Taiwan and geopolitical tension are the order of the day in Asia on Monday. China wrapped up three days of war drills around the democratically governed island, simulating a siege. The United States has responded by sailing a warship near the appropriately named Mischief Reef, a sandbar and coral reef that China has converted into a man-made island.
On Monday, China's aircraft carrier Shandong took part in the drills, which simulated a blockade, strikes on Taiwan and attacks on fleeing vessels. Some of the live-fire drills took place close to the Chinese mainland, suggesting they're for a domestic audience, with the wargames covered by the government channel CCTV. China was angered by Taiwanese President Tsai Ing-wen's perfectly legal trip to the United States. It's angered, after all, by her very existence.
The U.S. Navy destroyer USS Milius then sailed near the artificial installation on Mischief Reef, an atoll 130 miles west of the Philippines island of Palawan. A court in The Hague has ruled that the reef is submerged at high tide in its natural state, meaning it's part of the exclusive economic zone of the Philippines, although China has dredged sand to reclaim land and build a runway, military base and missile system there.
The command of the Milius called the trip "normal operations," but it was anything but normal given the wargames taking place around Taiwan. It was a pointed response. The ship deliberately came within 12 nautical miles of the reef - the distance a country can claim is its own from any permanent land it controls. Such freedom-of-navigation trips are designed to indicate these are still international waters, while the Chinese military said the U.S. ship had entered the waters "illegally" without Chinese approval, and was warned away.
China claims virtually the entire South China Sea as its own, based on some pretty flimsy historical evidence about ancient fishing trips. It's embroiled in legal arguments about its island building and land grabs in the sea not only with the Philippines, which won its case at The Hague, but also with Brunei, Malaysia, Vietnam and of course Taiwan. The South China Sea is important as a shipping lane, a staging base for any attack on Taiwan, for fishing, and perhaps most importantly because it contains large stores of natural resources, chiefly oil and natural gas.
It's a slow day of trade in Asia on Monday. Markets in Australia, Hong Kong, New Zealand and the Philippines are closed for the Easter holiday. Japanese stocks moved up in response to a weaker yen, with the Topix broad-market index closing 0.6% higher. South Korea's Kospi ended the day on a 0.9% advance. And despite the tensions around the self-governed island, stocks in Taiwan also edged ahead, with the Taiex finishing Monday up 0.3%.
On the corporate front, the main movement in Asia is from Tesla (TSLA) , which plans to build a factory in Shanghai to make the Megapack, its big battery. The company stated on Twitter that "Our next Megafactory will be in Shanghai," and capable of making 10,000 Megapacks per year.
It plans to break ground on the plant in Q3 with an aim to cranking up production in Q2 2024, the battery operation running alongside Tesla's existing factory making cars in Shanghai, China's largest city. Megapacks are designed to store large amounts of energy, as much as 40 gigawatt hours of electricity.
Although Apple (AAPL) CEO Tim Cook was recently in China, talking about expanding operations here, many companies are attempting to diversify their manufacturing operations away from China. But this is a doubling down by Tesla, and CEO Elon Musk.
Musk of course controls Tesla and now owns Twitter, not to mention running the satellite-based Internet service Starlink via SpaceX. His own Twitter feed blends news about all of the above, with a post stating that "Tesla opening Megapack factory in Shanghai to supplement output of Megapack factory in California" coming immediately after one stating "Starship is ready for launch." And then he posted a joke that "SANTA IS REAL AND USES YOU AS HIS DELIVERY SYSTEM FOR PRESENTS."
A blended bag of jumbled ideas, in other words. But given Tesla's tight ties to China, you have to wonder how free speech will continue to be on Twitter when posters criticize the Beijing administration. I'm also eagerly awaiting the provision of firewall-free Starlink service in China, where the Internet is furiously censored. Should that happen, I'm sure Tesla's Megapack and car factories will both risk getting shut down.
China is already planning a constellation of 12,992 satellites to combat Starlink, according to an academic paper about anti-Starlink measures published by a professor affiliated with the Chinese military's space-engineering program. But putting the squeeze on Elon Musk and his profit centers would work even better.
So I doubt we'll ever see Starlink offering free-world-style Internet service inside China, given Tesla's deepening presence in Shanghai. Beijing is a dictatorship that Musk would rather buddy up to, than risk angering. Twitter is banned in China, of course, but frequently used by Chinese officials as well as for Chinese disinformation surrounding, for instance, elections. Taiwan will have a presidential election in January that Beijing would dearly like Tsai Ing-wen to lose, since the opposition Kuomintang favors closer ties to China.
China is busy filling the airwaves with what the People's Liberation Army calls "joint precision strike simulations" on Taiwan, "Joint Sword" exercises aimed at encircling the self-governed democracy. Taiwan functions as a nation state in just about every respect, although the People's Republic of China, which has never controlled Taiwan since its declaration in 1949, claims it as part of its territory.
Beijing has conducted three days of drills near Taiwan, flying 71 warplanes into Taiwan's air-defense identification zone on Saturday and another 70 on Sunday morning, for instance. Many planes crossed the "median line," what until recently had held up as the border in the Taiwan Strait between Taiwan and China.
While the military exercises have been extensive, they aren't quite as massive as those held after then-Speaker of the House Nancy Pelosi visited Taiwan last August. This time around, Tsai met now-Speaker Kevin McCarthy and a group of other U.S. lawmakers last Wednesday at the Ronald Reagan Presidential Library in California.
The market reaction during trade in Taipei shows that the wargames functioned much as expected. We're getting a little too comfortable with the idea that China is entitled to conduct such bullying wargames, if you ask me, which exhaust the much-smaller Taiwanese military by forcing it to respond. Just because you expect something to happen doesn't make it right.
But the tensions and the missions of the Milius and the Shandong don't look to provoke a deeper stock-market response, assuming the activities are now over. Expect the waters around Taiwan to continue to be hot as we build to that election scheduled for January 13 in Taipei.