China view: Ideology and investment
Two national events were celebrated in the past week. The first was the 100th anniversary of the Communist Party of China on July 1. The second was the July 4 Independence Day in the US.
The global reactions to these two events were quite different. These reactions also confirm a shift in the global narrative that bodes an illwind for investment choices.
On July 1, Chinese President Xi Jinping delivered several defiantly long speeches, which were seen in the Western media as evidence of a hard-line stance.
The most quoted speech extract was: “The Chinese people will absolutely not allow any foreign force to bully, oppress or enslave us and anyone who attempts to do so will face broken heads and bloodshed in front of the iron Great Wall of the 1.4 billion Chinese people”.
China is usually castigated in Western media for its desire to fend off foreign interference in its domestic affairs and to protect its borders.
But such desire to protect sovereignty is common — even US President Joe Biden recently confronted his Russian counterpart Vladimir Putin about cyber-interference in the US.
Likewise, Australian Prime Minister Scott Morrison has made much of the same speeches when protecting the sovereignty of Australia.
These Western claims are accepted as legitimate. But judging from the Western media coverage, this Chinese desire for sovereignty is not.
In some ways, Chinese politics is not much different from politics elsewhere, as the governing party seeks to identify itself with patriotism and nationalism to protect and to promote the interests of its citizens.
Anyone who experienced the near-religious fervour of former President Donald Trump’s election rally will know how these strands come together.
Biden’s rallies may be less evangelical, but they drew on the same strands of patriotism, American exceptionalism and improvement of living standards that Trump promoted. Each claimed that only their party could bring these benefits to the people.
Xi made the same claims that it was only the Communist Party of China that could bring prosperity, dignity and stability to the country.
He also pointed to a centenary of success in China but like all leaders, glossed over the disasters that also occurred in that period.
Of course, there is no viable alternative in the Chinese political system, but the fundamental aims of good government remain the same under all systems because a dissatisfied population is a breeding ground for rebellion and insurrection — something also celebrated in July 4 Independence Day in the US and Bastille Day events in France.
In contrast, the July 4 Independence Day celebrations exhibits the same appeals to patriotism and a clearly stated desire to continue to interfere in the internal affairs of foreign countries, in the name of freedom and democracy passed without critical comment in the media.
In some ways, the media commentary was just as superficial as the coverage of Xi’s remarks.
What is important in both these events is the hardening of the ideological stance. This increasingly frames the US-China relationship in terms of ideological competition rather than commercial competition. This shift has been clear in the US for some time, but it is the first time that Xi has so clearly identified this as an issue.
Furthermore, Xi defined this more as a pushback with a refusal to accede to foreign interference in Chinese affairs.
When politics interferes with business, then business suffers as Australia has discovered. Investors need to be more aware of the way this shift to ideological competition will impact on commercial competition and investment.
Technical outlook for the Shanghai market
The Shanghai Index breakout failed and retreated towards the long-term uptrend line.
The index first retreated from resistance near 3,580 on June 21. The retreat rebounded from near 3,518 and the rally moved above the long-term resistance level near 3,580. It was anticipated that this would be the start of a new longer-term rally and a continuation of the uptrend. A new trend line A was plotted.
Two events developed: First, the index dropped below the value of trend line A. This signals a change in the trend behaviour. This index retreats also moved below the lower edge of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) Indicator. This is bearish and suggests that the uptrend rally that started in May has come to an end.
The second event was the way the index created a new short-term resistance level near 3,615. This is important because this short-term resistance level near 3,615 and the nearby longterm resistance level near 3,580 will form a strong resistance to any future index rally and uptrend.
The fall below the lower edge of the long-term GMMA suggests a significant change in the trend behaviour. There are two support features. The first support feature is the value of the long-term uptrend line B. This is currently near 3,485. A rebound from this level will suggest that the longterm uptrend that started in March remains intact. This is a much slower moving uptrend.
If the support from trend line B fails then the next support feature is the long-term support level near 3,450. This has been a significant support and resistance feature since July 2020.
Although the index has closed below the lower edge of the long-term GMMA there is no evidence of compression in the long-term GMMA. This shows that investors have not yet joined in the selling so there is a small probability that the index retreat is temporary. This is only proven if the index moves up quickly and continues to use trend line A as a resistance level.
Compression in the long- term GMMA will show that investors have become sellers. If this happens then the index will fall further testing the longterm trend line B as a support level.
The current condition of the index has the characteristics of a developing trend change so any rebound rally is treated with caution. Additional caution is required because of the twin resistance features coming from the value of trend line A and the longterm resistance level near 3,580. These act as significant barriers to any rally rebound.
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. The writer owns China stock and index ETFs