US President Donald Trump’s all-out assault on China seems to have backfired. The US China balance of trade figures — the much-touted China trade deficit — is actually larger now than it was when Trump was elected. The trade surplus with the US hit US$34.2 billion ($46.7 billion), the largest on record. The 9.5% y-o-y increase in China’s exports during August have also highlighted the rebound in the world’s second largest economy as the US continues to struggle with its own Covid-induced crisis.
The sanctions imposed on chip-makers have deprived those companies of their major market. Worse than that, it has also accelerated the move towards self-sufficiency by Chinese chipmakers. It is nonsense to believe that the thousands of people in China involved in the semiconductor industry are incapable of developing new and more advanced chips.
When relations normalise, the existing US chipmakers and their suppliers may find there is no longer a Chinese market interested in their product. This is an investment problem searching for a solution, and although we do not want to attribute this to the fall in the Nasdaq, there remains no question that the US tech industry is being forcibly excluded from their largest market.
Trumps currency war against the yuan, along with threats of currency manipulation, have also been a damp squib. The yuan gained some 4.5% against the US dollar since its May low. This is in part due to the weakness in the US dollar and China’s faster rebound.
Rebounding exports have also supported rising demand for yuan. Covid-19 has kept China’s international tourists at home and this has capped a source of downward pressure on the yuan. The widespread rejection of Chinese investment proposals in Western countries has also added to downward pressure.
The currency has also been supported by foreign capital coming into China’s bond market, with the Bond Connect programme making market access easier. Yet again the impacts have been
the opposite of what was intended by the US. The corruption and hijacking of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) and CHIPS (Clearing House Interbank Payments System) settlement systems have not contained China’s economic activity. Instead, they have accelerated the development of China’s sovereign digital currency. This is well on the way to providing a viable alternative to dependency on the US dollar and US dollar transaction pathways.
Again, this behoves investors to think carefully about their exposure to companies that are dependent upon US dollar settlement, or to companies that refuse to become involved with the Chinese digital currency platforms and cross border settlement processes.
These perverse outcomes are not evidence of a deliberate Chinese plot. They are more the result of incompetence and a basic lack of understanding of economics and trade.
However, investors must always try to understand the reality behind the bombast because that’s where the true investment opportunities are concealed. It would be unwise to take the equivalent of investment bets against China.
Technical outlook for the Shanghai market
The retreat in the Shanghai Index is no longer consistent with the general uptrend pressure in the market. The index has closed below the long-term uptrend line A. This bearish environment is confirmed by continued closes below trend line A.
Additionally, the index has also dipped below the lower edge of the long-term Guppy Multiple Moving Average (GMMA) group of averages. This is the first time this has happened since May this year. This indicates a developing potential for a trend change.
The tests of resistance near 3,450 were unsuccessful. Looking into the future, this suggests that any index rebound will again encounter strong resistance at this 3,450 level.
The key feature now for traders is the location of support in a falling market. There is a low probability that the lower edge of the long term GMMA near 3,260 will act as a strong support level. If this is successful as a support feature, then any rebound rally has immediate resistance at the value of uptrend line A.
This is also near to the peak value of the long term GMMA. These two features suggest that any rally has a high probability of being very weak. This combination of features suggests that traders need to be alert for further downside pressure and the development of a new downtrend.
It is difficult to locate strong support features in the recent activity of the Shanghai Index. Weak support is located near 3,190 but this is based on the series of spike lows in July and August. These were weak rebound points that had no historical support activity. This means they cannot be relied upon for strong support in the coming weeks.
The Shanghai index developed a very strong trend with the breakout in June. This offered good trading opportunities, but it did not develop any consolidation areas in the fast and strong rally. It is consolidation areas that help locate potential support levels when the index retreats. Using the weekly chart, the next strong support level is near 3,040. This is also not a well-defined support level so traders will wait for proof this level can hold before they come back into the market.
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 also a national board member of the Australia China Business Council.
