Mexico is the largest “assembler” of cars outside of China. The Audi you drive is most likely assembled in Mexico, and this brand is a good example of the issues facing business. The Audi is designed in Germany and is a product of German engineering. The consumer buys the vehicle for this brand status.
However, the Audi is assembled from thousands of parts and components, the vast majority of which come from China. Consider the software components that provide advanced driver safety as a representative example. They may be designed in Germany, but they are produced in China to be installed in the Audi assembled in Mexico and shipped into the US.
The Trump charges against Mexico are a large part of fiction mixed with a little fact. China does export a very small number of BYD and Haval cars to the US. Mexico also exports a small number of these cars to the US. In total, this is less than 0.5% of total cars sold in the US, so why the fuss?
China does export significant quantities of parts and components to Mexico, which are used in cars like the Audi and American branded vehicles, that are assembled in Mexico which are then exported to the US.
See also: China warns BYD, rivals to self-regulate as price war heats up
There are several issues here. The first is that it is nigh on impossible to produce a solely made-in-America car. The modern car includes thousands of components, from light bulbs to navigation screens, that are made outside of the US and which, in the foreseeable future, cannot be made in the US, let alone at a competitive price.
The global supply chain is too intermeshed for it to be easily or quickly pulled apart.
The second issue which concerned the ambassador and which should concern us is the drive to place tariffs on the products — a car, in this example — that contain components from China. There is little indication of a tariff on individual components. The current thinking is that US officials may impose a tariff based on their calculations of the level of Chinese components in the product.
See also: Chinese listing spree sparks revival hopes in Hong Kong stocks
That is a process fraught with danger because it allows the US to more or less arbitrarily decide the level of Chinese components without recourse to an independent authority to verify the accuracy of the calculations.
Step away from Mexico and the assembly of cars. This concept of placing a tariff on Chinese components in a product, be it a computer, electrical equipment or medical apparatus, changes the pricing formula and the competitive structure of business.
Investors need to re-consider their exposure to companies whose primary market is the US because their competitiveness may be under threat from this Mexican standoff.
Technical outlook for the Shanghai market
The Shanghai Index remains below the projected trend line B but is at the upper edge of the long-term group of moving averages in the Guppy Multiple Moving Average (GMMA) indicator.
The index has moved above the short-term downtrend line C. A further close above trend line B will confirm a resumption of the uptrend.
The GMMA indicator shows reasonably strong support that acts as a springboard for this retreat.
The narrow separation in the long-term GMMA shows relatively 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. The narrow separation shows investors all have a close agreement on the correct price and value relationship in the market.
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A wide separation shows that investors are more confident with a wider spread of catch-up re-entry points and values to keep the portfolio balance tilted towards the optimal. The wider separation shows there is a significant spread in the assessment of the price and value relationship.
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 uptrend line B near 3,380. The rally rebound has the next resistance level near 3,435. This is long-term historical resistance at the upper level of the trading band.
The resumption of the uptrend is confirmed when the short-term GMMA bounces above the long-term GMMA. This shows that traders believe the uptrend can continue. Typically, they act much more quickly than investors and the long-term GMMA will expand as investors try to get a good position.
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
