China-Taiwan: the drumbeat gets louder

China is making ominous threats against Taiwan. President Xi wants to reunify the “renegade province” with the ‘Motherland’, “preferably, peacefully”. What are the chances that China might seize the territory by force? And what would be the consequences, asks Victor Hill.

Straits of danger

Chinese warplanes, including nuclear-capable bombers and fighter jets have repeatedly been violating Taiwanese airspace since China’s National Day on 1 October. Last week, a total of 56 Chinese aircraft entered Taiwan’s air defence identification zone in a single night’s sortie. The intention of these sorties is clearly to intimidate the Taiwanese. Taipei demanded that Beijing cease “non-peaceful and irresponsible provocative actions”.

Last month, the Chinese military released a Saving Private Ryan–style film about Chinese soldiers practising beach landings on the coast of Fujian province − that’s on the Chinese side of the Taiwan Strait which separates communist China (1.4 billion people) from democratic Taiwan (23.5 million people). The People’s Liberation Army Daily said the military exercise had involved shock troops, sappers and special marine services. In response, Taiwan’s foreign minister, Joseph Wu, warned that the island would “fight to the end” in the event of a Chinese invasion.

Then the leaders of the two nations (though China does not regard Taiwan as a nation state) went head-to-head. President Xi, in a televised speech, vowed to pursue “reunification” with Taiwan and warned the country’s leadership not to declare official independence. The next day (Sunday 10 October) Taiwan’s leader, President Tsai Ing-wen, responded in her National Day address by affirming that Taiwan would never bow to Chinese pressure. She accused China of “harassment” and stressed that Taiwanese democracy is “non-negotiable”. An opinion poll conducted in August by Taiwan Constitution Foundation (a political party which favours independence) found that 90 percent of correspondents identify as Taiwanese – not Chinese. About two thirds of Taiwanese polled said they were willing to fight in the event of war.

It is an understatement to say that tensions have been rising between the two states. But other nations are directly involved too – not least the US, which has military bases in neighbouring Japan, South Korea and the Philippines. The US has offered Taiwan its tacit support for many years but has stopped short of offering a specific guarantee of its independence. The official US diplomatic stance is that Washington’s ‘One China’ policy prioritises formal ties with Beijing over its informal ties with Taipei − but the US does not recognise China’s claim of sovereignty. This has been described as a policy of “strategic ambiguity”.

Early this month, a carrier strike force led by HMS Queen Elizabeth passed through the Bashi Channel between Taiwan and the Philippines after conducting drills alongside the USS Ronald Reagan and the USS Carl Vinson in the Philippine Sea. The US’ and now the UK’s significant naval presence in the South China Sea is a warning signal to Beijing that there could be consequences if China seized Taiwan by force.

Then there is Australia. Foreign Minister Wu specifically appealed to Australia for assistance. In response, former Australian prime minister, Tony Abbott spoke out in support of Taiwan. The Chinese embassy in Canberra hit back. It called Mr Abbott, “a failed and pitiful politician”, accusing him of “a despicable and insane performance in Taiwan”.

The domestic perspective

China claims not just the island of Taiwan as part of its sovereign territory but also huge swathes of the South China Sea, including the virtually uninhabited Spratly Islands. Such claims are contested by Malaysia, Vietnam, Brunei and the Philippines which have advanced their own claims. China has been building artificial islands in the region, and possibly fortifying them.

The Chinese president knows that swaggering abroad will shore up nationalist sentiment at home at a moment when he prepares to be anointed as supreme “helmsman” for another five years – and very possibly much longer – at the 20^th Party Congress in 2022. Some China-watchers have mused that Mr Xi wants to replace the portrait of Mao Zedong at Tiananmen Gate with one of himself. As chairman of the Central Military Commission, orders to ‘buzz’ Taiwan repeatedly must have come directly from him.

On the domestic front, China faces fuel shortages (as I discussed last week), a declining growth rate and adverse demographics leading to a shortage of labour. Growth is running at 4.9 percent annually now as compared with 7.9 percent in Q2 2021. Productivity growth is now down to western levels at 0.7 percent per annum, according to a World Bank study. The impressive rebound that China experienced after the first phase of the pandemic seems to have run out of steam. Increases in living standards will no longer be sustained at the same rate as in the last 20 years.

An adventure in Taiwan might attract strong support at home, just as Mr Putin’s popularity was boosted in Russia by his seizure of Crimea in March 2014. But an invasion of Taiwan would be much riskier than Russia’s Crimean incursion – China might even get a bloody nose until such time as its overwhelming military superiority were brought to bear.

