South China Sea Operations Pose Risks
Earlier in the week, US/China headlines finally had some positive news after months of hostility between the two nations over a series of events. Reports that trade talks had resumed, following a three month break, helped assuage fears that tensions were close to boiling over between the world’s two leading economies. Following public disputes over the outbreak of the COVID-19 virus, and the US accusations against China over the pandemic, there were then clashes over US security fears pertaining to Chinese 5G operators Huawei. Tensions were then further elevated in response to China’s National Security Law which was written into Hong Kong penal code and saw the US removing the region’s status as autonomous, while criticising China for the act.
While these more high level disputes have been unfolding, there has been another situation developing behind the scenes which has caused particular concern for the US. Chinese militarisation of the South China Sea has been a longstanding aggravation for the US. The building of military outposts on reef structures and man made islands in the area, as well as the increasing population of Chinese war ships in the region, has, at times, forced the US to respond with similar shows of strength in region, sending in naval fleets to warn off Chinese carriers.
While China continues to maintain that it has control of the region, the US had adamantly denied the validity of this claim and warned China against continuing to operate in the region. This week, fears of military conflict between the two nations has risen once again in response to reports that China fired four medium-range ballistic missiles into the South China Sea yesterday.
US Announces Restrictions
The US response so far has been tame, with a military spokesman stating that so long as the operation was carried out within accordance of international law there is no issue. However, it is worth noting that on Wednesday, the US also declared trade and visa restrictions on 24 companies over their involvement in helping china “reclaim and militarise disputed outposts” in the region.
Political commentators have long warned over the issues posed by the situation in the South China Sea and the real threat that tensions could spill over into conflict. This latest development presents a further worrying sign that China shows no intention of stepping down. With Trump keen to take an aggressive stance against China in the run up to his elections, the likelihood of tensions flaring further remains high.
SHANGHAI COMPOSITE (Bearish below 3179.82)
From a technical viewpoint. The recent double top at the 3456.17 level was accompanied by strong bearish divergence in momentum studies, suggesting the risk for a deeper move lower. To the downside, the key levels to watch are the 3278.78 interim support and the bigger 3179.82 level, which is the neckline of the pattern. If price moves below here, we could see a much deeper reversal take place.
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