China view: China investment turbulence ahead before Trump exits office

Sixty-five days of investment mayhem lie ahead. The market relief rally that followed the calling of the US election is most likely to encounter significant turbulence. This particular president has a history of petty punishments for sleights imagined and real. An electoral defeat turns that characteristic into a major threat for investment certainty, not just more broadly, but particularly in relation to his ongoing feud with China.

Until the inauguration of the next president, Trump has 65 days where his childish retributions can be carried out using presidential executive orders which do not require the approval of Congress or the Senate. In time they may be overturned by a Supreme Court — a court which has just been stacked in his favour with an unprecedented appointment in the dying days of his presidency. Until they are overturned, these actions have the potential to inflict substantial and at times, irreparable harm on investments.

Currently Trump is refusing to enable the usual smooth transfer of power from one president to the next, so the transition of foreign policy actions may also be sabotaged via executive powers roadblocks. These are foreign policy decisions that are easy to implement but which are difficult to quickly unwind. They have the potential to further sour relations between China and the US.

Here’s a disaster list of potential actions that could be taken using presidential executive orders. All, or any of these steps can cause long-term irreparable damage to the US- China relationship and inflict significant harm on a range of China-related investment and investment strategies:

• Increasing tariff levels on supply chain components coming from China,

• Banning WeChat, TikTok and all Chinese social media platforms,

• Blocking web- related financial transactions with Tencent,

• Expanding the Clean Network concept to block most China business activity,

• Widening export bans on a wider range of goods or services on security grounds,

• Forcing all US government-related investment funds to divest any China exposure,

• Imposing some form of sanctions or punitive taxation measures on companies doing business in China,

• Suspending trading of some China stocks listed on US exchanges on security grounds,

• Subjecting RMB Swift transfers to additional compliance regimes that slow transaction speed,

• Authorising additional offensive weapons sales to Taiwan,

• Initiating more aggressive Freedom of Navigation exercises in the South China Sea,

• Declaring US government support for separatists in Xinjiang.

We are not suggesting that any of these possible executive order actions will come to pass, but investors need to be aware of the potential for mayhem. All of these actions have previously been considered by the Trump administration. Unfortunately, the past four years have shown that even the most outrageous proposals are within the bounds of possibility. The market has rallied on the certainty provided by a clear electoral victory of Biden. The market will react just as quickly to an increase in uncertainty should Trump choose to use his executive orders power to sow confusion and disruption.

Investors need to carefully assess this to decide if these market pullbacks are a signal for entry at a point of temporary weakness, or if the damage is more permanent and so signal the development of a new downtrend for some China related investments.

Technical outlook for the Shanghai market

The strong rebound in the Shanghai Index paused at 3,388 and then retraced. This type of rally and retracement is normal in a rangebound environment. The Shanghai Index is range-bound because it is trading in a broad trading band. A trading band is defined by horizontal support and resistance lines. The lower edge of the band is near 3,220. The upper edge of the band is near 3,340.

The index behaviour inside this band consists of rallies and retreats. There is no strong trend development or directional bias.

The index developed a down-sloping trend channel, defined by down- sloping trend lines B and C. This down-sloping trend channel is useful because it allows the trader to plot an upside target for a breakout. The width of the trading channel is measured, and the value is projected upwards. This gives an upside target near 3,353, which was achieved and exceeded.

Evidence of strong trend behaviour is provided when the longterm group of moving averages on the Guppy Multiple Moving Average (GMMA) indicator turn upwards and begin to consistently separate. This separation shows investors are eager buyers when any temporary price weakness develops. Additionally, in a strong trend, the short-term GMMA also moves upwards and develops a consistent steady separation between the short-term and long-term group of averages.

This trending behaviour is not seen in the Shanghai Index, so this confirms the continuation of the rally and retreat behaviour within the environment of a broad sideways trading band.

This is a wide trading band. The midpoint of the band is near 3,340. Starting in September, the index has remained in the lower half of the trading band. This is not bullish behaviour. The failure to move above this centre line value of 3,340 is another factor confirming that this rally is not part of a new uptrend.

Investors now watch for the retreat to use the areas around the upper edge of the long term GMMA as a support feature. This value is currently near 3,302. A rebound from this level and a rally break above 3,340 is bullish behaviour and will signal the potential for a new uptrend development. Aggressive traders will enter the market as the rebound develops. Cautious traders will wait until the index shows it can move above 3,340.

Failure of this support feature near 3,302 means the index will continue to fall and test the long-term support at the lower edge of the trading band near 3,220.

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 two decades. 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.