September 2020 - Academy Securities

What has Happened:

On Wednesday, multiple Chinese fighter jets entered Taiwanese airspace. This provocative action was described as destabilizing and a threat to regional peace by Taiwan’s Defense Ministry. It comes one day after Taiwan’s president called for a “coalition of democracies” to defend freedom and counter aggressive regional actions by China. On August 10^th, Chinese jets also crossed the median line over the Taiwan Strait, briefly entering Taiwanese airspace, during the visit to Taiwan by HHS Secretary Azar. While China claims Taiwan as its territory and consistently conducts naval and air patrols, current tensions raise concern about the risk for military advancement or miscalculation. China’s militarization of the South China Sea, the new national security law in Hong Kong, and the ongoing trade war keep China top of mind for Academy’s geopolitical and macro teams. Academy strives to provide insights into future risks posed by geopolitical events and tensions. With that in mind, our Geopolitical Intelligence Group presents the following analysis on the risks faced by Taiwan at this time.

Why it Matters:

“I believe that Hong Kong and Taiwan are apples and oranges. We have never been “the force” behind Hong Kong but have always been the force behind Taiwan. I think that the U.S. remains very active and visible in support of Taiwan. I also think that China has many significant potential economic issues that could reduce the probability of taking on such a large military engagement at this time. Over the past years, Taiwan has enhanced its ability to defend against a forced military takeover, including its ability to present such a takeover as a much more complex challenge. I tend to think a cross-strait attack by China is not the most likely option. Add to the equation that a takeover of Taiwan on the heels of Hong Kong would likely solidify Pacific Rim and international disapproval/push back, resulting in increased economic challenges. All of this leads me to believe that the risk of military, cross-strait escalation has not increased.” General Mastin Robeson

“I agree with Mastin’s points. China still believes that their strategic plan of becoming a global power is executing toward their goals and they do not want to jeopardize this over Taiwan. It would be difficult to disagree that they are on track given where they are today using all elements of national power as assessment tools. It is far easier for China to restrict Hong Kong than it is Taiwan. We will see increased pressure by Beijing on Taiwan but we don’t expect a military invasion of Taiwan so long as Taiwan does not stray too far from China achieving their “One China Policy.” We can expect more overt military intimidation with China’s increased military prowess, but we don’t expect an invasion because of the resulting diplomatic and economic fallout. Eventually this could happen, but not today with things continuing to work in China’s favor. The Trump administration’s recent overt efforts to support Taiwan are somewhat of an anomaly in comparison to past administrations that adhered more closely to the Taiwan Relations Act and its Six Assurances. We can expect Beijing to follow the U.S. election results closely in hopes of diminishing support for Taiwan in a new administration. We don’t expect any actions by Taiwan and the U.S. that enable claims by Beijing to justify an invasion.” General Robert Walsh

“I’m very focused on Taiwan. There is no risk of a major change in policy priced in. Major changes could impact the semiconductor business and investment grade corporate bonds could be affected given the holdings of Taiwanese insurance companies. This is not keeping me awake at night, but it’s a potential black swan that could hit markets and the economy well beyond anything we experienced with Hong Kong.” Peter Tchir

Original Post 09/10/2020

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