Reading the tea leaves - Taiwan

[TUK020]

One of the things that I have been reflecting on over the last couple of months is the rise of Open Source Intelligence (OSINT), and the increasing level of information publicly available. However, this just increases the challenge of being able to separate 'signal' from 'noise', assimilate and digest it.

The first such incident was me asking myself in Jan 2020 what were the likely impacts/risks associated with this new virus reported in Wuhan, and completely failing to react in terms of personal portfolio (I did put in place work from home strategies, software and equipment in Feb for my company, but missed the wider market significance). I did raise a post on the issue on the Global/Macro board, only to get it immediately rubbished by one of the challenges local to that board.

The second such incident was reading of troops being massed on the Ukraine border in Mar 2022. Later I reflected that Putin's track record on Georgia, Crimea, Donetsk seemed quite indicative. Still later I learned, that Putin wrote an essay on why Ukraine didn't have a right to exist, and should be part of Greater Russia - he sent a copy of this to every member of the Russia military mid 2021. We were all sat there, reading of troop movements in the press, and going "no, surely he won't be stupid enough to.....".

The latest thing that I have been reading is reports of US military leaked memos about China intent on Taiwan. I ask myself "Is this another boiled frog moment?" Are we missing signals that we should be assigning risk to, and responding preemptively?

I have just unloaded my holding of HSBA, and used most of the proceeds to increase my holding of Persimmon (yes, I know it is probably heading for a housing crash, and dividend cut, but think much of this has been priced in, and the long term value of its land bank is undiminished). I have also decided to resist any temptation to top slice my holding in BAe.

I am trying to work out what else I am sitting on that has significant exposure to a China move on Taiwan - mostly through ITs invested in that region - HFEL, MNKS, and SMT.

Also wondering if Samsung & Intel represent hedges against such an occurence

Would appreciate feedback from the clever folks here on:
a) am I being unnecessarily paranoid?
b) if I am not, what else should I beware of in portfolio terms?
c) if I am not, are there potential opportunities here?

tuk020

[Mike4]

One of the things that I have been reflecting on over the last couple of months is the rise of Open Source Intelligence (OSINT), and the increasing level of information publicly available. However, this just increases the challenge of being able to separate 'signal' from 'noise', assimilate and digest it.

The first such incident was me asking myself in Jan 2020 what were the likely impacts/risks associated with this new virus reported in Wuhan, and completely failing to react in terms of personal portfolio (I did put in place work from home strategies, software and equipment in Feb for my company, but missed the wider market significance). I did raise a post on the issue on the Global/Macro board, only to get it immediately rubbished by one of the challenges local to that board.

The second such incident was reading of troops being massed on the Ukraine border in Mar 2022. Later I reflected that Putin's track record on Georgia, Crimea, Donetsk seemed quite indicative. Still later I learned, that Putin wrote an essay on why Ukraine didn't have a right to exist, and should be part of Greater Russia - he sent a copy of this to every member of the Russia military mid 2021. We were all sat there, reading of troop movements in the press, and going "no, surely he won't be stupid enough to.....".

The latest thing that I have been reading is reports of US military leaked memos about China intent on Taiwan. I ask myself "Is this another boiled frog moment?" Are we missing signals that we should be assigning risk to, and responding preemptively?

I have just unloaded my holding of HSBA, and used most of the proceeds to increase my holding of Persimmon (yes, I know it is probably heading for a housing crash, and dividend cut, but think much of this has been priced in, and the long term value of its land bank is undiminished). I have also decided to resist any temptation to top slice my holding in BAe.

I am trying to work out what else I am sitting on that has significant exposure to a China move on Taiwan - mostly through ITs invested in that region - HFEL, MNKS, and SMT.

Also wondering if Samsung & Intel represent hedges against such an occurence

Would appreciate feedback from the clever folks here on:
a) am I being unnecessarily paranoid?
b) if I am not, what else should I beware of in portfolio terms?
c) if I am not, are there potential opportunities here?

tuk020

Funny you should say all that. I've been thinking exactly the same about Taiwan. The luke warm response of 'The West" to Ukraine must be encouraging China to go for it sooner rather than later. A year ago I was thinking the desire to subsume Taiwan into China was a long term aspiration of the Chinese leadership but now, I would not be surprised one jot if it happens this year.