Taiwan’s defence minister, Chiu Kuo-Cheng has warned that war could break out “accidentally” due to “misfire”. He told a parliamentary committee that Beijing “has the capacity now, but it will not start a war easily, having to take many other things into consideration”. However, he thought that China would be capable of mounting a “full-scale” invasion by 2025.

Hypersonic advantage?

Last weekend, the Financial Times reported for the first time that the Chinese military had undertaken a secret test of a hypersonic missile in August.

Hypersonic missiles are ballistic missiles that are launched into low-Earth orbit. They then circle the globe at up to eight times the speed of sound, and then re-enter the atmosphere and glide towards their designated target. The point about hypersonic missiles is that they make a mockery of anti-missile defence systems since these would not be able to detect their approach – at least until it was too late to respond.

That opens up the terrifying prospect that a nation with a proven advantage in this technology could launch an all-out nuclear strike on its adversary with a much-reduced threat of counterattack. Thus, the doctrine of mutually assured destruction − which many analysts argue has kept the nuclear peace since the 1950s − would be undermined.

We can assume that a western intelligence agency – most likely the CIA – has released this information into the public domain for reasons about which we may speculate (possibly to galvanise the Biden administration to roll out its own hypersonic programme). Reportedly, the Chinese missile missed its target by about 25 miles. But the fact that the test occurred at all suggests that China may already be in the lead.

Hitherto, we knew that just three nations were working on hypersonic missile systems – the US, Russia and China – but we supposed that they were still in the development stage. Mr Putin treated the Russian Duma to a chilling video on Russia’s Tsirkon missiles a few years ago – but this mostly consisted of computer graphics. Apparently, the code name for Russia’s hypersonic missile programme is “decapitation”. This summer, Russian Insight released a video in which it explained specifically how this weaponry could be used to annihilate Britain’s two new aircraft carriers.

Drew Thompson, an American defence analyst, described the Chinese test as a “game changer”. Thus far the US has held back from the military application of hypersonic technology, but it is now clear that Washington will have to respond in kind. A Chinese foreign-ministry spokesman claimed that the August launch was just a test for a new kind of spacecraft.

Earlier this month the CIA announced the creation of the China Mission Center to bring greater resources to the study of China and its military activities. The CIA now regards China as the single biggest threat to US security. CIA Director William Burns has talked about “our toughest geopolitical test in an era of great power rivalry”. The new agency is urgently recruiting Mandarin speakers. But then, Mr Biden’s trade ambassador, Katherine Tai, who is the US-born daughter of Chinese immigrants, even tweets in Mandarin (though that has been criticised).

A report by The Wall Street Journal suggested that two dozen or so US special forces and marines have been training the Taiwanese military how best to defend against attack for the last year or so. That is probably the tip of the iceberg of western military involvement in this simmering conflict.

China is changing – and why that should worry us

Until recently, China consistently prioritised economic growth over its political ambitions. Under ‘President Xi Version 2.0’, that has now changed. Deng Xiaoping’s dictum of “bide your time and hide your strength” has been unceremoniously junked. China is now being whipped into political conformity – even if that entails economic costs. We can cite numerous recent events as evidence of this.

First, China has emasculated Hong Kong, even though the territory was a stand-out economic powerhouse. Many talented ‘Hong Kongers’ have left. Hong Kong’s role as a financial, creative and communications hub, as well as a conduit for foreign capital into China, will wither. But for the Communist Party of China (CPC) that’s a price worth paying to place the territory under its thumb.

Second, under President Xi China has backtracked on plans to reform its dysfunctional state sector. Instead, CPC commissars have been appointed within private companies. So, every Chinese business is now an instrument of the CPC.

State intervention in China’s vibrant tech sector – internet platforms (Alibaba), fintech, ride-hailing (Didi), after-school tutoring (Gaotu Techedu), food delivery, e-cigarettes and now video games – has wrought damage. Poor Jack Ma has been sentenced to a life term playing golf in total silence. Chinese children are limited to three hours’ online gaming per week – and they are now obliged to use gaming time to learn about “Xi Jinping thought”. The value of shares in the Chinese tech sector has tumbled by over $1tn since February – but the CPC doesn’t seem to mind.

The CPC has fallen out of love with the western tech model. There has even been a crackdown on algorithms that personalise online content in the manner of Facebook or Amazon. China is also planning new rules to prevent companies that have access to large amounts of consumer data from listing on the US stock market.

