Central to any future engagement with China is a greater application of digital technologies. But this goes way beyond WeChat, the annual shopping event known as Singles Day or even e-commerce.
Future engagement with China includes blockchain development that is compatible with Chinese system development, emerging trade protocols and cross-border trade settlement. Much of this will include China’s sovereign digital currency or digital renminbi (RMB).
Currently, the digital RMB is confined to domestic use in China, but it is inevitable that it will be used in cross-border trade transactions.
The digital RMB is a digital form of China's physical currency. It is powered by blockchain technology and distributed through China's central bank to second-tier providers including state-owned banks and online payment providers like Alipay and WeChat Pay.
China already leads the world in digital transactions, so the world's first sovereign digital currency is a logical development.
China will have full control over the currency's circulation. The digital RMB is a powerful force in poverty alleviation because it takes banking to those who were previously unbanked. It will not require a bank account to access funds so it is a great benefit to the 20% of adults in China without a bank account.
Cash is anonymous and that brings both advantages and disadvantages. The blockchain foundation technology makes it easier to prevent illegal activities such as money laundering, counterfeiting, illegal financing and tax evasion.
At a policy making level, the digital RMB facilitates real-time collection of data related to money creation and bookkeeping.
Economic planning is improved because accurate economic information is quickly available. Real time data allows for rapid assessment of the impact of monetary policies.
Investors and businesses involved in any activity in China will need to include digital RMB in their planning, budgeting and reporting frameworks. Tax collection will become more efficient as will other types of business activity reporting.
In a broader environment, the impact of digital RMB will be felt throughout the Asean region as it provides a substitute to US dollar denominated trade settlement procedures and processes.
The People's Bank of China has indicated that Individuals will be able to use digital RMB to make payments abroad. International businesses involved in China's imports and exports sectors will also be able to complete transactions in the digital RMB.
This has a number of advantages. The digital RMB reduces the time for trade settlement and this in turn reduces counterparty risk. Recent examples of trade settlement have shown settlement time can be reduced from six weeks to just a few days using block chain technology. Digital RMB should be able to reduce this even further and this will impact favourably on business cash-flow.
One of the reasons for this speed of settlement is the elimination of third party currencies. It makes it easier to settle trade transactions between Belt and Road Initiative or Regional Comprehensive Economic Partnership (RCEP) partners, who use many different currencies. They will no longer need to use a third party currency to complete the transaction.
Furthermore, currency cross-border RMB settlement depends on the US dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. However, President Donald Trump has weaponised these cross-border payment and banking systems and used them as an arm of US foreign policy. The digital RMB provides an independent alternative for cross-border payments.
In short, the digital RMB reshapes the current cross-border payment system. Businesses that do not use these systems will be disadvantaged.
There is scope for new business activity built around the development of digital RMB compatible systems so investors should watch for these developments and those who have first-mover advantage.
Technical outlook for the Shanghai market
The Shanghai index has oscillated around the centre line of the broad sideways trading band that has dominated the market since July 2020. There has been no rapid rebound and retest of the resistance level at the upper edge of the trading band near 3,450. This shows a short-term reduction in bullish activity.
Attention has been focused on the support features. The index still has several sound support features, so investors can see how the index has behaved in these areas. Good consolidation activity provides a base for another rally and retest of the upper edge of the trading band.
The first support feature is the upper edge of the long-term group of averages in the Guppy Multiple Moving Average indicator (GMMA). The index ignored this support level and continued to fall. This means this level is unlikely to offer much resistance for any index rebound.
The second support area is the value of the midpoint of the long-term trading band. This is located near 3,360 and the index has oscillated around this value. It is a bullish condition while the index stays in the upper section of the trading band.
The third support feature is created by the lower edge of the long term group of moving averages. The index briefly dipped below this level but close above this level. This shows this feature is acting as a support feature. Failure of this support feature plunges the index into the lower half of the trading band. This would be a bearish development.
The GMMA relationships show strong trend behaviour with an upwards bias. The long-term GMMA is also well separated. This shows good support for the uptrend continuation is coming from investors. This separation shows that when the index pulls back the investors use the opportunity to buy the dip. However, this uptrend is under pressure for short-term sellers.
The short-term GMMA has compressed and is moving down to the value of the upper edge of the long-term GMMA. This is often part of a rally and retreat behaviour as the uptrend develops.
This trend behaviour remains different from the previous trend behaviour when the index moved above the midpoint of the trading band near 3,360. There is limited repeated expansion and compression activity in the short-term GMMA.
The current retreat is consolidating around the centre axis of the long-term broad trading band. Investors are watching for the index to develop retreat and rebound activity in the upper half of the broad trading band.
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 two decades. 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.
