If in the short term the risk of war remains improbable, in the medium term that is another story. Tensions between the two governments continue to mount as China steps up its military posture.
Earlier this month, a record number of Chinese military planes – including nuclear-capable bombers – reportedly entered Taiwan’s air defense zone.
When China tested a ferry to carry more than 1,000 troops and hundreds of vehicles on October 14, it marked the latest in an ongoing series of assaults and was seen as a repeat of a potential attack.
On October 18, China condemned the United States and Canada for sending warships to the Taiwan Strait, saying they threatened peace in the region.
“Taiwan crystallizes much of the tension between China and the Anglo-sphere,” said Gael Combes, head of basic research at Unigestion. Investment week.
He stressed that for years, the priority of both sides was to defend the political status quo while improving economic ties between Taiwan and China.
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“However, more recently China has adopted a more assertive foreign policy with President Xi. [Jinping] louder about the fact that reunification must be accomplished – the crushing of Hong Kong autonomy is an example of this path to reunification.
“Military intervention is unlikely to be China’s preferred route, but any move towards greater independence from Taiwan would be seen as a provocation. “
In the short term, he said, tensions will persist or could increase, but the likelihood of an invasion remains low and is therefore overlooked by investors.
“In the medium term, this could change as Taiwan continues to refuse reunification and China increases the pressure (including economic).”
An inopportune moment
According to Zhenbo Hou, sovereign emerging markets strategist at BlueBay Asset Management, it is not in Beijing, Taipei or Washington’s best interest to change the status quo on the Taiwan Strait.
“[Joe] Biden and Xi[Jinping] both understand the risks involved, ”he said, adding that open conflict is Beijing’s last resort to reunite Taiwan.
Nevertheless, Sahil Mahtani, investment strategist at Ninety One, confirmed: “As investors, we are monitoring the situation closely.
In the meantime, China faces other concerns, including the current coal and power crisis, as well as its “besieged” real estate market, according to Kevin Gray, fund manager at Fortem Capital.
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This “may mean that this is an inappropriate time to do anything more severe than flexing your military muscles,” he said. “But reunification is a central tenet of President Xi’s Taiwanese policy, so the problem is unlikely to dissipate in the near future.”
However, the friction around Taiwan could spill over into US-China relations and worsen the status quo.
The challenge for investors in this scenario would be figuring out where the risks are not properly factored in, according to Elliot Hentov, head of global macroeconomic policy research at State Street Global Advisors (SSGA).
In the commercial area, for example, a “huge” escalation could still occur.
“To what extent Taiwan is exacerbating US-Chinese access, that’s where investors need to focus their attention, and less on the military invasion scenario – which isn’t zero, but it’s something that’s much more difficult to translate. “
Hentov recalled when asked in January 2020 if Covid-19 would become a pandemic and replied that he would have other concerns if so. “A Chinese invasion of Taiwan would be absolutely devastating for the world economy. ”
Any conflict that breaks out has enormous potential human costs, explained Gray of Fortem Capital. “But the economic damage would also likely be severe because of Taiwan’s position as the world’s leading semiconductor supplier.”
Tensions between China and Taiwan are not new. Beijing has spent decades trying to isolate the island. As a result, Taiwan – officially known as the Republic of China – maintains full diplomatic relations with just 14 United Nations member states.
Geopolitical risk expert Klisman Murati, founder and managing director of Pareto Economics, explained that China has “consistently” taken steps to “weaken and discredit” Taiwan – from cyber attacks targeting government agencies to electoral interference, the manipulation of social media and the restriction of Chinese tourists from entering Taiwan.
“In addition, Beijing has increased pressure on countries not to sign trade agreements with Taiwan, and pushed to exclude Taiwan from multilateral trading blocks like the TPP. [Trans-Pacific Partnership] and RCEP [Regional Comprehensive Economic Partnership]. “
Investors, he argued, don’t have to wait for a military standoff to hedge their risks. “If China does something to scare investors off, we may well see a short to medium term liquidity crisis in this part of the world – this is one of the main ramifications,” he said.
Western governments could also increase sanctions against China, which would directly hit supply chains, Murati said.
An unstoppable force
SSGA’s Hentov said: “You really have to ask yourself whether the political victory of the capture of the territory would offset what would be a huge cost to the global economy, the Chinese economy and the repercussions that would follow.”
The advantage hasn’t shifted enough in Xi Jinping’s favor to risk an invasion, he said. “But that can change. Be careful. “
Xi Jinping has vowed to reunite with Taiwan by peaceful means under the CCP’s “One China” policy. Military provocations continue.
“What happens when an unstoppable force encounters a stationary object? Murati asked. “The answer: we see which one is stronger. “