IN THE RUBBLE of the Lehmann collapse, the British regulators asked American regulators whether they could conduct an audit of Lehman Brothers’ company books in England. The American regulators refused permission for the British to have access which made the task of unravelling the financial problem even more difficult for British investors and regulators.
In recent months, US regulators have been pushing Chinese authorities to allow them access to the books of Chinese companies in China. These are the companies that have been caught up in the sweep of allegations created by companies such as Muddy Waters. Recently, the Securities and Exchange Commission (SEC) charged the Chinese arms of Deliotte, KPMG, PwC, BDO and Ernst & Young with securities violations over their refusal to produce a range of audit papers. The immediate cause of this is the investigation of the Chinese company Longtop Financial Technologies. It follows the initial problems with Sino Forest. The investigation extends to nine other US-listed Chinese companies.
In mid-year the SEC noted that it was in discussion with Chinese regulators on cross border cooperation for access to documenters. They wanted the same sort of cooperation from the Chinese that they refused to provide for the British when requested.
At worst, the current SEC action could result in the de-listing of US-listed Chinese companies. Many see this as a political action rather than a professional issue. There are important differences between Chinese companies listed in the US and those listed on the Singapore and Australian exchanges. Chinese companies go to the US to tap large pools of capital.
Chinese companies come to Singapore and Australia for strategic reasons. It is usually part of a longer-term plan for cooperative development in strategic areas. When they raise capital, it is often from sophisticated institutional investors.
Given the US refusal to grant access rights to the British over similar issues, it seems that this may be driven more by a political agenda. One wonders what the US response would be to a request from Chinese regulators to inspect the US books of multinational companies operating in China. In this environment, there is a high probability of such a request developing or being a precondition for future foreign company listing in China.
The Shanghai Index developed a powerful rally on Dec 5. The rally lifted the Shanghai Index above the important 2,000 support resistance level. This is a continuation of the fan pattern trend line reversal. This type of strong rally in the Shanghai Index often continues for between four and five days. The rally of Sept 27 moved rapidly from 2,003 to 2,121 in five days. The current rally has one important difference and it is related to the pattern of fan trend lines.
The fan trend reversal pattern is a long-term bullish feature on the chart. The high on May 8 is used as the starting point for a series of four down sloping trend lines. These form a fan pattern and this is associated with a long-term trend reversal. Usually this pattern has between four and six fan trend lines.
The October and November rally-and-retreat behaviour set the position of fan trend line 4. The September rally and retreat set the position of trend line 3.
Fan trend line 4 is a strong resistance level. The market reacted away from this trend line in October and November. A break above this line is very bullish and suggests a high probability of a longer-term trend reversal. There are three resistance features above the value of trend line 4.
The first resistance feature is the upper edge of the long-term GMMA. The wide spread in the long-term GMMA shows investors will use this rally as an opportunity to sell. The true change in investor thinking is signalled when the longterm group of averages begins to compress. This shows investor buying is developing.
The second resistance feature is the longterm support and resistance level near 2,100. The third resistance feature is the very strong long-term support and resistance level near 2,140. This is the most important resistance level. A move above this level has the next significant resistance level near 2,240.
A bullish future development is when the index moves towards trend line 4, or the upper edge of the long-term GMMA and then retreats and uses the 2,000 level as a support level. This would confirm the pattern of consolidation developing before a new rally and a breakout above the value of trend line 4.
The most bullish future development of the current rally is when the index moves above the value of fan trend line 4 and then retreats and uses trend line 4 as a support area. A new rebound rally would develop from this level and move towards the support resistance level near 2,100.
The bearish future development is when the market develops a retreat and falls below the value of the support level near 2,000. In this development, the market would then use the value of trend line 3 as a new support level.
The strong rally suggests this is a new bullish environment. The future behaviour of the index movement above the value of fan trend line 4 will confirm the strength of the bullish emotion in the market. (See Chart.)
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