[UPDATED ROLLING ANALYSIS] China-Taiwan: A new week

NOTABLE WEEKEND UPDATES:

CHINA

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  China confirmed it will extend military drills around Taiwan for Monday, according to Bloomberg.


• 
  China’s military will conduct "regular" drills from now on at the eastern side of the median line of the Taiwan Strait, according to Reuters citing Chinese state television.


• 
  Chinese Foreign Minister Wang said China’s actions toward Taiwan are just, appropriate and legal with the actions aimed at safeguarding China’s sovereignty and territorial integrity, while he added that Taiwan is not part of the US and is China’s territory, according to Reuters.

TAIWAN

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  Taiwan’s Defence Ministry said it detected 66 Chinese aircraft conducting activities in the Taiwan Strait as of 5pm local time on Sunday. It was also reported that Taiwan said Chinese aircraft and warships practiced attacking Taiwan on Saturday in retaliation for US House Speaker Pelosi’s recent visit, according to Reuters.


• 
  Taiwan’s transport ministry said transit flights gradually resumed on Sunday near China’s military drill zones 1-6 and said they will continue to direct flights and ships away from China military zone No. 7 off Taiwan’s eastern coast until Monday morning, according to Reuters.

US

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  US Secretary of State Blinken said China’s actions on Taiwan were moving away from a practice of resolving issues peacefully to coercion and towards using force, while he said the change to the status quo that has prevailed is coming from China and not the US. Blinken also said that the US seeks to work closely with Philippines President Marcos and reaffirmed that an attack on the Philippines in the South China Sea would invoke the defence treaty, according to Reuters.


• 
  White House said China’s activity around the Taiwan Strait is a significant escalation in China’s efforts to change the status quo, while it added that the actions are ‘provocative, irresponsible and raise the risk of miscalculation’, according to Reuters.

Analysis details (07:17)

RHETORIC SINCE PELOSI'S LANDING: 

• China said US House Speaker Pelosi's visit violates the One China principle, and severely impacts US-China foundation, via Xinhua.


• US House Speaker Pelosi said while respecting the One China policy, our solidarity with Taiwan is more than ever, and added that they explored deepening trade ties with Taiwan and a trade agreement may be imminent. Pelosi is due to meet with semiconductor heads today.

ECONOMIC MEASURES TAKEN BY CHINA:

• China announced import bans on over 100 Taiwanese companies from the food & agriculture industries, while there were also recent reports that China halted Taiwan's natural sands exports from today.


• China announced stoppage of certain fruit and fish imports from Taiwan.


• China halted Taiwan's natural sands exports (of note for the semiconductor sector).


• Taiwan could seek to settle trade dispute with China at WTO, according to Reuters.

CHINESE MILITARY DRILLS (extended to Monday from Sunday):

• Chinese Eastern Military Command says it will carry out joint military operations around Taiwan Island from August 2nd evening local time; to conduct joint sea and air training in airspace north, southwest, southeast of the Taiwan Island, and will conduct long-range live firing in Taiwan Strait; live firing in waters off eastern coast of Taiwan.


• According to Global Times, "the PLA announced six exercise areas around Taiwan island, the closest being only 9 nautical miles from the island, and the waterways of Taiwan’s main ports will be blocked during the drills."

• 
  Military facilities and strategic security locations in Taiwan, and mainland China's amphibious staging areas, via AFP.

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  GLOBAL TRADE IMPLICATIONS: Shipping giant A.P. Moeller-Maersk (MAERSK DC) CEO said any potential closure of Taiwan straight would have a negative impact on global shipping. Earlier, SCMP reported global shipping lines postpone sailings and plan detours around Taiwan amid China drills with gas suppliers re-routing or reducing speed on some LNG vessels amid China drills, with shipments to Taiwan and Japan this weekend will be affected. (image via Bloomberg)