[ReformedCharacter]

One of the things that I have been reflecting on over the last couple of months is the rise of Open Source Intelligence (OSINT), and the increasing level of information publicly available. However, this just increases the challenge of being able to separate 'signal' from 'noise', assimilate and digest it.

The first such incident was me asking myself in Jan 2020 what were the likely impacts/risks associated with this new virus reported in Wuhan, and completely failing to react in terms of personal portfolio (I did put in place work from home strategies, software and equipment in Feb for my company, but missed the wider market significance). I did raise a post on the issue on the Global/Macro board, only to get it immediately rubbished by one of the challenges local to that board.

The second such incident was reading of troops being massed on the Ukraine border in Mar 2022. Later I reflected that Putin's track record on Georgia, Crimea, Donetsk seemed quite indicative. Still later I learned, that Putin wrote an essay on why Ukraine didn't have a right to exist, and should be part of Greater Russia - he sent a copy of this to every member of the Russia military mid 2021. We were all sat there, reading of troop movements in the press, and going "no, surely he won't be stupid enough to.....".

The latest thing that I have been reading is reports of US military leaked memos about China intent on Taiwan. I ask myself "Is this another boiled frog moment?" Are we missing signals that we should be assigning risk to, and responding preemptively?

I have just unloaded my holding of HSBA, and used most of the proceeds to increase my holding of Persimmon (yes, I know it is probably heading for a housing crash, and dividend cut, but think much of this has been priced in, and the long term value of its land bank is undiminished). I have also decided to resist any temptation to top slice my holding in BAe.

I am trying to work out what else I am sitting on that has significant exposure to a China move on Taiwan - mostly through ITs invested in that region - HFEL, MNKS, and SMT.

Also wondering if Samsung & Intel represent hedges against such an occurence

Would appreciate feedback from the clever folks here on:
a) am I being unnecessarily paranoid?
b) if I am not, what else should I beware of in portfolio terms?
c) if I am not, are there potential opportunities here?

tuk020

Funny you should say all that. I've been thinking exactly the same about Taiwan. The luke warm response of 'The West" to Ukraine must be encouraging China to go for it sooner rather than later. A year ago I was thinking the desire to subsume Taiwan into China was a long term aspiration of the Chinese leadership but now, I would not be surprised one jot if it happens this year.

You may be right but I think otherwise - that the likelihood of an invasion by China of Taiwan has become less likely as a result of the war in Ukraine.

RC

[Itsallaguess]

are there potential opportunities here?

Well there's always 'opportunities' when looking back at past events, but given that the FTSE's near it's all time highs whilst dealing with both the COVID and Ukraine issue that you've cited, I'd certainly put 'simply stay invested' as a valid 'opportunity' as well...

Don't forget that even if you're content that you saw those two issues looming, and perhaps regret not taking the opportunity to do something about them, you're currently only looking at when you might have sold. That's only half the process, and you'd then have to convince yourself that you'd have bought back in at the right time as well, and I sometimes think it's the absence of that evidence that makes it easy to look back and consider the sell-events only, and convince ourselves that we'd have been better ducking out of the market for a while...

Getting any re-entry process wrong, or not doing it at all and allowing the market to run away from you, can often be quite problematic, I imagine...

I prefer to stay fully invested and allow myself to play some tunes with my cash-levels if I'm feeling a little apprehensive. That ticks a few boxes for me, but the main one it ticks is the one that allows me to 'think I'm doing something', and over the long-term, I imagine getting it right or wrong with my floating cash levels isn't going to be too influential one way or another, so I think it's more a case of tricking myself into thinking I'm 'being proactive', rather than taking too much risk in doing so with my invested holdings...

Making sure to have some cash available to make a half-decent purchase during turbulent markets just about throws off enough of the 'feel good' vibes that it helps mask what's usually going on with my broader portfolio. It's a case of finding the mental-tricks that suit us as individuals, I think, and I'm glad I found that one because it's suited me for a lot of years now, but I do try very hard not to over-trade, and I appreciate that some of us are wired differently, and sometimes look for reasons to do it...

