There's been market shakiness here in Asia in reaction to the shockingly swift victory of the Taliban in retaking Afghanistan. There's little to no direct investment in the Afghan economy, and no direct stock-market exposure either. But Asia's frontier markets, particularly Pakistan, are at risk if the situation worsens.
The bulk of the Afghan frontier stretches along Pakistan and Iran, with the "stans" to the north: Turkmenistan, Uzbekistan and Tajikistan. The United Arab Emirates, Pakistan, India and increasingly China are its dominant trading partners.
Afghanistan shares a tiny 57-mile border with China, along a sliver of mountainous territory in the Hindu kush called the Wakhan Corridor. The proximity explains why China in late July invited a nine-man Taliban delegation to meet with Chinese Foreign Minister Wang Yi, in the city of Tianjin just to the east of Beijing. More on that later.
In terms of direct market exposure, the Global X MSCI Pakistan ETF (PAK) has the largest exposure to the Pakistani markets among products listed in the United States. As you'd expect, almost all its holdings (85.8%) are in Pakistan-focused stocks.
It is down 13.0% since the start of June, with the bulk of U.S. forces having left Afghanistan by mid-July. Their departure from Bagram Airfield on July 2 was a sign of things to come - Afghan officials said the new Afghan commander was only told of the US. withdrawal a couple of hours after it had already happened, by which time the base had already been looted. No orderly transfer of power there.
The Global X MSCI SuperDividend Emerging Markets ETF (EWX) has the next-largest exposure to Pakistan among U.S. funds. But that's only 2.2% of the overall assets. Like the Pakistan fund, it is down significantly since the start of June, off 6.7% since then.
The iShares MSCI Emerging Markets Asia ETF (EEMA) dipped 1.5% on Thursday as the Taliban offensive gained ground. But even its exposure to Pakistan is quite limited, most of its holdings coming from China, Taiwan and Korea.
The Afghan economy is tiny. At US$19.9 billion, as estimated by the IMF, it's smaller than Haiti and Laos, and 54.5% of the population lives below the poverty line. The economy is also heavily dependent on international grants. The previous Afghan government secured US$12 billion in international aid for the 2021-25 period, and that money is dependent on the Taliban peace progress that now lies in tatters.
The local economy depends on agriculture. It's noteworthy that this is the official economy; the data from the CIA World Factbook has a special note that the "data exclude opium production."
The Taliban says it's committed to revitalizing the country, and developing a stronger export sector. While that likely includes plenty of poppy-derived product, Afghan trade to the United Arab Emirates ships luxury goods such as gold into Dubai's markets, as well as precious stones, Persian-style carpets and quarried soapstone. Farming exports, mainly to Pakistan and India, revolve around cotton, fruit and nuts.
Trade with China has been increasing. But it's for another reason that Beijing was keen to summon Taliban representatives to the capital's doorstep - next-door in Tianjin, mind, not in the capital itself - as soon as it became clear the Taliban's victory was inevitable.
The Chinese Communist Party wants to position China as a peacemaker in the region, particularly now U.S. forces have left a vacuum. Foreign Minister Wang, according to the official Chinese account, stressed that the Taliban should play an "important part" in the process of "peaceful reconciliation and reconstruction" in Afghanistan.
Wang's next request cuts to the quick of China's top concerns. He asked the Taliban to crack down on the "East Turkestan Islamic Movement," the group that China blames for a string of terrorist attacks in its eastern Xinjiang province.
The United States removed the entity from its list of terror groups in late 2020, saying that for more than a decade, "there has been no credible evidence that ETIM continues to exist."
Beijing has used the specter of a shadowy Islamic independence group to justify its network of concentration camps and detention of more than 1 million mainly Muslim minorities in Xinjiang. Beijing now has a very real Islamic fundamentalist group, in the form of the Taliban, in power on its doorstep.
The Taliban, or "students" in Pashto, say their ultimate goal is to ensure Sharia law rules supreme not just in Afghanistan but across the globe. A Taliban commander, Muhammed Arif Mustafa, told CNN in an interview that "Islamic law will come not just to Afghanistan, but all over the world."
"We are not in a hurry," he went on to say in the interview. "We believe it will come one day. Jihad will not end until the last day."
China is therefore under particular threat, as a neighbor and given its treatment of its Muslim population. It will surely be showering the new Taliban government with political attention. Only Pakistan, the United Arab Emirates and Saudi Arabia officially recognized the previous Taliban government, after the Taliban seized Kabul in 1996.
Following the July meeting in China, the Taliban's political-office spokesman, Mohammad Naeem, said the "delegation assured China they will not allow anyone to use Afghan soil against China." The Taliban have repeatedly broken the terms of their ceasefires with foreign forces. But it will likely be keen to reassure regional powers that the country will not be a source of instability or home base to terrorists. After all, it was the Taliban's harboring of al-Qaeda operatives that prompted the United States to invade Afghanistan 20 years ago.
It was also Naeem who on Monday declared the "war is over" after Taliban forces seized Kabul and the presidential palace. It's hard to see President Biden's decision to pull out completely as anything but a massive miscalculation. The United States completely overestimated the willingness of an Afghan army that was 300,000-strong on paper to repel around 75,000 Taliban fighters.
We shall see if the Taliban has learnt from the process that led to invasion and 20 years of war. Reports of reprisals against government workers, public executions, crackdowns on civil liberties, and the blocking of access to education for women make it sound like little has changed in the Taliban's approach since it was ousted in 2001. Meantime, Asian neighbors have to contend with an exodus of refugees and uncertainty about the country's direction.