Third, the CPC is now reining in a debt-fuelled property sector in the wake of the collapse of the property developer Evergrande. As late as July last year the likes of HSBC, UBS and Blackrock were buying up Evergrande’s high-yield bonds. That was before an IMF financial-stability report warned of ballooning debt in the Chinese real-estate sector. One statistic recently struck me: over one half of all the world’s cranes reside in China. This is a much more interventionist China than the one western investors are used to − one which doesn’t care if US private-equity firms buy its companies’ bonds or not.

Moreover, China has ruthlessly sought to gain predominant influence in all the multinational bodies that officiate across the modern world, including the World Health Organisation, the World Trade Organisation and the International Monetary Fund. China brooks no criticism from any of these bodies.

Inside the dragon’s mind

The CPC wants to take control of Taiwan for multiple reasons, but these can be divided into two threads.

The first thread concerns the manifest destiny that the CPC has arrogated to itself. It sees its historic mission as to restore control over all of China’s far-flung territories – that is to say, all territories historically controlled by the Chinese empire before the fall of its ancient monarchy in 1911. Taiwan was first annexed to the Chinese empire in 1683 under the Qing dynasty. It was lost to Japanese rule for 50 years after 1895, and then reverted to the pre-communist Republic of China – the name it still uses to refer to itself.

The second thread relates to the strategic value of this extraordinary country in the early 21^st century. With just over 25 million people, Taiwan is one of the leading global players in the field of microprocessors (aka computer chips). The Taiwan Semiconductor Manufacturing Company – also known as Taiwan Semiconductor or just TSMC to most Western investors – can claim to be the world’s leading designer and manufacturer of computer chips. China has consistently sought in recent years to gain monopolistic control of the raw materials required for chip manufacture and, simultaneously, to gain a competitive advantage in their functionality. The Chinese state has been quite clear about its ambition to gain a predominant lead in the field of artificial intelligence. CPC control of TSMC would confer a huge technological advantage to the Chinese state.

Right now, as Chinese leaders look east across the Pacific to America and west across the steppes of central Asia towards Europe, they see a tableau of decline and disarray.

The American president, Mr Biden, is “underwater”, politically speaking (more Americans disapprove of his leadership than approve). The US is riven by identitarian division. Just this week, New York City Hall voted to take down a statue of Thomas Jefferson – the third president of the United States and one of the most luminous of America’s Founding Fathers. In the week that he learnt of China’s hypersonic capabilities, Secretary of State Antony Blinken pledged support for International Pronouns Day.

As I write, the US has recorded over 750,000 Covid deaths – that’s more fatalities than in any of the country’s wars. At 2,245 deaths per million, the US has had one of the highest Covid fatality rates in the world, despite spending 17 percent of its massive GDP on health care. The Senate has just raised the federal government’s debt ceiling to accommodate its $28.4tn of debt. And it faces an imminent hike in rates precipitated by mounting inflation. The Biden administration has permitted Mr Trump’s trade deal with China to wither on the vine. Under that deal, China pledged to purchase an extra $200bn of US goods and services relative to 2017 levels. As of August, the figure was about $61bn.

As for Europe, they see that the UK and France are at daggers drawn – in the worst phase of their relationship for 200 years – and that this is likely to get worse. And the EU is persecuting Poland for wanting to assert the primacy of its own laws. Illegal immigration is rampant, resulting in shanty towns across Europe; and most European nations are in danger of going bankrupt as interest rates rise.

Nations which are at war with their own histories do not represent impressive adversaries for autocratic rising powers. China has banned the new James Bond film, No Time to Die. But the home-grown film Battle at Lake Changjin, which celebrates China’s role in the Korean War, has broken all box-office records. It depicts heroic Chinese soldiers fighting their better-equipped US troops in freezing conditions.

It is quite possible that President Xi, who evidently sees himself as the historic equal to the founder of the People’s Republic of China, Mao Zedong, has already calculated that now is as good a time as any to assert China’s status as the preeminent global power. Would America and its allies, such as they are, really want to risk all-out nuclear war against a power that might already have hypersonic missiles − in order to defend an island off China’s coastline which speaks Mandarin?

Frankly, I doubt it.

Any Chinese invasion of Taiwan would cause total convulsions in global markets. The world would never be the same again. This geopolitical risk, once again, has not yet been priced in. But then there are reasons to suppose that equity markets are overpriced anyway – which I shall share soon.

Listed companies cited in this article which merit further investigation

• TSMC (TPE:2330)