This week, investments in Australia for exposure to China markets took another hit: China announced an anti-dumping investigation into Australian wine exports to China. Treasury Wine, a major exporter and investment portfolio favourite, took a substantial hit. This Chinese action follows recent actions on Australian barley and some beef exporters.
Is it time to abandon Australian investments with China exposure? Is this part of a broader Chinese punishment of Australia for its stances on issues such as the investigation of Covid-19 sources, the South China Sea and the increasing anti-China rhetoric in the media? In short, is this a foreign policy response rather than a commercial response?
Or are these actions part of the usual pattern of trade and commercial decisions undertaken as part of the normal to-and-fro on trade patterns under the umbrella of the WTO and its rules-based trade structure?
The anti-dumping actions are largely driven by domestic interests with increased complaints from domestic players reflecting the desire of Chinese wine makers to keep out foreign competitors and not just Australia.
China is reckoned to be the fifth largest producer in the world. Thousands of new vineyards have been planted across the country to help fill rapidly growing demand, but China’s wine producers have been struggling for some time to overcome a history of poor-quality product at a time when China’s wine market has been the fastest growing in the world. Overseas suppliers have been eroding the market share of domestic producers since 2008 with imports growing from 20% share of the market to 54% in 2018. It is no wonder Chinese wine producers are upset.
Covid-19 has not helped the situation. Chinese consumers prefer to consume wine in restaurants and hotels, rather than at home, so Covid-19 shutdowns have had a particular impact.
China’s actions against Australia need to be compared to China’s measures taken against other countries. China has 33 actions against the US, 31 against Japan and 24 against the EU. Thailand and Singapore both had seven actions in place.
Australia has a number of anti-dumping actions and countervailing duties levied against other countries too, especially China. Australia has 43 anti-dumping investigations or other actions underway against Chinese products, and 17 measures already in place.
The US has 386 measures in place that does not include several hundred investigations and other actions underway many of which ignore the rules-based framework of the WTO and represent a larger risk to investors.
With Australia-China relations at an all-time low, it certainly suits China to support this call from its domestic wine producers at this time. However, this is also part of a wider global pattern of regulatory protectionism undertaken by many countries as part of their response to Covid-19 slowed economies. Unlike US actions, these Chinese measures are undertaken within the framework of WTO regulations and that provides hope for a fair settlement of the charges.
From an investment perspective it signals an opportunity. First is the opportunity to invest in the fledging Chinese wine industry. This includes Shanghai-listed TongHua Grape Wine and Weilong Grape Wine. Second is the opportunity to invest in established Australian wine producers like Treasury Wines at a point of temporary price weakness because, one thing is for sure, the Chinese demand for wine is not going to diminish.
Technical outlook for the Shanghai market
The Shanghai Index has retreated from the strong double top pattern near 3,457. The retreat is still consistent with a continuation of the uptrend. This suggests a breakout will develop and the index will move higher.
The index has fallen below the lower edge of the short-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. The index is testing the upper edge of the long-term GMMA. This is consistent with consolidation behaviour prior to another retest of the double top area.
Is this a potential trend retreat and change of trend direction, or is it just a retreat within the context of a rising trend? This question is answered 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. If the index falls then investors come into the market as buyers and help drive the index up again. The wide separation acts like a shock absorber because investors take the opportunity to join the trend at a point of temporary weakness.
The warning signal for a potential trend change is when the long-term GMMA shows signs of compression as the market pulls back. This shows investors are losing confidence and some of them are joining the selling as they try to protect their profits. Compression is not developing so traders and investors are confident the uptrend will continue.
The long-term uptrend is defined by trend line A. The value of trend line A is now near to the value of the lower edge of the long-term GMMA. This trend line is useful for trend confirmation but the long-term GMMA is used for trade management.
The index can fall to the value of the upper edge of the long-term GMMA and still remain 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.
Traders are watching for a minor retreat followed by a stronger rebound rally retests of the double top and then continuing with a breakout above the resistance level near 3,475.
The first upside target for the rebound breakout rally is near 3,560. This is equal to the peak index highs in February 2018. This is not a strong historical resistance level, so there is good potential to quickly move higher.
A trading band projection is applied with caution and it suggests an upside target near 3,900. This is a long-term target, so the path to this level will not be smooth. The uptrend will consist of rallies and retreats as they develop a gentler and less volatile trend-up move.