Analysis at 09:07

LONG-STORY-SHORT: Tensions have escalated between the world’s two largest economies over the visit of US House Speaker Pelosi to Taiwan. The move has struck a nerve in Beijing with recent rhetoric from China of a military nature. The visit will likely not lead to any joint economic policies between Taipei and Washington during the brief visit, however, it will cause China to question the US’ acknowledgement of Beijing’s “One China principle” which does not see Taiwan as a sovereign nation, with Pelosi being the highest-ranking US official to visit the island since 1997. Desks have also flagged the timing of the visit - August marks the 95th anniversary of the founding of the People's Liberation Army (PLA), and thus a visit to Taiwan from the US comes at a sensitive time for Beijing. From the US side, some officials, including National Security Advisor Sullivan, have warned against the trip as it escalates the risk of a conflict. However, heading into the US midterms in November, “many Republicans, and a few Democrats, have urged Pelosi to proceed, arguing that any decision to postpone or cancel would be capitulating to China”, according to the FT.

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  BRIEF HISTORY: The rhetoric over Taiwan was somewhat stable until the leak of Speaker Pelosi’s potential visit to Taiwan. China for years has spoken against the growing alliance between the US and Taipei, an area China claims territory over. China has urged the US to cut official ties with Taiwan and to stop upgrading substantive relations, interfering in China's internal affairs, and to stop undermining peace and stability across the Taiwan Strait, as well as US/China relations. A full history via BBC can be found here.

BEIJING RETALIATION:

• 
  MILITARY: Global Times' Hu Xijin tweeted on Tuesday "Based on what I know, in response to Pelosi's possible visit to Taiwan, Beijing has formulated a series of countermeasures, including military actions.", whilst several Chinese warplanes reportedly flew close to the median line of the Taiwan Strait (see figure below) on Tuesday morning and several Chinese warships have stayed close to the median line of the Taiwan Strait since Monday, according to a Reuters source briefed on the matter. Further reports also highlighted that the Chinese military will hold exercises in the South China Sea from August 2-6 and a warning was issued - with entry to an area in the sea prohibited due to military exercises from Tuesday to Saturday, according to Global Times. A military source vis SCMP close to the Chinese People’s Liberation Army said it would step up its pressure campaign against Taiwan in response to a Pelosi visit and that “Beijing will give Taipei a hard time” afterwards. SCMP highlights some potential military options the PLA can take:

1. Sending warplanes to Taiwan Air Defence Identification Zone (ADIZ)


2. Flying across the median line – a buffer zone the US established in 1954 which China denies (see figure below) - and/or flying over Taiwan.


3. Deploying warships in waters near Taiwan.


4. Conducting missile tests in waters near Taiwan.

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  ECONOMIC: SGH Macro Advisors, citing their sources, suggest that “Beijing has floated economic retaliation against the United States as well”, which if realised, would be an “unexpected and major wildcard for markets” as participants focus on military responses. The desk suggests export restrictions of “daily necessities” to the US could be targeted in a bid to directly influence supply and thus exacerbate inflation at a time of elevated prices and slowing growth.

MARKET IMPACT

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  STOCKS:  Economic retaliation from Beijing will likely keep stocks under pressure. It’s also worth being aware of the Chinese giants listed in the US – such as Alibaba, and Tencent, whilst Taiwanese contract chip manufacturer TSMC is also watched amid the Co’s over-50% market share in the chip production sector – any hindrances in operations could be bearish for chip supply.


• 
  FX: Desks note of potential haven flows into the Buck amid Pelosi’s risky trip, with ING warning of potential shockwaves across FX markets: “The dollar, the yen (which may break below 130.00 already today) and CHF should be the main beneficiaries, while CNY and China-sensitive currencies (along with high-beta currencies in general) could come under pressure. Here, AUD and NZD appear mostly vulnerable in G10”, ING says.


• 
  BONDS: It is worth noting that reports last month suggested that Mainland China has reduced its holding of US debt, with the total dropping under the USD 1tln mark for the first time in 12 years, with analysts in China suggesting US Treasuries themselves are risk assets.

08 Aug 2022 - 07:12- Fixed IncomeEconomic Commentary- Source: Newsquawk