In a show of imperialism redux, the UK is sending the aircraft carrier HMS Queen Elizabeth to lead a naval group to sail through the South China Sea.
It will be a spectacular sight to see it berthed alongside a Singapore wharf. However, mixed with an understandable pride will also be a sense of anxiety because it presages a ratcheting up of tension not just in the South China Sea, but with China itself.
In Australia, the Home Affairs Department Secretary Mike Pezzullo warns that they “hear the beating drums and watch worryingly the militarisation of issues ... bracing yet again for the curse of war”.
Australia appears to have developed an unhealthy thirst for arms, although it argues that the massive defence build-up is done for all the right reasons — wrapping up submarine purchases, air force expansion and defence base upgrades are necessary for preserving peace in the Indo-Pacific.
However, the Weapons of Mass Deception strategy used to promote the 2003 Iraq conflict are being deployed again.
The US has just passed the Strategic Competition Act, which includes up to US$300 million ($398 million) in an openly described effort to spread information on the “negative impact” of the Belt and Road Initiative (BRI) and promote “anti-Chinese influence” programs.
This will make it even more difficult to establish what is really happening in China.
Readers of the mainland media are pushed to find a matching ‘let slip the dogs of war’ narrative in the Chinese language newspapers.
President Xi Jinping has reiterated his long-standing Chinese policy on Taiwan, which the West now suddenly views as a threat.
Despite the rollout of the BRI and Covid-19 vaccine support, China has squandered much of its potential soft power.
Although it has added to its naval forces in particular, China does not have a proven hard power.
They have massive market power and that is a significant point of vulnerability for business.
It is easy for business to dismiss talk of the ‘drums of war’ as just ill-advised and incautious political rhetoric but such dismissal would be unwise.
The commitment of the aircraft carrier and support group on an international tour of past British empire glory requires serious money.
It is not just a rhetorical whim, so its intent and potential impacts deserve closer analysis.
It appears there is not a great deal that business and investors can do to stop this juggernaut of propaganda and misinformation that gained traction with the Covid-19 crisis and former US President Donald Trump’s misleading commentary.
Unless there is a concerted rallying of opposition, then it may be getting too late for that.
However, business and investors must start to incorporate these possibilities into their plans and investment decisions.
Against this background, here are a few starting points that should be under active consideration in board rooms across the region.
For example, how secure are China supply chains, both physically and politically?
What vulnerability is exposed via joint venture activity with China partners?
What commercial arrangements with China are at risk of revocation? How vulnerable is the ongoing Chinese capital investment in our business operations?
Finally, how vulnerable is our business activity in China or with China? These are confronting questions. The risk does not come from China, but comes from the West.
These questions should not need to be asked, but the beating of the drums from the West means these questions need to be on the table for boards and for investors.
Technical outlook for the Shanghai market
The Shanghai Index failed to remain above the 3,460 level.
It plunged on April 27 and then quickly recovered on the same day to create a dragonfly Doji pattern.
This chart pattern is often associated with a trend reversal. It cannot be applied in the same way in this situation because it is not developed at the end of a clear trend.
However, the rapid rebound suggests a rapid shake-out of the bears before the bulls took over.
Also, the dip found support near the value of the uptrend line and gives the uptrend line four anchor points. This suggests a strong probability of uptrend continuation.
This forms an upsloping triangle pattern as the base of the pattern is 125 index points and was created around March 9, taking this value and projecting it above 3,460 gives a target near 3,585.
This is a useful theoretical target because it does not match any previous support resistance levels.
In this bullish situation, it is not unusual for the market rise to exceed the chart pattern target and reach the next resistance level.
With the Shanghai Index, this is near 3,620.
The Guppy Multiple Moving Average (GMMA) indicator is used to assess the way the breakout trend may develop in the future following the current index rebound from the uptrend line.
The continued compression in the long-term group of averages confirms investors are not strongly bearish.
The compression also suggests investors are waiting for a strong lead from traders and proof the breakout can remain above 3,460 before they enter the market against strong buyers.
This, combined with other bullish features, suggests the potential for a strongly supported breakout trend.
The short-term group of GMMA averages provides information about traders. The index twice tested the lower edge of the long-term GMMA. However, the short-term GMMA still remained against the long-term GMMA when the market dipped during the week. This shows traders are growing more confident.
GMMA analysis helps us to understand the trend. Trading band analysis helps establish trend targets. The long-term trading band dominated in the second half of 2020.
The first feature of this trading band is the strong resistance level near 3,450.
The second feature in the trading band is the support level near 3,360 while the third feature is the midpoint of this broad trading band located near 3,360.
The index oscillated around this level — the market was bullish when it remained between 3,360 and 3,450. The index was bearish when it was between 3,240 and 3,360.
Finally, the width of the broad trading band gives an upside target near 3,630 while the short-term breakout target is near 3,540.
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.
