(May 8): When the Western barbarians attacked China in the middle of the 19th century, it was a full-on brutal and bloody assault on the front door. When the Manchus attacked and overthrew the Ming dynasty in 1644, they came through the Shanhai Pass door, unlocked by the Ming general Wu Sangui.
The differences in strategic approach to resolving problems remain. US President Donald Trump has been brutal and brash in his destruction of the global trading order with his frontal attacks on the World Trade Organization (WTO). The final assault was his refusal to confirm the appointment of appellate judges to the WTO trade dispute board.
After five months of attacks, trade dispute resolution has come to a standstill. New complaints about dumping and unfair tariffs have been sidelined. It is not true to say world trade ground to a halt, but it is certainly fair to say that the grit in the wheels of dispute resolution was having an impact. Covid-19 has magnified the impact because appeals against the inevitable raft of new US tariffs, particularly against China, would have no formal dispute resolution mechanism other than direct conflict.
Gradually, some of those who supported, or tacitly supported, Trump’s actions have come to realise that although the WTO needed repair, it did not warrant this ongoing sabotage. Led by the EU and supported by China, a new system has been created to replicate the structure and functions of the WTO’s Appellate Body. The new Multi-Party Interim Appeal Arbitration Arrangement (MPIA) was formalised last week. It is a side-solution to the frontal attack on the WTO by the US.
The MPIA has a pool of 10 judges to be chosen by the 20 WTO members who are so far involved in this process. These arbitrators are separate from the WTO and have their own administrative support structure. Decisions are based on, and compatible with, WTO law. Should the WTO appellate system be restored some time in the future, this means that MPIA decisions will not need to be revisited.
The MPIA neutralises US power to some extent by granting Trump’s wish to exclude the US from global trade agreements. The list of signatories includes US neighbours Canada and Mexico, Brazil, Australia, New Zealand, Norway, Switzerland, Singapore and several Latin American countries. There are hopes South Korea and Japan will sign in the next 30 days.
China has cast its support for the new arbitrator as proof of its support for multilateralism, free trade and a global rules-based order. Australia’s Trade Minister Simon Birmingham welcomed the participation of the EU, China and numerous other partners in this attempt to maintain a functional dispute settlement system within the WTO. He said Australia would work with all willing partners in support of a rules-based trading system where disputes can be fairly resolved. This is a step away from the previous tacit support Australia offered to the US stance on the WTO.
Rather than create a solution, the US approach has created a vacuum into which an unlikely European-Chinese partnership has stepped. This “side door” solution goes a long way towards ensuring a post-Covid-19 return to smoother international trade relations and, if necessary, excluding the US.
Technical outlook for the Shanghai market
Despite the dip below the uptrend line, the Shanghai Composite Index has failed the break above the resistance level near 2,850. The index continues to show strong uptrend pressure with a solid rebound.
The confusion of index activity on April 28 and 29 makes it more difficult to place a well-defined uptrend line. The uptrend line is plotted as a best-fit line rather than as a line firmly anchored on rebound points. This is a minor technical detail because the general activity of the index confirms strong and consistent uptrend pressure.
The first evidence of this is the size and character of the rebound rally days. These are long candles that show strong and consistent buying. This is bullish behaviour.
The second piece of evidence is the relationships with the Guppy Multiple Moving Average (GMMA) indicator. This is developing the classic GMMA test, re-test and break-out patterns
The first rally, shown as A, tests the resistance strength of the longterm GMMA. This is followed by a pullback and a second test of GMMA strength. The second rally, shown as B, penetrates further into the longterm GMMA and shows that resistance is weakening. Usually the retreat from the second rally is small, but in this case, there were longtailed dragonfly doji days.
The third rally, shown as C, moved above the upper edge of the long-term GMMA. This usually signals a continued breakout. The retreat from this really uses the upper edges of the long-term GMMA as a support feature.
As this series of rally and retreat develops, there are changes in the GMMA relationships. The long-term GMMA begins to show signs of compression and moves slowly upwards. The short-term GMMA moves into the long-term GMMA, and then moves above the upper edge of the longterm GMMA.
This is a classic GMMA trend reversal. It is often confirmed with a straight-edge uptrend line. This is used to define the early stages of the developing uptrend, so investors watch for additional successful retests of the line as a support feature.
It is normal for this breakout to retreat and test the support level before developing a new uptrend rally. Support is near 2,850. The upside target for the trend breakout is near 2,980
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 more than a decade. 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.
