For the first time since introducing the Blocking Rules five years ago, China has officially activated them against US sanctions targeting Chinese refineries. Although this is a case-specific application of the rules, it also presages a broader strategic shift in the trade landscape.
China is signalling that US domestic law is no longer automatically accepted as global law for companies operating in China. This represents a direct challenge to the concept of extraterritoriality, most commonly illustrated by the status of foreign embassies. Although located in Singapore, the grounds of the US embassy are considered US territory and are subject to US law. As a result, diplomatic staff cannot be held accountable for breaches of Singaporean law.
More broadly, there was an informal acceptance of US extraterritoriality through the long-arm reach of US jurisdiction. This was possible because most international companies almost automatically complied with US sanctions in order to retain access to US dollar settlement via the Society for Worldwide Interbank Financial Telecommunication (Swift) system.
Any international trade settlement, large or small, conducted using Swift banking codes is vulnerable to unilaterally imposed US sanctions. This is no longer an issue affecting only large international companies.
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The application of the blocking rules underscores how sanctions, energy security and supply chains are becoming increasingly central to broader US-China strategic competition. This creates challenges for Singaporean companies exporting to both China and the US.
For many businesses, this may accelerate the need to separate China-related business from US and other global operations. This will require developing processes to navigate two increasingly divergent legal systems.
Compliance with one system or the other is no longer a technical box-ticking exercise. For some business operations, it will become an existential decision.
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If they comply with US sanctions, they may violate Chinese law. If they follow Chinese law, they may face US sanctions, including exclusion from the Swift trade settlement system.
The world is entering a fragmented global legal and financial order. US rules no longer automatically carry extraterritorial effect. There are no easy solutions, but awareness of these shifts is essential for forward planning.
Technical outlook for the Shanghai market
The operation of the Shanghai Index has been disrupted with two weeks of shortened trading due to May Day holidays. The market has persisted with its fast rise, exceeding the projected target level near 4,100 and moving strongly towards the 4,300 target level.
The 4,300 target level is calculated by projecting the width of the trading band. The 4,100 resistance level on the Shanghai Index has been a powerful feature, where previously the index spent many months oscillating around this level. It provided no barrier to the fast rise to 4,229. However, it may provide a support level for the inevitable pullback.
This is a continuation of a classic Guppy Multiple Moving Average (GMMA) breakout in the Shanghai Index. It has developed into a fast-moving uptrend. The placement of the trend line is adjusted to take in two anchor points.
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The trend line is plotted through anchor points A and B. The trend is confirmed by a pullback and test of the projected trend line. This creates a third anchor point, and then the trend is confirmed.
The value of the trend line is near to the value of the lower edge of the short-term GMMA. A fall to near this level followed by a rebound would create a third anchor point for the trend line.
The short-term group of averages is well separated, confirming strong support from traders. The index is clustering along the upper edges of the short-term GMMA. This is bullish behaviour.
The short-term group of averages has completely moved above the value of the long-term GMMA and maintained a steady degree of separation. This shows steady optimism from traders. The long-term GMMA has quickly turned up and compressed. Proof of long-term support from investors has come as the long-term GMMA expanded. This behaviour indicates that investors become strong buyers.
A retreat in the index to the lower edge of the short-term GMMA, or to the upper edge of the long-term GMMA, remains consistent with the continuation of this uptrend.
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 Chinese stock and index ETFs.
