Taiwan invasion won’t happen for decades: Minxin Pei

One of the world’s foremost experts on the Chinese Government, Minxin Pei, says a full-scale Taiwan invasion by China’s People’s Liberation Army won’t take place until China’s ruling party is sure of two key factors that are critical for success:

  1. That the Chinese economy can be insulated from Western sanctions
  2. The China’s military might can deter America and its allies from intervening.

Minxin Pei, who is a Chinese national based in the United States, says each of the above could take a decade to achieve from this point on.

“Although reunification is indeed one of his (Xi Jinping) long-term objectives, any attempt to achieve it by force would be extremely costly. It might even carry existential risks for the Communist Party of China regime, the survival of which would be jeopardized by a failed military campaign,” said Pei on Project Syndicate.

Pei believes what’s likely in the more immediate aftermath of the contentious Nancy Pelosi visit is a new Taiwan Strait crisis.

China is probably not planning to launch an immediate and deliberate attack on Taiwan. But it may decide to engage the US in a game of chicken in the Taiwan Strait. It is impossible to predict such a confrontation’s exact form or timing. But it is safe to assume that it would be extremely dangerous, because China believes that only brinkmanship can concentrate all the players’ minds.

“Like the 1962 Cuban Missile Crisis, a new Taiwan Strait crisis might end up stabilizing the status quo – albeit after a few hair-raising days. And that may well be China’s plan. But such a gambit could also go horribly wrong. Lest we forget, the fact that nuclear war did not break out in 1962 was largely a matter of luck.

Global implications of a new Taiwan Strait Crisis

Following the Pelosi visit, China has been conducting its largest ever military drills over the Taiwan coast.

On Saturday (August 6), Taiwan scrambled fighter jets in response to dozens of Chinese jets that crossed the median between the two countries in the Taiwan Strait.

Taiwanese officials have stated they believe the exercises were conducted in order to test China’s on-the-ground and long-range air strike capabilities and appeared to simulate a full-scale Taiwan invasion.

While a new Taiwan Strait Crisis is seemingly already underway, a major military standoff in the Strait, like the world saw in 1954, 1958, and 1995/96, would have major ramifications for the global economy.

The waterway, which narrowest point is just 130 kilometers wide, services close to 90 percent of the world’s top 100 largest container ships annually.

Taiwan invasion
Image: Bloomberg

A full blown military standoff in the waterway could see the world’s current supply chain bottlenecks even further exacerbated – and likely lead to even more inflationary pressures.

Thomas Matthews from Capital Economics, notes the prospect of a fourth Taiwan Strait Crisis hasn’t yet weighed on stock markets.

But he says this can quickly change.

“The situation could yet escalate and make its way more firmly onto investors’ radars,” he warns.

“Even if a war between the US and China isn’t imminent, there are several plausible ways in which the relationship between the two countries could deteriorate further as a consequence of China-Taiwan tensions, potentially resulting in some combination of fresh tariffs or sanctions on China, attempts to restrict the country from the global financial system, and disruptions to Taiwan’s semiconductor exports.”

Matthews predicts a Strait Crisis would result in benchmark equity indices falling, including those in the U.S.

“After all, the S&P 500 rose after Russia invaded Ukraine (although it began to fall again not long after). But that reflected a couple of things. For one, real yields initially fell as well, propping up equity valuations. Once those yields rose again, equity prices came under renewed pressure.

“We think real yields would rise in the weeks after any further escalation, at least if it happened in the near term. And perhaps more importantly, a disruption to Taiwan’s semiconductor exports would be a significant blow to developed market corporate earnings, as would further decoupling from mainland China.

“What’s more, China’s and Taiwan’s equities on their own are significant shares of global equity indices – in particular those focused on emerging markets – in a way that Russia was not.”