How could the China /Taiwan situation affect the markets?
2022 is seemingly the year of geopolitical friction. Today we’re shedding some light on the China Taiwan dispute and how potential escalation may affect the markets. After that, we’ll take our usual plunge into the top fundamental events to watch out for this week.
China-Taiwan, what’s the deal?
First things first, what’s actually going on?
Well, it all goes back to 1945. After World War Two, China took the island from Japan. Following that, China was gripped in a civil war between the ruling nationalist government and the Communist Party, led by Mao Zedong.
In 1949, the communists won the civil war and took control in Beijing. The remaining nationalist government, now exiled, fled to Taiwan, where they ruled for several decades.
Technically, Taiwan is and always has been a part of China, but this has is heavily disputed by the local island population. Currently, only 13 countries (plus the Vatican) recognise Taiwan as a sovereign country.
It’s also very hard to see how that situation will be changed as declaring a nation as a sovereign territory must be accepted by unanimous agreement by the permanent members of the UN Security Council — the United States, United Kingdom, France, Japan, Russia and, of course, China. Oops!
And what’s happening in 2022?
Given what’s happening in eastern Europe right now, anything seems possible. China has always exerted a lot of pressure on nations to refrain from accepting Taiwan as a country in its own right and still declares, with great fervour, that it claims sole sovereignty of the territory.
The situation hit boiling point a few weeks ago when US Speaker of the House of Representatives, Nancy Pelosi visited the island despite strong condemnation from China, with the nation declaring the visit “extremely dangerous”.
This resulted in China launching a military operation which effectively formed a blockade of the island.
What’s the potential market impact of an invasion?
So what if China sought to militarily enforce its claims?
Taiwan might be small, but its economy is mighty. A huge amount of the world’s everyday electronic equipment — from phones to laptops, watches and games consoles — are powered by computer chips made in Taiwan.
Aside from that, any incursion would be met with global condemnation and potential sanctions. It’s hard to see them being as hard-hitting as those currently placed on Russia, but still. Such sanctions could have a big impact on CNY-connected FX pairs and the stocks of companies that rely on products and raw materials from China, which is a lot, to say the least.
China’s powerhouse manufacturing sector is deeply linked with economies across the globe, including the United States and Europe. Arguably, any military confrontation — regardless of sanctions — would hit the global economy harder than any other event since World War Two. US trade with China is worth approximately $656 billion per year.
And then there’s the usual market impact to consider. Significant military conflict and unrest has been associated with rapid 10–20% declines in equity markets. Serious geopolitical stress is also bad for risk assets, including emerging market equities.
The good news is that the markets have shown no concern over Pelosi’s visit to Taiwan or China’s menacing response. The S&P 500 rose the week Pelosi visited Taiwan and China started its military operation, as investors interpreted this as posturing.
There’s no actual sign that China is preparing to launch an actual war. And breathe!
What do you think?
Do you think China would realistically risk an invasion/annexation of Taiwan? What could the ramifications be if so? Have you planned a shift in your trading strategy? Let us know by tweeting us at @_Contentworks.
Top trading events this week
The markets look pretty hectic this week. Here’s when and where all the main action can be found.
● JPY — GDP Growth Annualised Prel (Q2)
● GBP — Employment Change (MAY); Unemployment Rate (JUN)
● CAD — Core Inflation Rate MoM (JUL); Core Inflation Rate YoY (JUL); Inflation Rate YoY (JUL)
● GBP — Core Inflation Rate YoY (JUL); Inflation Rate YoY (JUL)
● EUR — GDP Growth Rate QoQ 2nd Est (Q2); GDP Growth Rate YoY 2nd Est (Q2)
● USD — Retail Sales MoM (JUL); FOMC Minutes
● AUD — Employment Change (JUL); Unemployment Rate (JUL)
● EUR — Core Inflation Rate YoY Final (JUL)
● JPY — Inflation Rate YoY (JUL)
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The Contentworks team