Will China invade Taiwan?

By Gareth Horsfall
This article is published on: 23rd December 2022

Well, it’s nearly that time of year again and I thought I would subject you to a last dose of Gareth’s musings before the year closes.

They say that the years pass more quickly the older you get, but I am not sure just how much quicker they can fly by based on how this one has zipped by.

I saw a great post on Facebook just the other day saying just how much we all seem to have pushed ourselves in the last year, maybe from the fear of being in a lockdown again or just making up for 2 years of lost time. Whatever, the reason, I find myself guilty of having packed a lot of activities into 2022 and Christmas has not just crept up on me but arrived like a Japanese bullet train.

Regarding my work, more than anything this year it has been marred with genuine concerns and worries about the state of the world, war/s, the impact of rising prices and general concerns about finances. I have been trying to make sense of it all myself by reading articles and books, which I would not normally have chosen. I just thought I needed to challenge some of my preconceived ideas. I found this to be a really good exercise and ,in some ways, has helped to calm me down as I can see a little bit more clearly, the ‘why’ things are happening, although I am lacking the ‘where’ (are we going from here) just like everyone else. However, understanding a little more about how we got here has helped me lean into the volatility and uncertainty with more confidence.

So, it is with this in mind that I thought I would write something nice and Christmassy for you: Why it’s unlikely that China will invade Taiwan…..at least for the foreseeable future! What more could put our minds at rest this Christmas than a rational argument as to why China is unlikely to start another war in 2023 just when we have plenty of others to contend with.

OK, it doesn’t necessarily have a festive feel to it, I understand that, but I bought a book this year written by Louis-Vincent Gave who is one part of a company called Gavekal. They provide very high level statistical, political and economic analysis to businesses and governments around the world. They are quite famous in this area and their work is exceptional. The book is entitled ‘Avoiding the Punch: Investing in uncertain times‘. In it there is a section on exactly why China is unlikely to invade Taiwan, at least for now. Since this was a concern expressed by more than just a few clients this year (presumably given our Western media tendency to constantly be baiting us into believing that it is imminent),I thought it might make a nice E-zine to finish the year and give us some hope for 2023. As they say, knowledge is power…and I would add less angst!!! :0)

It’s all about semiconductors.
Yes, the whole business of China invading Taiwan and the USA threatening to protect the island, whatever it takes, is all about semiconductors but if, like me, you are wondering exactly what we use semiconductors for, the following should give you a quick answer:

Semiconductors are an essential component of electronic devices, enabling advances in communications, computing, healthcare, military systems, transportation, clean energy, and countless other applications.

In essence, they are now used in almost everything that we ‘need’ to run our daily lives. From your phone to computer to thermostat, clocks, TV’s, machinery in factories, the MRI machine at the hospital, wind turbines etc. We can’t live without them. So, for any nation state it is important to have access to the companies, and countries, that monopolise the manufacture of them.

Control of the market in chip making has for a long time been monopolised by the USA through the tech firm Intel. But, in July 2020, the US were taken aback when Taiwan Semiconductor Manufacturing Co (TSMC) announced that they had technologically leapfrogged Intel in the business of high-end chip making.

(The USA started a trade war with China over semiconductors in 2017/18 when they placed restrictions on the export of semiconductors to Huawei, ZTE and other Chinese companies which brought those companies to their knees).

When we were friends

However, like all fairy tales, there once was a time when the USA and China sort of got along with one another. The days when Taiwan made those nice little plastic toys and bicycles that they would export into the West, and no one felt threatened. However fast forward to today and they are now arch enemies just at the time when Taiwan has now surpassed Intel to become the No 1 producer of the world’s most important commodity.

So, the real battle ground is not Taiwan itself (which interestingly, the USA recognises Taiwan is a part of China, but does not recognise China’s sovereignty over the island) but for the control and continued access to the global semiconductor market.

