Wednesday 3 March 2010
Tales of the Shanghai market
I have a personal dislike for the term “perfect storm”, because it is rarely accurate. However, the Spring Festival holiday break included some announcements and actions that bring together a previously loose collection of events into something that is perhaps more significant — an almost- perfect storm.
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Tales of the Shanghai market
Daryl Guppy
02 March 2010
I have a personal dislike for the term “perfect storm”, because it is rarely accurate. However, the Spring Festival holiday break included some announcements and actions that bring together a previously loose collection of events into something that is perhaps more significant — an almost- perfect storm.
First is the Chinese selling of US Treasuries. China sold US$34.2 billion ($48 billion) of Treasuries in December. Chinese investment in US government securities dropped by US$34.2 billion at end-2009 to US$755.4 billion. China also scaled back buying in the current Treasury auction. If the trend continues, the US will be forced to raise interest rates and add to the strain of its ability to manage its gigantic debt.
So, where is the money going? China’s reserves of US$34.2 billion is not to be sneezed at and China’s overall reserves are growing to around US$2.4 trillion. This is the second element of the perfect storm. It is the continuation of the shift towards silver rather than gold. China already owns some gold, totaling about 1.5% of its reserves. International central banks hold an average of around 10% of their reserves in gold. To get to that level, China would have to buy about two years’ worth of global mine output. It’s possible that considerable Chinese gold buying is taking place on a confidential basis, but it seems that there is a greater shift towards silver, which has been a traditional reserve in China.
Last September, the Chinese government encouraged Chinese savers to buy silver. It was publicly suggested that buying silver was a good deal, because at 70:1, the gold-to-silver price ratio was historically very high. The government endorsed the issue of small-value ingots and prohibited the export of silver from China.
This helped dampen stock-market speculation and reduced money supply growth, as some bank deposit funds were converted into silver. This, in itself, is not enough to account for alternative spending of reserves, but it is indicative of diversified movement into areas beyond Treasuries and US companies.
Third is the growing labour and shipping shortages in China. In the past, people shipped material to China, added value and then shipped the goods out. Now, the material is going into China and staying there to satisfy domestic demand. However, there are still enough exports coming out of China to create a bottleneck in shipping availability in Shanghai and Ningbo. Add to this the developing labour shortages and you have a picture of a strongly resurgent economy with sustainable long-term recovery. Inflation becomes a problem on the horizon.
Fourth is the appointment of Deputy Governor Zhu Min of the People’s Bank of China to the International Monetary Fund in a senior position. This propels China into a more formidable and influential position in terms of managing currency developments. This also allows China to become an active part of the solution and paves the way for a revaluation of the renminbi, or a widening of the permissible trading band.
All these factors come from different aspects of economic behaviour, but they come together potentially at the right time and the right place and this confluence of events is reflected in the behaviour of the Shanghai Index. The index is hammering out a support area that is a little lower than the historical support at 3,000. It starts from near 2,900 and extends to 3,000. The area has been developing a strong test. The retreat tested 2,900 several times, and it has also tested resistance near 3,000 several times. This test and retest behaviour is developing a strong foundation for a rebound.
At the moment, the behaviour is bullish, because the support level is successful. However, remember that a fall below this strong foundation support level will turn this into a formidable resistance level.
A successful rebound from the foundation support level has three important resistance barriers to defeat. The first is set by the value of the downtrend line 2. The downtrend line starts with the high at 3,361 in November. The line uses the highs in December and January. The current value of the downtrend line is near 3,200. If a new uptrend is to develop, then the price rally from near 3,000 must be able to rise above the value of the downtrend line.
The second resistance barrier is the value of the long-term uptrend line 1. This line begins in November 2008. The line touches the low in January, March and September of 2009. During 2009, this uptrend line acted as a support level. Now the uptrend line will act as a resistance level. The current value of the uptrend line is near 3,200. This is near to the value of the downtrend line.
The third resistance barrier is the strong historical resistance near 3,300 to 3,400. The market has not been able to move above this resistance area in the past four months. This is a strong resistance barrier.
This combination of resistance features makes it very difficult for the market to quickly develop a strong uptrend that can move above these resistance features. In the next few months, the value of the long-term uptrend will move higher. This means a rally will first have to move above the value of the downtrend line, and then also move above the value of the long-term uptrend line before any new long-term uptrend is established. A successful move above 3,200 will still find resistance between 3,300 and 3,400.
In the next few months, the market may develop fast-rally behaviour followed by fast retreats. This is similar to the trading-band behaviour. This sideways movement is also developing in many global markets as they follow the behaviour of the Shanghai market.
China is prepared for the “perfect storm” and the activity in the Shanghai market shows the hatches are being battened down and the sails trimmed for a fast run ahead of strong economic winds. This is a market journey with the classic Chinese blessing yi fan feng shun, or “good winds and plain sailing”.
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