Our Investment Committee has talked about China weekly for several months now. Over that time, the news about a possible war has been building. China may try to seize Taiwan or may not. The United States may go to war with China or may not. It may be a big deal or it might be nothing.
This article is a curated list of recent news about Taiwan. For information about how we responded to this news, read our article “Adding an Ex-China Fund to Our Emerging Market Strategy (July 2023).”
Taiwan has one of the wealthiest economies in Asia. As a densely populated island, Taiwan’s economy is driven by competitive exports, especially in the Technology sector. It’s largest publicly traded company is Taiwan Semiconductor Manufacturing, representing over 30% of the MSCI Taiwan IMI Index .
Taiwan is officially called the Republic of China, and its status is contentious. The People’s Republic of China (China), Taiwan’s neighbor to the northwest, refuses to have diplomatic relations with countries who recognize Taiwan. China’s ongoing attempt to isolate Taiwan threatens both the country’s long-term political autonomy and its presence in overseas markets. For example, it was a founding member of the United Nations, but is no longer granted status in the organization.
That being said, Taiwan has its own currency, widely accepted passport, armed forces, constitution, elected president, and more. While Taiwan has seemed to prefer continuing the status quo, China’s anti-secession law means that the People’s Republic of China has a substantial military presence stationed on their neighboring coast.
As the BBC reports , “Relations between Taiwan and China deteriorated sharply following a visit to the island by the then US House Speaker, Nancy Pelosi, in August 2022.”
However, “tensions between China and Taiwan had already been increasing. In 2021, China appeared to ramp up pressure by sending military aircraft into Taiwan’s Air Defence Zone…”
War is Possible.
On April 21, 2023, James Stavridis published an opinion piece at Bloomberg titled “China’s Game Plan for a Taiwan Invasion Is Not a Secret” (available here ). In it, Stavridis explains that Chinese military exercises have clearly communicated the plan: a ring of combatant warships around the island to create a de facto blockade, missiles to devastate the island’s air defenses, and a major cyberattack against every military target on the island. Stavridis concludes the piece writing, “The key to staving off a Chinese invasion is deterrence through military strength… .”
The flipside of this puzzle is explained in “Collapsing buildings, incoming missiles: Taiwan rehearses a Chinese assault on its cities ” by Helen Davidson for The Guardian published May 10, 2023. Davidson reports, “…for the first time this year, the civil response drills have included a simulated military strike… .” Pictures in the article include people rehearsing rescue operations in a variety of urban catastrophe simulations.
On May 11, 2023, Andy Langenkamp wrote an opinion piece for The Hill called “Is war in Taiwan inevitable? It depends on whom you ask .” Langenkamp summarizes, “the chances of Beijing deciding to launch a military strike against Taiwan in the next few years still seem remote. Nevertheless, beware of too much optimism.”
Bloomberg reported on May 5, 2023 “US Prepares to Fast Track $500 Million of Arms for Taiwan” (available here ). Peter Martin and Tony Capaccio report how the 2023 National Defense Authorization Act authorized Biden to give up to $1 billion of US inventory to Taiwan. Now, “the Biden administration is …using a fast-track authority” to send “a $500 million weapons package” to Taiwan. The writers go on to explain, “the package will involve sending existing stockpiles of US weapons or support equipment to Taiwan under what’s known as a Presidential Drawdown Authority… .”
On the topic of possible war, Martin and Capaccio note that “most high-level communication stalled after an alleged Chinese spy balloon traversed the continental US in February.”
On May 27, 2023, the South China Morning Post, a Hong Kong-based English-language newspaper, published an article which quoted the Chinese President writing, “In a summit with US President Joe Biden last year, Chinese President Xi Jinping said Beijing was ‘patient’ and sought peaceful reunification. However, ‘if Taiwanese independence separatist forces provoke or even break through the red line, we will have no alternative but to take drastic measures’, Xi warned.”
Investment controls are possible.
On May 17, 2023, several locations reported how UK “Prime Minister Rishi Sunak said he is considering stricter export controls and curbs on investment by British firms in China, insisting he is ‘very aligned’ with US President Joe Biden on policy toward Beijing.”
In July 2023 , Janet Yellen, the U.S. secretary of the treasury, traveled to Beijing for four days and said, “The US and China have significant disagreements but President Biden and I do not see the relationship between the US and China through the frame of great power conflict. We believe that the world is big enough for both of our countries to thrive.”
As Tom Westbrook writes for Reuters in “China investment consensus cracks as politics fuel fears ” how “There have been ample excuses to buy China as the world’s second biggest economy gathers steam” but “many managers are steering clear after seeing wartime sanctions erase the value of Russian investments.” Westbrook goes on to write:
The investment mood reflects political discomfort in the West with China’s rise. Competition with the U.S., in particular, has intensified from trade spats to strategic rivalry that has prompted export and investment bans on Chinese chipmaking and other sectors seen as militarily important.
