and develops a consistent steady separation between the short-term and long-term group of averages.
There is developing evidence that these trend conditions are emerging. Long-term separation in the GMMA is steady. Separation between the short-and long-term groups of averages is remaining consistent.
Investors watched how the retreat used the lower edge of the long-term GMMA as a support feature. The rebound from this level and a rally break above 3,340 is bullish behaviour and will signal the potential for a new up-trend development.
Aggressive traders entered the market as the rebound developed. Cautious traders will wait until the index shows it can move above 3,340.
