Debate over a possible trip by House Speaker Nancy Pelosi to Taiwan is pushing investors to assess the risk of a conflict over the self-ruled island democracy on their portfolios and the broader global economy.
The conclusion: A US conflict with China over Taiwan would be catastrophic, so much so that geopolitical analysts and global money managers see the risk of an intentional conflict as low.
That is keeping them from hitting the panic button, even as they acknowledge increased risk of a conflict and as some managers build in extra cushion into China and technology holdings to account for that risk.
China has warned any trip by Pelosi, who has yet to officially announce a visit, would trigger “serious consequences.” US military officials have issued their own caution, suggesting the trip may not be a great idea right now. That comes as China has become more aggressive in the South China Seas and the relationship between the US and China has continued to deteriorate.
Taiwan is a 245-mile long island with outsize importance. Taiwan controls roughly 90% of advanced semiconductor manufacturing capacity, making it crucial for the global economy.
It’s also at the center of the world’s biggest geopolitical rivalry. Beijing views Taiwan as part of Chinese territory and President Xi Jinping aims for reunification, a key goal that puts it at odds with Taiwan—and the US effort to maintain ambiguity about Taiwan’s position even as it partners and supports it, including by selling it arms .
The delicate dance around Taiwan has been complicated as the US and China re-evaluate their relationship and tensions rise. For example, past meetings between US and Taiwanese officials in informal places like hotels and restaurants were moved to “official” locations like the State Department, says Andy Rothman, investment strategist at Matthews Asia, who served as Taiwan desk officer for the State Department during the Clinton administration.
Though congressional groups and senior administration officials have visited Taiwan in the past, Pelosi’s possible visit comes as China is more worried about rhetoric from the US and indications the US may be wavering from its 40-year commitment to the One China policy, Rothman says. The Chinese government, however, doesn’t want to use force, he adds.
What could change that? A joint decision by President Joe Biden and President Tsai Ing-wen that the current state of de facto independence is no longer sufficient and they want to move to a more formal type of independence. Such a move, Rothman says, would spark China to consider using force.
“I see zero potential for that happening: The president of Taiwan is into her second term and never indicated a desire to do that, and no one in Taiwan supports it because it would bring chaos,” Rothman says. “And President Biden has committed to a One China policy, which means it isn’t formally Taiwan.”
Geopolitical analysts worry more about the risk of an unintended conflict. For example, Rothman worries some US politicians may underestimate how sensitive the issue is for China’s government and could push too much—or that the Chinese go too far in their escalation and there’s an actual accident in the South China Seas with few channels between the two countries to defuse the situation.
“This is an issue that will continue to simmer along at a relatively high rate of tension versus a few years ago, but I don’t think the risk of the conflict across the Taiwan Straits is significant enough to be an obstacle to investing in Taiwan or mainland China,” says Rothman.
Stocks have started to price some of that elevated risk, with part of the selloff in Chinese stocks in recent months reflecting a bigger “fear premium” to compensate for the perception that an attack on Taiwan is much more likely, says Philip Wool, managing director of Rayliant Global Advisors.
While Wool also sees little chance China makes an intentional military move against China, he expects Beijing to turn up the rhetoric and take nonmilitary actions to strongly signal their unhappiness with a Pelosi visit. However, he adds, policy makers are aware it’s a terrible time to do anything that could force the US and allies to impose the types of economic penalties levied against Russia after its invasion of Ukraine.
Trivium geopolitical analyst Taylor Loeb puts the odds of a Pelosi visit at slightly more than 50/50 as both parties try to flex their tough on China credentials. Pelosi could voice support for both Taiwan and the One China policy, and keep comments about China’s increased aggression toward Taiwan to a minimum, Loeb says. China’s response to such a scenario would probably result in a slight ratcheting of recent escalations, potentially increasing the number of planes flying over Taiwan’s Air Defense Identification Zone and possible military exercises on China’s coast, Loeb adds.
That is the type of activity that will likely keep everyone on edge, but not yet preparing for an invasion that could upend not just the case for Chinese or Taiwanese stocks but the stocks of any company that needs semiconductors or relies on China as a major supplier .
Write to Reshma Kapadia at [email protected]
Credit: www.marketwatch.com /