(Oct 21): Next week, I will visit Nanshan in Shenzhen. Some describe it as China’s Silicon Valley and home to high-tech companies. If you want cutting-edge technology, 5G development and artificial intelligence programming, this is where you go. Nanshan district is a model high-tech, sophisticated, smart-city development, and it stands in stark contrast to Dunhuang in remote Gansu province, which I visited a few weeks ago to speak at a Belt and Road roundtable forum.
Dunhuang struggles with poverty, isolation and lack of economic opportunity. Although different in climate, the remote province of Yunnan has the same problems of deeply ingrained poverty. China has a proud record of lifting millions of people out of poverty over the past 70 years but, as a visit to the outer provinces shows, much work remains to be done. The cities in Gansu and Yunnan are a long way from the sophisticated cities along the east coast of China and the Pearl River Delta — and therein lies a dilemma. Is China a developing country or is it “cheating” on this status, as constantly alleged by President Donald Trump,
Defining China as a “developing” or “developed” country for the purpose of the World Trade Organization matters a lot to the US president. He has directed the US trade representative to “use all available means to secure changes” at the WTO to strip China of its developing status. Some US allies have joined the calls, with Australian Prime Minister Scott Morrison referring to China as a “newly developed economy”, and saying that “obviously, as nations progress and develop, then the obligations and how the rules apply to them also shift”.
In practical terms, the difference means almost nothing. Under the WTO, developing countries are entitled to “special and differential treatment” set out in 155 rules. Each member is able to “self-designate” its status, subject to challenges from other members. When China joined the WTO in 2001, it faced resistance due to “the significant size, rapid growth and transitional nature of the Chinese economy”.
The result was that China was given very few of the special treatments normally accorded to a developing country. Under the Uruguay Round of tariff reductions that applied to developing countries already in the WTO, China was required to cut its average industrial tariff from 42.7% to 31.4%. Instead, the country went much further and cut the tariff to 9.5%.
China voluntarily agreed to cut its agricultural tariff from 54% to 15.1%, which was more than the 37.9% that was required. The level of these voluntary reductions puts China’s commitments on a par with those of developed rather than developing countries.
On some issues, China’s WTO commitments far exceeded those of even developed countries. It agreed to eliminate all export subsidies on agricultural products, an obligation that developed countries took an additional 14 years to accept. The US continues to routinely provide agricultural export subsidies.
China also eliminated all export taxes, which are still allowed under WTO rules and widely used by many governments.
Contrary to the US narrative, when China became a member of the WTO, it received few of the benefits available to developing countries. However, as the stark contrast between Dunhuang and Nanshan shows, those few benefits remain relevant to vast swathes of China and the Chinese economy. The allegations of “cheating” are both inaccurate and ill-founded. They are just a distraction in Trump’s attack on the global rules-based trade order from which countries such as Singapore and Australia benefit.
Technical outlook for the Shanghai market
The breakout pattern of retreat and rally in the Shanghai Index continues with the rally move towards resistance near 3,040. The fast rebound from 2,900 has slowed, but it is consistent with this type of trend development.
Investors are watching for the index to rebound away from the lower edge of the short-term Guppy Multiple Moving Average (GMMA) and move above the historical resistance level near 3,040.
The 3,040 resistance level is well established and stopped the market rise in July and again in September. This indicates a very strong resistance level, so a breakout above this level has the potential to be very powerful. There is a high probability the Shanghai index will consolidate near the 3,040 level prior to any breakout activity.
A strong breakout from a downtrend often has three parts to the pattern defined with the GMMA indicator. The current rebound is part of the third section of the GMMA trend breakout pattern.
The potential future development of the breakout pattern is shown by the thick lines on the chart. Traders and investors wait for the pullback to successfully test the support areas before developing a new rebound rally and retest of resistance near 3,040.
The trend breakout and uptrend continuation are confirmed when the index hits the support areas near 2,920 and then develops a rebound rally. This is the current environment. Trend continuation is confirmed when the index is able to move above resistance near 3,040. A breakout above 3,040 has an upside target near 3,120.
The GMMA indicator breakout pattern has three tests of trend strength. The first part of the pattern is a fast rally following a significant downtrend (1). Then traders wait for a retreat from the upper edge of the long-term GMMA (2).
The second rally carries the index above the upper level of the long-term GMMA to the resistance level near 3,040. The index consolidates near this level before developing the current retreat pattern.
The third part of the breakout pattern (3) continues to develop. This is when the second rally retreats and tests the support features. The index bounces away from this level and again moves decisively above the upper edge of the long-term GMMA. This rally has a high probability of moving above the resistance level near 3,040 and towards the longer-term resistance target near 3,120.
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.
