China's supply chain liability

One of the highlights of this campaign to date was the passing of a unanimous motion condemning China by the British parliament.

Less widely reported, however, was that this motion was moved late at night and supported by all five of the parliamentarians remaining in the House of Commons.

The first reaction by now may be that we do not want to get involved in this discussion and that it has little to do with investment.

But that is where you are wrong, because this momentum is impacting supply chains in a way that could not be anticipated a few months ago.

This agenda has created significant supply chain risk in all sorts of unexpected places and it has nothing to do with what you may think about China’s activities in the remote Xinjiang province.

Hand in hand with this Uighur discussion comes the rejection of cotton produced in Xinjiang and the demand that clothing manufacturers stop using, not just Xinjiang cotton but all cotton produced in China.

It is impossible to separate the Xinjiang fibres from cotton grown in other areas, so this quickly morphed into a blanket shaming of any cotton sourced from China.

The allegation is that this cotton is produced using forced labour.

This may be true in some circumstances but it does not apply to all the cotton produced in Xinjiang, let alone China.

The idea of forced labour is quickly bundled up with low paid labour and used as evidence of ‘slave like’ conditions which are condemned when located in the supply chain.

This seems to exclude cotton products produced by low paid labour in Bangladesh and the use of low paid prison labour in the US, which is used by Boeing and multinational aerospace and defence technology company Northrop Grumman amongst others, to produce parts used in American military equipment.

Australia is the latest country considering new laws around these labour transparency issues, with the aim of making it illegal to have forced or low paid labour components in imported products.

The push for supply chain moral purity is particularly directed towards the Chinese supply chain. It also delves deeper into the product supply chain at a granular level.

This may soon include the poly-silicon used in around 45% of the world’s supply of solar-grade polysilicon used in solar panels. As an importer of any type of goods from China, can you guarantee that not a single part of the product has been produced by low paid or forced labour?

That is a difficult guarantee to give but your customers may be asked to give it.

It is easy to dismiss this as something unique to Adidas, Uniqlo and other large companies. As the moral momentum builds, it may be something a broader range of businesses will need to consider.

These concerns also apply to those who value adding to imported components and then export to countries which adopt these supply chain requirements.

This is becoming an issue, not just for businesses but also for investors.

Just as consumers have reacted in moral outrage against companies supposedly using Xinjiang cotton, so too may this legislated moral outrage spread to other companies suspected of sourcing materials from forced or low paid labour. It is a new investment risk. I do not support forced labour and exploitation, but there are more effective ways of tackling these issues than blanket bans with their inherent widespread collateral damage.

Technical outlook for the Shanghai market

The Shanghai Index has rebounded from support near 3,515. This was a drop below the long-term support level near 3,580.

The rebound rally followed a successful test of the support area near the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator.

This behaviour signals the end of the breakout uptrend that started on May 14 defined by trend line A. The retreat and rebound point provide a second anchor point for a new trend line B.

This has the potential to define a slower and more sustainable long-term uptrend consistent with the trend support given by the long-term GMMA group of averages.

The May breakout reached the target level calculated from the upsloping triangle breakout pattern.

The initial upside target for the current rally is also near 3,580. A move above this level meets resistance from the value of uptrend line A. The index retreat was a pullback in the trend to trend support levels.

The current rebound rally from the support area created by the lower edge of the long-term GMMA is not unexpected.

Any rally rebound has two upside barriers to overcome before it can develop into a long-term sustainable uptrend.

The first barrier is the recent resistance level near 3,580. The second barrier is the value of short-term uptrend line A. This line did act as a support level for the initial breakout trend, but in the future, it will act as a resistance feature.

The underlying trend continuation is well supported as shown by the wide separation in the long-term groups of averages.

This group moved sideways as the market retreated, but they did not compress. This also suggests investors remained confident that the uptrend would continue and were willing buyers as the index lost value.

Compression is this group would show fading support from investors and this did not develop.

After taking short-term profits, traders are now buying back into the market in the new rally. The short-term GMMA indicator shows how traders are working in the market.

Momentum indicators like the Relative Strength Index (RSI) are showing confirmation behaviour. Traders were alert for any RSI divergence signal but this did not develop.

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. The writer owns China stock and index ETFs.

Photo: Bloomberg