(Apr 30): Several months ago, senior Australian Ministers stood beside US Secretary of State Mike Pompeo at a Sydney conference and smiled in support as the latter warned, “You can sell your soul for a pile of soybeans or you can protect your people,” in response to a question about trade with China.
This week, Chinese Ambassador to Australia Cheng Jingye pondered: “The Chinese public is frustrated, dismayed and disappointed with what Australia is doing now. I think in the long term... if the mood is going from bad to worse, people would think, why should we go to such a country that is not so friendly to China? The tourists may have second thoughts. The parents of the students would also think whether this place which they found is not so friendly — even hostile — whether this is the best place to send their kids here. It is up to the people to decide. Maybe the ordinary people will say: Why should we drink Australian wine? Eat Australian beef?’’
This was immediately labelled “Chinese retaliation”.
Senior Australian ministers even labelled this comment as Chinese economic coercion — even though it appeared to be no more a statement of the very obvious choices considered independently by Chinese consumers.
But this is not just an issue of Australian interest. It also foreshadows a bifurcation of the trade environment post-Covid-19. It touches — but does not acknowledge — two very different approaches to trade and the way it is used as a political instrument.
The first issue was an extension of American isolationism that has been accelerated by their handling of the pandemic. In January, it appeared that President Donald Trump would campaign on the idea that the US-China trade deal was a US victory — one that only he could deliver.
But in more recent weeks, the campaign focus has shifted to the idea that China must be held accountable for unleashing Covid-19 on the US. This strategy heightens xenophobia and racism, appealing to his conservative voter base while dismantling trade with China.
It also increasingly forces a choice upon countries who are not necessarily comfortable with having to make a choice not yet formally articulated but its outlines are clear. If you want trade with the US, then you must accept our anti-China terms or we will treat you adversely. The Australian reaction is merely a regional precursor of taking one side over the other. It will have significant consequences for investment and investment flows.
This also captures two very different approaches to trade. Historically, China has used trade to secure its borders. However, the West — and more recently, the US — has used trade to expand its borders.
The Chinese civilisation has endured for around 5,000 years, outlasting the Roman and British empires by centuries. Humbled, but unbroken for a hundred years from the mid 19th century, China emerged as an intact cultural society. For 5,000 years it managed its land and sea borders by using trade (often termed ‘tribute’) as the tool of diplomacy — what we now call ‘soft power.’
However, western civilisations used trade as a way to expand their borders and this expansion was often enforced with military force and exploitation. The British East India Company used military force to splinter and exploit the Moghul Empire. China was forced to trade on unfavourable terms with European Powers following the Opium drug wars. Rather than trade, the US seized Texas, California and New Mexico in a series of wars in 1845 and then the Philippines and other Spanish possessions in 1898. Military force — not diplomacy — was, and often remains, the foundation of Western trade.
This cultural tendency is not something consigned to the history books. It is a tendency again becoming ascendant. It also underpins the significance of both Australia’s response to Ambassador Cheng’s remarks and their implications for post-Covid-19 trade relationships across our region. Investors may rapidly be called upon to make uncomfortable choices.
Technical outlook for the Shanghai market
The Shanghai index has failed the break above the resistance level near 2,850. The break below this level is bearish. The Close below the line on Friday was not a temporary dip and rebound. The Monday rebound failed to close above the trend line and confirmed the continued fall in the market on Tuesday.
The first downside support target is near 2,720. This is a minor support level created in the last week of March. Traders wait for evidence of consolidation and a rebound from this level.
Failure at this level has the next support level in the region near the previous trend lows. This is the area between 2,650 and 2,680. Again, this is not a well-defined support level. This region did act as a support point in February and again this region was a support level in the third week of March.
A successful test of this as a support level creates the conditions for a triple bottom rebound. A rebound from this lowest support level also creates the conditions for a prolonged sideways trading band between 2,670 and 2,850. This longer rally and retreat behaviour offer good trading opportunities in a trendless market. It is similar to the trading and behaviour seen during 2019.
The impact of the sudden January drop has washed out of the calculation of moving averages so the Guppy Multiple Moving Average can be applied with confidence. The longterm group of averages is well separated and moving downwards.
This confirms a bearish trend supported by investors. The short-term group has compressed and reacted away from the resistance feature created by the long term GMMA. This shows short term bearish pressure is building as traders look to lock in short term profits because they believe the market has more downside.
The Dragonfly Doji in this position does not confirm an immediate downtrend so traders remain cautious and prepared for a minor retreat and the potential for the rebound rally. However, it is a low probability outcome.
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.