3 reasons why China are unlikely to invade Taiwan

So it might not be surprising that the USA is starting to worry about semiconductor security if Taiwan were to be unified with China, but invading Taiwan would only set China back economically and the following are the 3 main reasons why it is unlikely to happen:

1. If China were to invade Taiwan it would surely result in Taiwan’s semiconductor factories being damaged and/ or destroyed. Even if China invaded by sea, Taiwan would have time to self-sabotage the factories and keep hidden any secrets in the manufacture of this precious commodity. Since a third of China’s semiconductors are supplied by Taiwan, it would shut down China’s tech industry for which there would be no other supplier. China has placed significant importance on the development of its tech industry as part of its growth strategy and so this would be a backward step.

2. Military conflict with Taiwan would limit, if not cease, China’s ability to make these semiconductors at home. Factories that produce these highly specialised chips need an investment of close to $20 billion just to be functional and most of the machinery required to make them comes from Japan, the USA, the Netherlands and South Korea. All countries which would likely cease trading with China if it invaded Taiwan.

3. A lack of highly skilled labour. It is not for want of trying but China is, not yet, a market leader in the manufacturing of high end semiconductors. They can build the factories and buy the machinery at present, but they don’t have the skilled people who are able to operate the machines at the level that the engineers in Taiwan can. However, if they can encourage the top Taiwanese talent in this field to move to the Chinese mainland and train Chinese engineers then China might well be on its way to being a market leader a lot quicker than we might think. A war would likely see an exodus of this talent to either Japan or the US, and those that remained would be unlikely to want to go and work for an invading country. So, in short a Chinese invasion of Taiwan is very unlikely, until they have sufficiently developed their own semiconductor industry first and secured their own supply chain.

Strangely, what might speed this process along (and a potential invasion of Taiwan) is America’s continued actions to strangle China out of the semiconductor’s market. On 7th October 2022 the USA imposed new sanctions on China by restricting the supply of equipment and tools to any manufacturer of semiconductors in China. Not only, but also any US person, green card holders and foreign national of the US are prevented from going and working in a Chinese semiconductor production facility without first obtaining a licence, therefore making it virtually impossible to do so. (Strangling the ability for China to hire the talent to train their own engineers)

You might think this would slow China down, but it’s quite the opposite because as a result of these sanctions the Chinese government have now placed an even greater importance on the development of science and innovation in their economy. The US sanctions have had the adverse effect of aligning Chinese business interests with the Chinese government itself. Both are now convinced that they cannot rely on anyone but themselves and certainly must not be dependent on US (and its allies) sourced goods/materials. Hence the Chinese government and Chinese businesses are collaborating to build domestic alternatives to imported technologies.

The question of building a domestic semiconductor sector in China has moved from being a business decision to a matter of national security, and for businesses a matter of survival.

So, you might be thinking what is the time line for China becoming self-sufficient in the manufacturing and technology surrounding its own domestic market for semiconductors? The answer: around 2030 according to various sources. So, a Taiwan invasion, might be a few years off yet! All the sabre rattling between the US and China is likely to be just that for some time to come.

We can’t control people or events but we can control what we choose to think about!

The most interesting point of this from an investor point of view is that most analysts will tell you that they see some of the best economic growth, and potentially some of the better investment returns coming from Asia in the years ahead, driven by consumer demand in China. So, even with any worries you may have surrounding China and its imperial intentions, a good investment portfolio should have a reasonable allocation to China and Asia to help in the growth potential of your portfolio. This might seem to be completely contradictory to common sense given what we see in the news, but making surely you are armed with the facts in 2023 and beyond, and not just what ‘the papers say’ is going to more important then ever for the long term protection of your money.

If you would like to discuss this or any other subject relating to how the economic, social and political events in the years ahead might affect you and your personal financial plans, then you can contact me on gareth.horsfall@spectrum-ifa.com or on cell +39 333 6492356

And on that happy note..

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