It is a fair to say that most readers who see this week’s headline will assume the story is about the US and the West decoupling from trade with China. This is certainly consistent with President-elect Trump’s most recent pronouncements. It also follows the high-profile decoupling with the earlier ban on Huawei and Chinese drone makers.
However, that perception would be wrong. Instead, more Chinese companies are choosing to decouple from the US and the West. Huawei was forced into decoupling by the imposition of sanctions and trade bans. The tech company’s reaction, survival and growth is an example of what has become broader market trends.
Nationally, China has implemented some recent policies that decouple trade with the West. This applies particularly to the export of some of the rare earth materials used in semiconductor and military applications. This is usually considered to be part of a tit-for-tat exchange in response to US bans on computer semiconductors and other products. However, it is also part of a broader context of China’s decoupling from the West.
This is not to say that China will abandon these markets. Instead, it suggests that China will reduce its reliance on these markets and instead seek to open new markets. This process is consistent with the development and expansion of the Belt and Road Initiative.
Western observers fail to see the link between the building of infrastructure like roads, ports and airports and the way this enables trade and economic development. This infrastructure is key to opening new markets that will come to replace markets lost in the US. It won’t happen overnight, but steady progress toward this objective has already been achieved.
Western firms in China are struggling and Chinese firms have taken notice. To protect their operations, domestic companies are localising supply chains to ensure the material flow of goods and components does not depend on foreign companies. They are reducing their supply chain dependency and increasing their on-shoring.
Decoupling from the West has three important business impacts. First, as shown by the Huawei experience, is how decoupling responds in China’s still growing domestic market. Huawei has not only survived but thrived in this market, displacing Apple as the leading cell phone provider.
See also: UBS Global Wealth Management urges Chinese stock investors to stay ‘defensive’
Competition in China has become stronger and more sophisticated. The foreign premium once attached to products and services has diminished.
The second business impact is the increase in Chinese exports and market penetration outside the US and traditional European markets. The electric vehicles (EVs) coming to Singapore are not going to the US. Domestic markets of countries like Singapore have become more crowded with Chinese products and that impacts a broad range of local business activity.
The third impact is higher Chinese penetration of non-Western markets in Asia and the Global South. This creates a more competitive environment for any other country seeking to grow its export business in these regions.
See also: Chinese stocks tumble in worst start to a year since 2016
Decoupling works both ways, so businesses cannot afford to be complacent.
Technical outlook of the Shanghai market
The Shanghai Index breakout continues to move strongly and test the resistance at around 3,435. This is a strong move above the downtrend line that defined the temporary retreat in the market. The rebound confirmed the second anchor point used to plot the longer-term uptrend line.
The rebound developed from the mid-point of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. The strength of support is shown by the consistent degree of wide separation in the long-term GMMA and this has added impetus to the uptrend continuation. The consistent wide separation in the long-term GMMA indicates that investors remained as buyers as the short-term downtrend developed.
This wide separation in the long-term GMMA also suggests that any retreat from the resistance near 3,435 will find good support from the long-term GMMA and the projected uptrend line.
A breakout above the 3,435 resistance level has an initial upside target near the previous high of 3,675. The peak high acts as a psychological resistance level. The weekly chart shows longer-term resistance near 3,700 to 3,720. The breakout has a high probability of consolidating in this resistance area. A breakout above this level has a longer-term target near 4,600.
A retreat from 3,435 and rebound will help to confirm the placement of the longer-term uptrend line by creating anchor point D. This would be the third anchor point for the trend line and it would increase the reliability of the line. The line could be projected further into the future where it is expected to act as a new support level.
This is a strong trend continuation pattern of behaviour. Traders will treat any pullbacks as temporary and use these as an entry point of temporary weakness in a continuing uptrend. Continued wide separation in the long-term GMMA confirms investors are of the same opinion and using the pullbacks to add to long-term positions.
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
