I asked for their assessment of Trump’s potential impact on China trade, specifically in relation to cross-border trade settlement and the weaponisation of the Swift (the Society for Worldwide Interbank Financial Telecommunication) system. The participants chose to sidestep the question, but businesses do not have this luxury. This sleeper issue strikes at the heart of how global trade operates.
With tariffs, it makes sense to focus on how they affect transport and the small details of costs and fees. However, global trade grinds to a halt if settlements are delayed, raising counterparty risk and the likelihood of default.
Trump has already threatened to punish any country that seeks to settle cross-border trade using the proposed BRICS alternative — a shared mechanism under discussion by Brazil, Russia, India, China and South Africa. This chokehold on cross-border settlement via US dollars targets China most directly. Although the issue has faded into the background, the potential abuse of the Swift system remains very much alive.
This is an issue that impacts every trade settlement where payment is converted into or from US dollars. It includes the business order for components from a third country, where transactions are filtered through the Swift settlement system, requiring multiple conversions into and from US dollars.
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While it is commonly referred to as a Swift issue, that’s not strictly accurate. Swift is a messaging system that conveys instructions from one bank to another. It tells the co-respondent bank where the funds are coming from and where they need to go.
The US has a chokehold on the Clearing House Interbank Payment System (CHIPS), which Swift uses for large US dollar transfers. This extends the reach of US regulations beyond the statutory borders of that nation. As Trump showed, the US dollar-dominated Swift trade settlement system can be weaponised.
The co-respondent facilitators — the American banks — sit at the core vulnerability of the system because they are subject to decisions made by the US government, and more exactly, by decisions made by Trump.
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A unilateral decision taken by US regulators can exclude a non-compliant company from transacting international business in US dollars. Already, the Swift cross-border trade settlement system has been weaponised to freeze, halt and hinder trade settlement in dollars for Russia, Iran, Venezuela, selected criminals and others.
Many people support these financial sanctions that manipulate the Swift system. The question is, what level of support would be given if this financial weaponisation were applied to trade transactions with China? This is not an idle question given Trump’s vindictive and erratic behaviour exercised through executive orders.
This is a sleeper issue. Businesses must start considering how they would continue trading with China if Trump were to prohibit US co-respondent banks from settling dollar-based transactions. It’s a question they may wish to raise with their bank — the one that handles their trade settlement.
Technical outlook for the Shanghai market
The Shanghai Index has dipped below the projected trend line B. This has the potential to slip further and reverse the prevailing uptrend. However, the Guppy Multiple Moving Average (GMMA) indicator shows reasonably strong support that may halt this retreat.
The long-term group of averages in the GMMA indicator provides a guide to the way investors are thinking about the market. Investor support is critical for any trend continuation. The wider the degree of separation in the long-term GMMA, the greater support for trend continuation.
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Narrow separation shows weak support for the trend as the index retreats; investors who have not entered at lower prices begin to enter the market as buyers because they are worried about missing out on the rising trend. They buy the dip.
Narrow separation also shows that few investors are prepared to do this. There is less confidence in the trend and its ability to rebound.
Wide separation shows that investors are more confident with a wider spread of catch-up re-entry points and values. Wider separation shows there are few sellers amongst investors.
The current long-term GMMA relationship has reasonable separation, and this is the key support feature for any pullback and potential rebound. A rebound rally has resistance at the value of the uptrend line B. It has the next resistance level near 3,435. This is long-term historical resistance at the upper level of the trading band.
The key indication of a resumption of the uptrend comes when the short-term GMMA bounces off the long-term GMMA. This shows that traders believe the uptrend can continue. Typically, they act much more quickly than investors.
A sustained fall below the lower edge of the long-term GMMA as support near the lower edge of the trading band near 3,160.
The key feature to watch is the market behaviour around the long-term group of moving averages. This is a critical support feature.
Daryl Guppy is an international financial technical analysis expert. 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 former national board member of the Australia-China Business Council. The writer owns China stock and index ETFs