Multi-national firms are also re-making their supply chains to avoid such heavy reliance on Chinese manufacturing, trends investors say change the risk-reward calculus on the country.
…”We’ve come to this conclusion that the rally is maybe one half to one third of the way through. We still think there is opportunity for investors,” said Robert St Clair, head of investment strategy at Fullerton Fund Management in Singapore.
…”We’re positive on China over the short term but our long term outlook is neutral to negative,” said John Pearce, chief investment officer at Australia’s $75 billion UniSuper. “As it’s impossible to quantify geo-political risks we don’t attempt to,” he said. “Our reservations about China’s long-term investment prospects are based on our outlook for returns to capital.”
During the war on Ukraine, the United States banned Americans from buying Russian stocks and bonds . As CNN reported :
Americans will still be allowed to sell Russian stocks and bonds, although only to a “non-US person,” Treasury said. The guidance explains that Americans are not “required” to divest Russian securities and may continue to hold them.
US investors can also still invest in US funds that own Russian securities, as long as those Russian holdings are not the bulk of the fund’s assets.
While ETFs like Vanguard FTSE Emerging Markets ETF (VWO) were able to divest from Russian investments at below fair market values to foreign investors, the loss still hurt EM returns.
Also in response to the Ukraine War, the U.S. proposed a G7-wide ban on practically all exports to Russia . It is conceivable they could try to do the same to China, although current posturing suggests they won’t.
The Telegraph reported on July 9, 2023 in “Trade war would be ‘disastrous for both of us’, US tells China” (available here ):
The treasury chief’s trip is the latest in a US diplomatic push to tamp down tense relations between China and the United States. Last month, Antony Blinken, the US Secretary of State, met President Xi Jinping in Beijing, with both stressing the importance of avoiding conflict. But China refused Blinken’s call to resume military-to-military communication channels, which Beijing suspended in August over a visit by Nancy Pelosi, the then US house speaker, to Taiwan.
Taiwan Semiconductor is important to the Global Economy.
On April 25, 2023, Betsy Reed of The Guardian published “If China invaded Taiwan it would destroy world trade, says James Cleverly .” James Cleverly, the UK’s foreign secretary, is quoted as saying, “About half of the world’s container ships pass through these vital waters [the Taiwan Strait] every year, laden with goods bound for Europe and the far corners of the world. … A war across the Strait would not only be a human tragedy, it would destroy world trade worth $2.6 trillion… . No country could shield itself from the repercussions. Distance would offer no protection from this catastrophic blow to the global economy – and to China most of all.”
On May 4, 2023, Reuters published “Top US spy says Chinese invasion halting Taiwan chip production would be ‘enormous’ global economic blow .” Jonathan Landay reports, “A Chinese invasion of Taiwan could potentially halt production by the world’s largest advanced semiconductor chip maker, wiping out up to $1 trillion per year from the global economy… in the first few years, the top U.S. intelligence official said on Thursday. …[U.S. Director of National Intelligence Avril Haines] noted that the advanced semiconductor chips produced by Taiwan Semiconductor Manufacturing Company Ltd (TSMC) are used in 90 percent of ‘almost every category of electronic device around the world.'”
On May 16, 2023, Elon Musk confirmed that Tesla is one such Tech company using Taiwan Semiconductor. When asked if a China-Taiwan conflict would be bad for Telsa, Musk is reported as saying , “The Chinese economy and the rest of the global economy are like conjoined twins. It would be like trying to separate conjoined twins. That’s the severity of the situation. And it’s actually worse for a lot of other companies than it is for Tesla. I mean, I’m not sure where you’re going to get an iPhone, for example.”
In contrast, on June 1, 2023, Reuters reported that the Nvidia CEO feels “perfectly safe” because “Nvidia was diversified through multiple fabs at TSMC and Huang confirmed it also planned to source from the TSMC fab in Arizona, ‘so we have a lot of diversity and resilience designed into our supply chain.'” Reuters describes Nvidia as “the world’s most valuable listed semiconductor company.”
The Yahoo Finance article “Buffett: Taiwan Semiconductor is ‘one of the best-managed’ and most important companies in the world ” published May 6, 2023 reported how Buffet sold his Taiwan Semiconductor shares [TSMC] in February 2023 even though he is quoted as saying, “Taiwan Semiconductor is one of the best-managed companies and important companies in the world.” The reason for the sale is only its geographic location and the “rising geopolitical tensions between China and Taiwan as well as China and the US.”
Meanwhile, The Motley Fool published “3 Reasons Why Taiwan Semiconductor Is a Screaming Buy ” two months after Buffet’s sale on April 28, 2023.
For information about how we responded to this news, read our article “Adding an Ex-China Fund to Our Emerging Market Strategy (July 2023).”
Photo of Taiwan by Timo Volz on Unsplash. Image has been cropped.