(Dec 9): In what has become a normal week, US President Donald Trump has imposed new tariffs on friends, foes and innocent bystanders. This includes the French, and several Latin American countries. He has indicated that a China trade deal may be off until after the next US election. The impact of this attack on the global rules-based order on markets was noticeable.
In contrast, China reaffirmed support for the World Trade Organization, but is this leadership enough? Unless this is supported by other WTO members and a coalition be built to back up China’s support for the WTO, then China’s leadership by itself is probably not enough. So, the question is, how is the coalition to be built? What is required to mobilise and empower smaller WTO members to get behind the leadership provided by China?
Speaking at a Belt and Road business forum in Xi’an recently, I offered four suggestions. The first is a need for mid-sized members of the WTO, such as Australia, to be encouraged and supported to recognise the threat to their own prosperity that would be posed by an undermining of the WTO.
Second is for a need for the smaller members of the WTO to develop a coordinated and common response to the US attempts to dismantle or sabotage the structure and operations of the WTO. This response may be to support the efforts of mid-sized members. It is appropriate to develop coalitions of influence to encourage those with greater influence to support the stand.
Third is the need for representative business chambers to be more active in their support for the WTO and to make this support known to political leaders. Political leaders must be told by business that backing for the WTO is essential.
Fourth is recognition that the WTO is a product of a previous historical period, and it does need reform to enable it to function effectively in a changed economic environment where China plays a far greater role. Reform does not mean dismantling. Business councils need to work with their WTO representatives to encourage reform so that the WTO can better serve the interests of the global community.
The core of China’s support for free trade is shown with the Belt and Road Initiative. This is compatible with WTO architecture and consistent with multilateral trade agreements. The BRI’s structure supports the WTO multilateral trade environment.
Business chambers need to work closely with governments at all levels to explain the way they can engage with the BRI. This includes greater explanation and education so that they have a better understanding of all aspects of the BRI. When support comes from the business community and business chambers, then this counterbalances conflicting advice that may come from foreign sources opposed to the BRI.
Imperfect as it is, the WTO is an essential foundation of global trade, while the BRI is an integral part of the multilateral trade environment. Together, they can contribute to a stable trade environment that is conducive to sound and stable investment decisions. Investment decisions that rely on a stable US trade environment are susceptible to a greater level of risk as tariffs are capriciously threatened, applied or withdrawn. This creates a situation that calls for defensive investment approaches.
Technical outlook for the Shanghai market
The Shanghai Index continues to move slowly down towards support near 2,830. This is a slow and steady decline, with the index clustering along the lower edges of the short-term Guppy Multiple Moving Average (GMMA). There is no indication of trend reversal or strong, sustainable rally behaviour.
However, the decline shows no evidence of panic selling with a fast fall or large intraday dips.
This restrained trend movement increases the probability of good support developing near 2,830 because the downward pressure is not very volatile.
The GMMA is used to assess the strength of the trend. The long-term GMMA is showing steady separation. The upper edge of the long-term GMMA is near to the value of the central support resistance level near 2,920.
The short-term GMMA indicates the way traders are thinking. This group is also steadily and consistently separated. There is no evidence of compression, so this suggests steady selling. Traders are waiting for the test of support near 2,830 before they enter the market in anticipation of a trend change. This steady separation suggests any rally will be short-lived.
The separation between the two groups of averages is also consistent. This consistent separation is a characteristic of a steady and well-established trend. The key future event is the strength of the support behaviour when the index reaches 2,830.
A successful consolidation and rebound requires three main features to develop before a new uptrend can be established.
The first bullish feature for any rebound from support is a change in the relationships between the GMMAs. The short-term group of averages must compress, turn upwards and move above the upper edge of the long-term GMMA. This confirms a bullish environment.
The second feature is the support and resistance level near 2,920. The index must be able to move above this level and use it as a support level before any new uptrend can develop.
The third resistance feature is the value of the downsloping trend line. The value of this downtrend line will act as a resistance level for any rally above the 2,920 level. The current trend line value is near 2,975.
The combination of the downtrend line and the horizonal support level near 2,920 creates a downsloping triangle pattern. A downside target is calculated by measuring the height of the base of the triangle and projecting this value downwards.
The 2,800 target level is below the value of the lower edge of the long-term support level near 2,830. This suggests that in any strong market fall, the Shanghai Index may dip to the 2,800 level before rebounding and developing a consolidation near 2,830.
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 more than a decade. 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.
