China’s Economic Cost of Invading Taiwan
China and Taiwan have been locked in a tussle for decades over who gets to call the island country home. China considers Taiwan a breakaway province, while Taiwan sees itself as a sovereign nation. The recent increase in tensions between China and Taiwan has many experts worried that Chinese forces may soon attempt to retake the mainland by force, but that won’t happen anytime soon. China would face a prolonged conflict on its doorstep that would worsen its already strained economic conditions.
First, let’s take a look at those strained economic conditions. Remember when China’s property giant Evergrande defaulted on its interest payments to international investors, causing the Chinese Communist Party to intervene in order to avoid a global economic shock? Yeah, that’s still a huge issue considering China’s property sector is estimated to account for about 30% of total economic output. Local party and government officials are having to foot the bill of incomplete housing projects left over by Evergrande. This is a significant expense due to inflation and demands of contractors to be paid in advance in order to secure payment.
Another indicator of China’s weakened economy are their employment figures and the effects of their zero COVID policies. China hit an all-time high of youth unemployment in July at 19%. Migrant workers have faced little prospects of employment due to zero-COVID policies. Factories are having to shut down due to those same policies, disrupting supply chains.
Lockdowns are keeping people at home, which slows consumer demand. Residents are no doubt growing restless and lacking confidence in their own future, let alone one that may include war.
Now, with those current economic conditions in mind, let’s look at what’s at stake if China decides to invade Taiwan. China still depends on exports to keep what’s left of its economy running. The U.S. makes up for $700 billion in two-way trade annually. Mainland China exported $3.03 trillion worth of goods in 2021. The United States, Hong Kong, Japan, and South Korea are its top trading partners. Trends show China continues to increase year-by-year exports to the United States and South Korea. China is reliant on its global partners to fuel its economy, and even help recover. Beijing cutting itself off from the rest of the world would be economic suicide given its status as a top trading partner with the world and due to the number of foreign direct investments. Political ambitions are a weak force against the laws of the market.
China is also dependent on foreign oil. Its focus on investing into more renewable energy resources gives insight to its future plans to be more independent from other countries, but it’s still a long way from meeting its own energy needs. Right now, China supplies about 80% of its own energy, but that leaves 20% at risk. Its oil imports pass through the Strait of Malacca, where the U.S. has strengthened its naval power. This leaves those energy imports at risk of being seized. China still has to rely on coal imports because their hydropower capabilities failed to meet the demands of its citizens after heatwaves and droughts rolled over the south. China faced the same issue last year, leaving businesses and citizens in the dark (literally) in a government effort to conserve energy. Although the country has goals to become independently powered by renewables, it’s still at the mercy of friendly trade relations in order to make up for what it can’t produce. This of course lends itself to the cheap oil from Russia.
Militaries need top technological capacity to fare well against nations such as Japan and the U.S. China cannot successfully invade Taiwan without risking its own technological progress. China imported $378 billion worth of semiconductors in 2020. Xi is appointing technocrats to lead the progress of an independent China, but this effort had only just begun. In September, Xi named about 9,000 enterprises up for tax breaks to help boost their technologies sector. The number of companies actually being successful for the Chinese Communist Party, which often touts favoritism and party loyalty instead of economic achievement, will be dubious.
It’s no doubt that China is looking at Russia closely after Putin invaded Ukraine. A global financial messaging system for banks across the globe called Swift cut off Russia after its invasion, leaving financial institutions in the country without access to any capital. Most trade transactions between the U.S. and China are done with the American dollar, leaving China at risk of taking a financial hit.
Strict COVID regulations are blocking China’s economic recovery. A test of the government’s movement towards relaxing those regulations to rejuvenate their economy is the Rugby Sevens tournament. The international games, which are in Hong Kong, usually attract thousands of people to the city. However, many travelers are hesitant to go because of the authoritarian rules related to testing positive. Many people infected with the virus are required to stay in government facilities until they test negative. Although Hong Kong authorities say they are relaxing these policies by the time the games start in November, all plans for players are aimed around these policies being in place, such as setting up a closed loop arrangement, where players can only travel between the training grounds, the games, and their hotel. I doubt any traveler will want to risk staying in a Chinese government facility, as they aren’t exactly the equivalent of even a one-star hotel from all reports.
It’s no secret that tensions between China and Taiwan have been running high lately. If China does invade Taiwan, it could have devastating consequences for international trade. It could also have even worse consequences for China’s economy. If you are curious to know a timeline of a possible invasion, President Xi Jinping once laid out plans for China’s “great rejuvenation”, by 2049, positioning control of Taiwan as one of the objectives of that goal. That leaves about 25 years for the world to get its act together, that is, if Putin doesn’t blow us all up by then.