The past few weeks have seen a range of China initiatives impacting the assumptions of international trade and broader relationships. It’s too early to know how these will play out regarding on-the-ground business, but these initiatives cannot be ignored.
There are seven areas of interest where we can say: “Watch this space.”
First is the meeting between Chinese President Xi Jinping and Saudi Arabia. This area is usually regarded as the preserve of the Americans keen to protect their oil interests. The diplomatic moves show a new side to China, but the agreement to develop a so-called petro-yuan is more significant for business. Traded through the Shanghai Petroleum and Gas Exchange, this gives new strength to the digital yuan.
Second is the increased impetus for Currency Multipolarity, which supports the yuan’s internationalisation. This is part of a broader move towards de-dollarisation. It involves greater acceptance of the yuan as a settlement currency. Malaysia has indicated support.
This is the meeting between French President Macron and Xi Jinping, including drinking tea together in Guangzhou. The main thrust of the meeting was an improvement in economic relations between China and France to maintain economic and trade interests. Macron signalled that France would not become a vassal of the US.
The fourth area of interest is the meeting between Xi Jinping and European Commission President Ursula Von der Leyen. There was a NATO (North Atlantic Treaty Organization) message, but more importantly, there was also a EuroZone trade message. European countries are hungrily eyeing the reopening of the Chinese economy. There is little appetite in Europe for China to be captured by US sanctions.
See also: China tightens securities lending rule to support stock market
The fifth area offers a unified ticketing system for high-speed rail across BRI (Belt and Road Initiative) countries. This is important because it suggests that China standards will become entrenched across BRI-supported projects. Inevitably this will lead to wider standards penetration across many different software platforms. China’s compatibility will provide a competitive advantage.
Singapore’s recent MOU on Cooperation in Import and Export Food Safety means both countries will engage in deeper exchanges around food safety regulatory frameworks and policies and strengthen bilateral cooperation in food trade.
Sixth is the series of meetings with African leaders. Like almost all of the Global South, they do not want to be involved in sanctions. It’s a prescient reminder that the bulk of the world economy lies outside of the West and that this economy has room to grow rapidly. BRIC countries have a combined GDP greater than the Group of Seven (G-7) nations.
See also: Eight reasons why I am still in favour of China stocks
Xi’s meeting with Russian President Vladimir Putin is the seventh area of interest. It indicates growing China’s strength and influence in the geo-political environment.
The Americans and their allies would like business to believe there are increasing risks in doing business with China. Sanctions, attacks on Chinese companies like TikTok, trade blockages on the chip and other industries back this. However, in recent weeks China has shown it has a much broader range of international connections that are not part of this Western bandwagon. This includes the Global South and many European countries wishing to continue trading with China.
Technical outlook for the Shanghai market
The Shanghai Index breakout paused as it approached previous highs near 3,333 and then retreated. This retreat and retest of support is the usual behaviour associated with a breakout above strong resistance levels. The rally breakout moved above the upper edge of the sideways trading band in a strong breakout, moving towards an upside target near 3,350. This target is calculated by measuring the width of the trading band and projecting it upwards in a measured move.
The longer-term upside target is near 3,410, near the high the market reached in July 2022. This target is calculated by doubling the value of the width of the trading band. However, there is a high probability the market will consolidate near the first target level of 3,350.
The previous period of extended sideways consolidation provides a base for the strong breakout.
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A failed retest of support will see the index return to the sideways trading band between support near 3,220 and resistance near 3,280. However, the Guppy Multiple Moving Average (GMMA) relationships suggest this is a lower probability outcome.
During March, the index used the lower edge of the long-term GMMA as a support feature. The limited degree of compression in the long-term GMMA indicated a bullish bias in the market early. This was confirmed when the long-term GMMA turned up and developed wider separation. This long-term group expansion confirms that investors are aggressively entering the market as buyers. Investor activity continues to support the rally, which traders lead.
The behaviour of the short-term GMMA also confirmed the breakout. The short-term GMMA has moved well above the long-term GMMA and is widely separated. The lower edge of the short-term GMMA is above the resistance level, near 3,280, which adds to the bullish environment.
The previous uptrend line will now act as a resistance level. This will limit the extent of any fast breakout above resistance near 3,280. If the market moves exceptionally rapidly from the current level, the trend line resistance value is near the longer-term trading band price projection target of 3,420.
This breakout is also consistent with the fan pattern (not shown on the chart). This pattern signals a long-term trend change. It is also consistent with the double bottom pattern (not shown on this chart). The depth of the double bottom pattern is measured and then projected upwards to give a long-term target of around 3,860.
In the short term, the index retests the upper edge of the trading band as a support level before continuing with the uptrend. In the longer term, the breakout is a bullish indication of a longer-term uptrend.
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
