Software and games developers, exporters, logistics chain managers and payment gateway providers are all watching the TikTok and WeChat bans in the US with trepidation and horror. These bans come on top of the long-running campaign against Chinese telecom giant Huawei. These cannot be considered in isolation as they now form a pattern of behaviour that threatens every foreign business operation in the US.
It also moves a long way along the path where software will need to be developed for China and another version developed for countries dominated by US protocols. It is a step along the path where everyday companies will be forced to use different cross border currency transfer systems to be able to complete international business. The real danger is that the system may be both exclusive and, on one side at least, sanctionable.
This pattern of coercion has three aspects and it starts with Huawei. Here, the intention was to exclude the company from government business and by extension from non-government business. The intention was to drive them out of the global market and in the process destroy the company.
Much of the campaign was built around unproven security risk allegations, particularly to China’s 2017 National Security Law which requires companies to respond to Government security agency requests. The fact that these requirements were no different to the 2018, the Clarifying Lawful Overseas Use of Data (CLOUD) Act — which subjected US tech companies to the same legal requirements — appeared to be irrelevant.
The second aspect comes with the banning of TikTok, a popular video-sharing app. The objective here is to use politics, not the market, to kill business competitors. A thriving and successful business was hijacked by political decisions and the spoils handed to TikTok’s American competitors. This strategy can be deployed against any company that threatens the market share of a US company and that’s the real danger for international business.
The second pattern also rests on unproven allegations of a security risk. These can be levelled against any software programme, game or service that collects user data.
The third aspect of the pattern is the ban imposed on Chinese-owned messaging app WeChat. The US is not banning WeChat because of any specific security threat, but simply because it is a popular Chinese app. WeChat poses no competitive threat to Facebook in the US. The WeChat ban is a direct attack designed to degrade WeChat functionality and ultimately to destroy the service delivery in the US. In part, this is achieved by marshalling the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and Clearing House Interbank Payments System (CHIPs) dollar transfer systems to prevent WeChat enabled payment transactions. There is no suggestion that WeChat can survive if — like TikTok — it partners with a US company.
This is a capricious action, loosely justified with vague references to security, but in reality, the service is singled out because of its ownership.
This poses two sets of questions. The first set is for business. In this new environment how do you know your company will not be next in the firing line for an executive order? Which of your payment transactions or transaction services will be blocked? Can you afford to develop two software versions, or manage two software logistics processes to operate in separate markets?
For investors there is only one question. What risk does this pattern of coercion pose for my investment in any company that has business with China?
Technical outlook for the Shanghai market
The Shanghai Index remains below the long-term uptrend line and the lower edge of the long-term Guppy Multiple Moving Average (GMMA). The rebound rally has failed, and the index is again testing the lower edge of the long term GMMA. This combination of features is often an indication of a change in trend.
What do traders need to see to prove this is just a temporary retreat prior to the resumption of the uptrend?
The first item of proof is the ability of the Shanghai Index to rebound and close above the value of the upper edge of the long-term GMMA. This rally was temporary and has failed.
The second item of proof is when the value of the lower edge of the short-term GMMA moves above the upper edge of the long-term GMMA. This can also be described as a crossover of the 15 and 30-day exponential moving averages. The rebound rally dragged up the short term GMMA, but it failed to move above the upper edge of the long term GMMA. This is a bearish signal.
It is more possible that the Shanghai Index is developing a broad consolidation pattern with resistance near 3,440 and support near 3,210. This defines a very broad sideways trading pattern or trading band. The pattern is proved when the index again successfully tests 3,210 as a support area.
In this situation the depth of the trading band consolidation is measured, and this value is used to set an upside breakout target. This is near 3,680. This analysis should be applied with caution as it is a longterm pattern development and target.
The evidence for the failure of this pattern is a sustained move below the support area near 3,210. The same measurement method is used, and this sets a downside target near 2,980. This is near to the historical resistance and support features.
It is too soon to know if this pattern of behaviour can be defined as a trading band consolidation.
The potential bearish outcome is a continuation of the downtrend after the short term rebound rally.
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.
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.