Cheers,

Itsallaguess

[Dod101]

What real motivation is there for China to take Taiwan by force? What would it gain? It would be a very expensive way to gain 'face' and from whom anyway?

Xi is the hardest line Chinese president for some time but it does not mean that he does not understand the world of geopolitics. I will probably be proved entirely wrong but it would surprise me if China does not bide its time and organise Taiwan so that it becomes the rotten apple and drops into China's pocket. Meanwhile the Chinese nationalists in Taiwan are hardline right wing and will be defended by most of the west one way or another should China invade.

I am certainly not doing much with my portfolio although I may well reduce my holding in HSBC if the price continues upwards, but that will be more on investment grounds than any threat by China on Taiwan.

If China does invade, the whole of the stockmarket will be an uncomfortable place to be.

Dod

[micrographia]

If China does invade, the whole of the stockmarket will be an uncomfortable place to be.Dod

Indeed. That is approaching gold and guns under the bed territory. Imagine the economic impact of global trade sanctions against the PRC coupled with the sudden loss of Taiwan's contribution to the global economy .

EEM

[absolutezero]

What real motivation is there for China to take Taiwan by force? What would it gain? It would be a very expensive way to gain 'face'

You appear to underestimate how important 'face' is in the Chinese psyche.
Face is everything

[TUK020]

If China does invade, the whole of the stockmarket will be an uncomfortable place to be.Dod

Indeed. That is approaching gold and guns under the bed territory. Imagine the economic impact of global trade sanctions against the PRC coupled with the sudden loss of Taiwan's contribution to the global economy .

EEM

I think that is the point I am trying to make.
It sounds too horrible to contemplate, so we all prefer not to think about it.

So, let's try a little mental exercise. Russia invades a sovereign nation, uses its considerable power in energy to hold Europe to ransom, and threatens use of nukes. The stock exchange tanks about 7.5% immediately, and then as much again over the following months as the consequent impacts unfold (mostly around increased energy costs).

China is much more integrated into the world economy, and Taiwan contributes much higher value added stuff than wheat and fertiliser. So let's say the impact will be 3x the Russia/Ukraine one. Surely the possibility of a 20-40% decline warrants holding some 'dry powder' in reserve? Some thought about what would be relatively untouched as an asset to hold said dry powder in? Cash, gold, US Treasuries?

And thinking about what would have lots of consequent impact? HSBA is one obvious one. How about Diageo & BLT for dependence on China markets?

[Dod101]

What real motivation is there for China to take Taiwan by force? What would it gain? It would be a very expensive way to gain 'face'

You appear to underestimate how important 'face' is in the Chinese psyche.
Face is everything

You don’t need to tell me that. I lived in Hong Kong for 23 years and was then closely associated with it for another three. I still return often.

My comments are only my opinion. I do not underestimate ‘face’ for the Chinese but I cannot see what ‘face’ they would gain by forcibly taking Taiwan, or lose by not taking it. If you have an angle, I would be interested to hear what it is.

Dod

[Mike4]

If China does invade, the whole of the stockmarket will be an uncomfortable place to be.Dod

Indeed. That is approaching gold and guns under the bed territory. Imagine the economic impact of global trade sanctions against the PRC coupled with the sudden loss of Taiwan's contribution to the global economy .

EEM

I have to agree. I'm sorely tempted to buy some gold despite the lack of dividend but frankly, I don't know how.

Yes I can buy the miners and all those derivatives but I'd rather have the solid gold.

OMG I've always had them traveller roots deep inside me...

[moorfield]

I have to agree. I'm sorely tempted to buy some gold despite the lack of dividend but frankly, I don't know how.

Yes I can buy the miners and all those derivatives but I'd rather have the solid gold.

OMG I've always had them traveller roots deep inside me...

Always believe in your soul.

[micrographia]

I think that is the point I am trying to make.
It sounds too horrible to contemplate, so we all prefer not to think about it.

So, let's try a little mental exercise. Russia invades a sovereign nation, uses its considerable power in energy to hold Europe to ransom, and threatens use of nukes. The stock exchange tanks about 7.5% immediately, and then as much again over the following months as the consequent impacts unfold (mostly around increased energy costs).

