Where does the buck stop for your China business?
Acommon entry point for those starting a business in China is to set up a representative office. The office functions as a promotional tool, allowing the business to establish contacts and a footprint.
The representative office is designed to investigate business opportunities but the office cannot undertake transaction business in China. It cannot sell products or receive money for the sales of products or services. A representative office is designed for product marketing.
Despite these limitations, the representative office remains a popular way of exploring China market opportunities.
It is very unwise to use a representative office structure as a backdoor to do business in China although this structure has been abused in the past.
Just as in the US, there is a surge of protectionism in all its forms. This ranges from the increasingly familiar imposition of tariffs and export restrictions or sanctions. But it also includes legislative changes to prohibit certain activities. One example is the forced sale of companies as is happening with TikTok in the US. They all include heightened levels of risk for those associated with the company.
The West often charges China with the risk of arbitrary detention when in fact this is most often related to breaking China laws. Ironically, the same style of arbitrary detention is used as a weapon in the US. The most infamous
example is the arrest by Canada of Huawei CEO Meng Wanzhou at the request of the US authorities.
This rise in patriotism also impacts your business activity and this may impact the staff of your representative office. Your nominated representative office leader is the legal face of your business in China and is legally responsible for everything the company does. It is the same as the in loco parentis principle applied to teachers. A teacher has the same duty of care as a parent. Your representative office leader has the same duty of care for your business and may be held responsible for your activities in China.
If you undertake activities in China that are illegal and then leave the country, your representative officer may be held in your stead. If the representative office engages in activities which are outside of the regulatory bounds, then your officer will suffer the consequences which may include fines or imprisonment.
In the current heightened environment, this may extend to holding the representative office responsible for activities outside of China that are seen as anti-China. This is an extreme circumstance and very rare. However, in the increasingly febrile environment, this is presenting a higher risk than in the past. It lies behind the increasing reluctance of some foreign executives
to either remain in China or to visit China as part of their normal business activity.
It is not just China. Those businesses seen as pro-China are facing increasing scrutiny in the US. TikTok CEO, Singaporean Shou Zi Chew is routinely misidentified as Chinese by Congressional members and others despite many corrections.
These risks have always been there but in the heightened environment of protectionism, the risks are increasing. It is important to be aware of these risks because your representative officer may pay the price for your ignorance.
Technical outlook of the Shanghai market
The Shanghai Index has moved decisively above the long-term resistance level near 3,080. This is a significant breakout and suggests that the index can move quickly towards the target level near 3,240.
This target level is calculated by taking the width of the long-term trading band and projecting this upward above 3,080. These trading bands have been an effective way of defining Shanghai Index behaviour.
The strength of the breakout is indicated by two features. The first, paradoxically, is the length of time it took for the breakout to develop. The resistance level was tested unsuccessfully three times before the current breakout. This shows the resistance level was a strong historical feature. This means once it is broken with the breakout that all of the strong hands that created resistance with their selling at 3,080 have been swept from the market. This clears the way for the index to move quickly in a continuation of the rally.
The second feature is the behaviour of the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. We have noted the resilience of this long-term group in previous notes. The breakout comes as no surprise because of the behaviour of the long-term GMMA.
The long-term GMMA shows the behaviour of investors. When the market retreated from resistance on the three previous occasions the degree of separation in the long-term GMMA remained stable. This showed that investors were confident about the uptrend continuing.
They used the dips in the index as buying opportunities. We know this because the long-term GMMA did not compress in reaction to these market pullbacks. If investors were worried about the strength of the uptrend, they would have joined the selling and this would lead to a compression in the long-term GMMA.
It is the lack of compression in the long-term group that underpinned our confidence that a successful breakout would develop.
The character of the move towards the upside target near 3,240 cannot be assessed at this stage. Normally, we would expect to see the market pullback and test the 3,080 as a new support level before developing a new leg of the uptrend.
But this is China, so the market may continue to move upwards in an extended rally similar to that seen with the rebound in February from the 2,675 lows.
The market is closed for the next week for the extended Labour Day or Wu Yi holiday.