Could China ‘do a Ukraine’? (Birmingham Post article 11.05.2023)

What is the next big shock coming the way of both investors and the world economy?

Because, just like Covid, banking wobbles and Putin’s invasion of Ukraine, there will be one as surely as night follows day.

Market watchers increasingly fear it could be a China attack on Taiwan, given the dictatorial whims of President Xi Jinping who is into his third consecutive five-year term as Chinese leader.

This would have mega consequences for manufacturers, international trade, and share portfolios.

Taiwan’s economy is hugely important. It produces about 90 per cent of the world’s most advanced semiconductors.

The BBC noted: “Much of the world’s everyday electronic equipment – from phones to laptops, watches and games consoles – is powered by computer chips made in Taiwan.

“By one measure, a single Taiwanese company – the Taiwan Semiconductor Manufacturing Company or TSMC – has over half of the world’s market. TSMC is a so-called ‘foundry’, a company which makes chips designed by consumer and military customers. It is a vast industry, worth almost $100 billion (£73 billion).”

Former US Federal Reserve chairman Alan Greenspan has warned that an invasion could trigger a global economic crisis that fuels major market sell-offs, posing a so-called “black swan” risk, unpredictable events that end up having unexpected and severe consequences for stocks and other financial asset classes.

“The black swan event I think markets, and really the world at large, ought to be most worried about is some kind of conflict erupting between China and Taiwan,” said Mr Greenspan, an economic consultant to Advisors Capital Management, in a question-and-answer investment commentary.

Quoted by Business Insider, he went on: “Xi has methodically consolidated power and made himself essentially president for life. He has been fairly candid in his intention to eventually bring Taiwan back into the fold, and he may begin to feel his window is closing.”

China sees self-ruled Taiwan as a breakaway province, stating that reunification “must be fulfilled”, and refusing to rule out the possible use of force to achieve this. It regularly seeks to intimidate the island with shows of military force and incursions into Taiwanese air space.

Taiwan, which lies roughly 100 miles from the coast of south-east China, sees itself as distinct from the Chinese mainland, with its own constitution and democratically-elected leaders. China highlights how historically Taiwan was originally a Chinese province. However, the Taiwanese point to the same history to argue that they were never part of the modern Chinese state.

The US sells arms to Taiwan, which it sees as a buffer to Chinese expansionism in the South China Sea.

So, how might things develop?

Nikkei Asia commented: “Government officials and experts in Washington hold two conflicting views. Pessimists predict China may attempt to seize the island by 2027, as its military will likely have the necessary capability by then. Once the armed forces can launch an invasion with a reasonable hope of success, it could happen at any time, the thinking goes.

“A more optimistic take is that Xi has not given up hope that he can achieve unification without resorting to military force. According to this view, Beijing will use a mixture of carrots and sticks to sway public sentiment in Taiwan – military threats, disinformation and economic engagement – gradually tightening its grip on the island. China has not completely abandoned this option, so it is wrong to conclude that an invasion is inevitable, say proponents of this view.”

Perhaps the worst-case scenario is that China and the United States go to war, just as the Japanese attack on Pearl Harbour kicked off the Pacific War in 1941.

A grim thought.