I've always thought financial markets behave strangely in response to geopolitical shocks, and today is no exception. Taiwan's stock market is the top performer in Asia today, despite mainland China flying missiles over the island and simulating a blockade, in an aggressive show of strength.
China is blocking imports of certain fruits and fish from Taiwan in response to U.S. Speaker of the House Nancy Pelosi's visit to the island on Wednesday. The mainland is basically making a political statement by banning discretionary items it can do without: citrus fruit, frozen horse mackerel and chilled white-striped hairtail, with the Chinese commerce ministry also suspending sales of natural sand.
The Taiex in Taipei rose a strong 2.3% on Friday, reversing dips on Tuesday and Thursday. That leaves it higher over the course of a tumultuous week, up 0.2% since last Friday's close having recovered all of Tuesday morning's 2.5% fall.
Chinese shares also gained, with the CSI 300 index of the largest listings in Shanghai and Shenzhen up 1.4% on Friday. Hong Kong's Hang Seng Index rose 0.1%.
"All things considered, the market reaction to the visit has been remarkably mild," the Jefferies global head of equity strategy Christopher Wood writes in his Greed & Fear newsletter.
Contract chip maker Taiwan Semiconductor Manufacturing Corp. (TSM) and TW:2330, the biggest component of the Taipei market, climbed 3.2% in Asian trade on Friday. On Wall Street, TSM added 2.2% on Thursday, so there's room for further gains today. The Taipei ticker 2330 is up 1.4% since last Friday.
China left Taiwanese chips, of the silicon variety, off the trade-blockade list. Both the United States and China depend on Taiwanese manufacturers for the world's most-advanced semiconductors, although China is intent on developing a homegrown chip industry. U.S. Congress, meanwhile, last week passed the CHIPS and Science Act.
The bill, which President Biden plans to sign into law on Tuesday, would deliver US$52 billion in subsidies to chipmakers with U.S. manufacturing facilities. Pelosi frequently brought up the new law on her Taiwan trip, with Taiwanese manufacturers TSM and GlobalWafers TW:6488 eyeing U.S. sites. Korean competitors Samsung Electronics KR:005930 and SK Hynix (HXSCL) and KR:000660 also stand to benefit as they expand their U.S. operations.
To avoid a court case before the World Trade Organization, China came up with excuses on its bans for Taiwanese food. Beijing suddenly claims that the fruit had contained pests and pesticides in the past, while some seafood packaging has contained traces of the coronavirus.
But the timing of the trade bans makes it clear they're really in response to Pelosi's visit to the island. The House Speaker spent less than 24 hours on the island but became the most-senior U.S. politician to visit in a quarter century, since then-Speaker Newt Gingrich made the same trip in 1997. I noted on Wednesday that her trip could stabilize a volatile situation if it makes clear to China that any attempts to seize Taiwan will be met with international condemnation.
China has today also announced sanctions against Pelosi and her family in response to her "egregious provocation." It didn't specify what kind of sanctions, but Pelosi better scratch the terracotta warriors in Xian and the limestone cliffs of Guilin off her vacation list.
China's foreign ministry says Pelosi visited Taiwan despite "grave concerns and firm opposition," and that her whistle stop trip "gravely undermines China's sovereignty and territorial integrity, seriously tramples on the one-China principle, and severely threatens peace and stability across the Taiwan Strait."
Of course, Pelosi is perfectly entitled to visit Taiwan if she wants. China continues to push the boundaries of its claim to Taiwan by attempting to cut it off diplomatically from any and all allies. At a time the risk of a Chinese invasion of Taiwan is higher than ever, Pelosi delivered a powerful message of support for the only democracy in the Chinese-speaking world. She met with Taiwanese President Tsai Ing-wen as well as Taiwan's legislature, and pointedly visited the National Human Rights Museum.
China's wargames in response to Pelosi's visit have gone further than they ever have. There have been a series of firsts: the Chinese military has surrounded the island; conducted drills off Taiwan's eastern coast, which faces away from China; and held live-fire exercises that crossed into Taiwanese waters.
Taiwan says on Friday that 13 Chinese warships and 68 airplanes crossed the midway point in the Taiwan Strait, some traveling into the Taiwanese waters that extend 12 nautical miles offshore before being driven away. Taiwan confirmed that Chinese missiles passed over the island but said they were high in the atmosphere and posed no threat.
Japan is protesting after it said five of the 11 missiles launched by China landed in its waters, also a first. The Japanese island of Yonaguni is only 67 miles from the coast of Taiwan, so the Tokyo government is increasingly concerned about the potential for conflict. More than half (62%, if anyone's counting) of the 50,000 U.S. troops stationed in Japan are in Okinawa Prefecture, which includes Yonaguni. China's People's Liberation Army said that its missiles "all precisely hit their targets," an implicit threat to Japan.
Singapore Airlines (SINGY) and SG:C6L and Korean Air Lines KR:003490, meanwhile, both cancelled flights to Taipei on Friday in response to the Chinese exercises. Korean Air shares fell 2.5%, although the Singapore carrier was little changed, with a 0.2% decline.
U.S. Secretary of State Antony Blinken said on Friday that China's actions are "flagrantly provocative," designed to intimidate not only Taiwan but also its neighbors. White House spokesperson John Kirby said China has "chosen to overreact."
Taiwanese Premier Su Tseng-chang ramped up the rhetoric in asserting that the war games are the actions of an "evil neighbor flexing its muscles on our doorstep."
There's been the usual diplomatic tit-for-tat in response to Pelosi's visit and the Chinese drills. Wood at Jefferies believes that China's actions have always come in response to U.S. provocation on Taiwan, although these war games do indeed seem to have gone further than ever before. What's more, Chinese President Xi Jinping said in January 2019 that the Taiwan issue "cannot be passed on from generation to generation," suggesting he wants to complete the mission to conquer Taiwan before he leaves office.
One reason tensions are particularly high on Taiwan is that Xi is seeking a third term in office. A once-in-five-years conclave of the Chinese Communist Party will occur in October or November. Xi's rubber-stamp reelection has been muddled by China's poor economic performance and a series of dispiriting lockdowns imposed by the Xi administration in a vain attempt to wipe out Covid-19.
European nations have largely stayed out of the fray surrounding Pelosi's trip. Only Lithuania, a frequent critic of Beijing that's already engaged in a diplomatic skirmish with China, praised the trip, with its foreign minister saying on Twitter that now Pelosi "has opened the door to Taiwan much wider, I am sure other defenders of freedom and democracy will be walking through very soon."
Taiwan has governed itself since 1949, when the nationalist Kuomintang under Chiang Kai-shek fled to the island, following defeat to the Chinese Communist Party in China's civil war. The People's Republic of China, the national entity set up by the CCP, has been desperate to conquer Taiwan ever since. Taiwan continues to function as a nation, though it is denied that status largely in response to China's successful efforts to deny Taiwan full representation at the United Nations.
Although China may be responding to Pelosi's provocation with its military drills, the Western world shouldn't let its aggressive actions pass without a response. Blinken, who is attending a meeting of the ASEAN grouping of Southeast Asian nations, encouraged the United States and its allies to continue air and sea passage through the Taiwan Strait, which China is starting to claim as its own territory.
"We will fly, sail and operate wherever international law allows," Blinken said.
