SINGAPORE (May 20): The Chinese are not alone in not understanding the vagaries of US President Donald Trump, but they do have a unique appreciation of his contribution to the Chinese economy. On the sidelines of a Belt and Road Initiative conference I spoke at, it was suggested that the two greatest contributors to China’s opening-up were Deng Xiaoping and Trump. It was said only partly in jest. The pressure exerted by Trump on China has enabled Premier Li Keqiang to advance a number of opening-up measures that had been previously blocked or slowed by hardliners. It has also speeded up the modification and implementation of BRI measures.
This is seen most clearly in market substitution. Australian wheat exports have collapsed 50%, as they have been supplanted by wheat from the far side of Central Asia. Improved agricultural techniques, coupled with access to BRI fast rail, mean this wheat is delivered faster and cheaper than Australian wheat. Where you can grow wheat, you can also grow soybean, so there is no absolute need to increase imports from the US.
The growth markets of the Silk Road, including Southeast Asia, offer a market in which growth outstrips US growth potential. BRI is positioned to bring these markets together through trade pacts and improved logistics.
The Chinese are very aware of the precedent set by the Plaza Accord of 1985, in which, under intense US pressure, Japan agreed to revalue its currency. Many in China believe the Plaza Accord represents a successful American attempt to thwart the rise of Japan.
They are determined not to let the same thing happen again. One of the lead negotiators of the Plaza Accord team was Robert Lighthizer, who is now the chief China trade negotiator applying old approaches to a new situation. China has not missed the significance.
China also observes Japan’s response to the heavy-handed tariffs, which are, in effect, a tax on the US consumer. Tariffs were the spur that drove Japanese innovation, as the more expensive cars were loaded with advanced features that made them even better value, albeit at a higher price to the consumer. Ultimately, higher tariffs only increased the Japanese car penetration into the US market.
One group of winning strategies in The 36 Stratagems is to make a sound in the east and strike in the west. The US is focused on noisy tariff hikes, but there is significant action taking place elsewhere. On May 13, the People’s Bank of China did not set a trading band for the renminbi and the exchange rate nudged 7, with trading at a high of 6.97. The trading band was reimposed on May 14, but the message is clear. Unrestrained, the renminbi will move above 7. All that is keeping it below 7 is the PBOC-imposed trading band. Should this be removed, or widened, the renminbi will spike above 7 and provide a cushion for China exporters.
Trump infamously co-wrote a book titled Trump: The Art of the Deal, which summarises a uniquely American approach to deal-making. Unfortunately, he has not delved into The 36 Stratagems, so, unlike US businessmen who actually trade with China, Trump and his advisers have a poor grasp of how the Chinese go about deal-making. The result is unnecessary pain for US consumers and allies as markets are distorted by tariffs and subsidies. The year-long sideways movement in the Dow Jones Industrial Average belies claims of continued economic strength.
In my formal and informal conference discussions in China, there was an air of confidence that although the trade war would inflict some pain, there was no doubt about who would emerge stronger.
Technical outlook for the Shanghai market
The Shanghai Index has developed strong consolidation around 2,880. This is slightly above the historical support level near 2,820. This is significant from a technical perspective because it gives room for the index to fall lower to 2,820 and then rebound. If this were to happen, it sets up the conditions for a bullish Relative Strength Index (RSI) divergence pattern. It seems counter-intuitive to be happy about another retreat in the Shanghai Index, but a bullish RSI divergence pattern will give traders and investors increased confidence in the rebound rally and drive a new sustainable uptrend.
The most reliable indication of a change from a downtrend to an uptrend is the RSI bullish divergence signal, and it is this signal that traders are watching for as the index falls. The divergence means that the trend line connecting the valley lows on the index chart move in the opposite direction to the trend line connecting the valley lows on the RSI indicator.
This type of reversal signal develops over several weeks and requires a rebound, retreat and rebound pattern to develop in the index.
The behaviour of the Guppy Multiple Moving Average also suggests a bullish consolidation. The short-term GMMA has plunged below the lower edge of the long-term GMMA, but it has not clearly moved below the longterm GMMA. The value of the upper edge of the short-term GMMA is near to the value of the lower edge of the long-term GMMA. Compression is slowly developing in the short-term GMMA, and this suggests that selling pressure is reducing.
The long-term GMMA has also turned down, but it is not a rapid decline like the compression and decline seen in February 2018. This shows that investors are nervous, but they have not panicked.
This confirms that investors are more cautious in their reactions and they will react more positively to any rebound rally and come into the market as buyers.
The consolidation is bullish, but the strength of the consolidation is not confirmed. Traders and investors watch for future retreats and a test of historical support followed by a new rebound.
The area between 2,700 and 2,820 acted as a broad trading band in 2018. Traders and investors are alert for the potential for this trading band to again act as a support and consolidation area. Activity within this consolidation area may also develop into the conditions for an RSI bullish divergence pattern.
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.
