The way the Digital Silk Road and the Belt and Road Initiative (BRI) enable communities to expand and join the 21st century economy was the focus of my address at the Belt and Road Trade and Investment Forum in Beijing on Dec 2.
These communities include those in Central Asia, reaching into Europe and the cluster of landlocked hinterlands in Southeast Asia.
Whilst their inclusion is welcome, it also increases the level of competition in the Chinese market.
The Digital Silk Road is an integral part of the BRI, a global infrastructure development strategy adopted by the Chinese government to invest in nearly 70 countries and international organisations. Think of the former is the soft infrastructure that brings added benefits to the hard infrastructure so often associated with the BRI.
This week saw the first trains running on the high-speed rail connection between the Chinese city of Kunming to the Laotian capital Vientiane. The physical and market benefits of this hard infrastructure are easy to measure.
However, this rail line is as much part of the Digital Silk Road as it is part of the physical infrastructure roll out of the BRI.
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A fast rail system relies on software to manage the speeding train on the rail tracks, to handle scheduling and co-ordinate ticketing. A fast train becomes a slow train if it has to stop at borders to complete customs and quarantine requirements. The train and railway also include blockchain software that expedites customs clearances for freight, and the necessary documentation for passengers.
This soft infrastructure includes the use of Digital Silk Road blockchain applications to reduce cross border trade friction. This soft Digital Silk Road infrastructure has obvious benefits for fast trains, but it also has broader implications for the handling of all crossborder goods transactions delivered by ships and the ports that manage them.
Singapore is already well advanced in adopting what is rapidly becoming Digital Silk Road standards. Shipping from some other locations is slower to adopt these standards due to political pressure.
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A significant benefit of the Digital Silk Road is the potential use of China’s Digital Currency Electronic Payment (DCEP) or sovereign digital currency as a frictionless cross-border financial transaction process.
Trade settlement using DECP essentially eliminates the need for a carnet, letters of credit, delayed settlement as customer banks find problems with funds transfers and reduces the risk of counterparty insolvency.
DCEP transactions are real-time settlement without the delays associated with currency exchanges and bank paperwork. Banks are no longer needed to issue shipping guarantees to the buyer’s customs broker or freight forwarder because DCEP blockchain transactions are secure and instant. The virtual elimination of counterparty risk changes the cross-border trade landscape.
This blockchain distributed ledger brings advantages beyond speed and certainty of trade settlement. It is a major antidote to corruption. This includes the large-scale threats and the petty minor irritations experienced at some borders.
When cross-border trade is fully digital and blockchain based, there are significantly reduced opportunities for corruption and facilitation payments at all levels of the process.
The Digital Silk Road reduces the cost of doing business and opens crossborder trade to new participants.
Technical outlook for the Shanghai market
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The Shanghai Index breakout rally has consolidated above 3,580. The rally has stumbled, but not retreated. The 3,580 level and line B is offering support for a rally continuation. The rally first broke through resistance near 3,580 on Nov 23 but was unable to hold above this level. This second breakout is stronger and has good support from other market features.
The initial rally quickly moved above the long-term group of moving averages but they showed no expansion. With the latest rally breakout, the long-term Guppy Multiple Moving Average (GMMA) is turning upwards.
It is showing limited signs of separation. This suggests that investors are beginning to support the rally breakout. The long-term group of averages is a proxy for the way investors are thinking.
The current rally is showing some support from investors. The long-term GMMA has turned up but they have very narrow separation. This behaviour suggests that investors are beginning to believe that the rally is a precursor to a trend change. A sustainable breakout is signalled when investors move quickly to follow the rally and become enthusiastic buyers on any pullback.
This investor buying support is evidenced by a rapid expansion in the long-term GMMA. In the first breakout, the short-term GMMA moved completely above the upper edge of the long-term GMMA but the rally failed to attract support from investors.
In the current rally, the short-term GMMA has again expanded and moved completely above the upper edge of the long-term GMMA. This time there is good separation between the two groups of moving averages, and this suggests much stronger support for the developing uptrend.
Any breakout is limited by the longterm resistance near 3,580. This resistance level is defined as the extension of the uptrend line A. This is the upside target for this breakout.
A successful breakout requires that the 3,580-level act as a support level in any index pullback. This level has been tested with intra-day lows. Investors watch for a stronger successful test of this level before joining the new uptrend. A stronger test of this level gives confidence that the support level is strong and that the uptrend can continue.
Traders and investors watch for the long-term resistance level near 3,580 to again act as a support feature for any retreat and provide a base for a rebound continuation of the uptrend.
Any new sustainable uptrend requires support from investors coming into the market as buyers. The evidence of this comes from an expansion in the longterm group of averages. The short-term group of averages needs to stay above the long-term group. It is the expansion of the long-term group of moving averages that proves investor support.
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
Cover photo: Bloomberg