China is much more integrated into the world economy, and Taiwan contributes much higher value added stuff than wheat and fertiliser. So let's say the impact will be 3x the Russia/Ukraine one. Surely the possibility of a 20-40% decline warrants holding some 'dry powder' in reserve? Some thought about what would be relatively untouched as an asset to hold said dry powder in? Cash, gold, US Treasuries?

And thinking about what would have lots of consequent impact? HSBA is one obvious one. How about Diageo & BLT for dependence on China markets?

It's not that it is too horrible to contemplate. It's more that the economic impact would be of such magnitude that it might not be possible to significantly mitigate its effects. The combined GDP of the PRC and RoC is 10X that of Russia and Ukraine and both are far more important to the developed world economies than either. This recent report from the CSIS covers most of the main economic and political considerations, though fails to note that the PRC is also now the worlds largest food importer. It predicts a global flight to US cash deposits and Treasuries should an invasion look likely.

https://www.csis.org/analysis/reunifica ... tory-china

Also worth noting that even if circumstances persuaded the PRC leadership that it was worth a throw, it is not at all clear that they could successfully bring off a successful invasion of the RoC. If it tried it would certainly require an enormous expenditure of blood and treasure for little tangible return and given the magnitude of the military and naval build-up needed there should be ample warning of what is coming.

EEM

[rhys]

I have to agree. I'm sorely tempted to buy some gold despite the lack of dividend but frankly, I don't know how.

Yes I can buy the miners and all those derivatives but I'd rather have the solid gold.

I use Bullionvault.com; 0.1% annual holding fee.
My regret has been buying in their London rather than Zurich vault.

[stevensfo]

I have to agree. I'm sorely tempted to buy some gold despite the lack of dividend but frankly, I don't know how.

Yes I can buy the miners and all those derivatives but I'd rather have the solid gold.

I use Bullionvault.com; 0.1% annual holding fee.
My regret has been buying in their London rather than Zurich vault.

Many years ago, I would have agreed. But Switzerland has had pressure to abide by international standards for many years. It's part of the single market, in the Schengen area and part of the CRS. If you read the small print very carefully, you may find that the bullion dealers claim exemption from all Swiss privacy laws. So even if your gold is in Zurich, the UK government may not be able to touch it physically, but they will know exactly how much you have and send the boys round to make you an offer you can't refuse!

Steve

[TUK020]

I think that is the point I am trying to make.
It sounds too horrible to contemplate, so we all prefer not to think about it.

So, let's try a little mental exercise. Russia invades a sovereign nation, uses its considerable power in energy to hold Europe to ransom, and threatens use of nukes. The stock exchange tanks about 7.5% immediately, and then as much again over the following months as the consequent impacts unfold (mostly around increased energy costs).

China is much more integrated into the world economy, and Taiwan contributes much higher value added stuff than wheat and fertiliser. So let's say the impact will be 3x the Russia/Ukraine one. Surely the possibility of a 20-40% decline warrants holding some 'dry powder' in reserve? Some thought about what would be relatively untouched as an asset to hold said dry powder in? Cash, gold, US Treasuries?

And thinking about what would have lots of consequent impact? HSBA is one obvious one. How about Diageo & BLT for dependence on China markets?

It's not that it is too horrible to contemplate. It's more that the economic impact would be of such magnitude that it might not be possible to significantly mitigate its effects. The combined GDP of the PRC and RoC is 10X that of Russia and Ukraine and both are far more important to the developed world economies than either. This recent report from the CSIS covers most of the main economic and political considerations, though fails to note that the PRC is also now the worlds largest food importer. It predicts a global flight to US cash deposits and Treasuries should an invasion look likely.

https://www.csis.org/analysis/reunifica ... tory-china

Also worth noting that even if circumstances persuaded the PRC leadership that it was worth a throw, it is not at all clear that they could successfully bring off a successful invasion of the RoC. If it tried it would certainly require an enormous expenditure of blood and treasure for little tangible return and given the magnitude of the military and naval build-up needed there should be ample warning of what is coming.

EEM

Thank you for the link. Valuable contribution to the discussion.

[Hallucigenia]

What real motivation is there for China to take Taiwan by force? What would it gain? It would be a very expensive way to gain 'face' and from whom anyway?

Because it's not about "face", it's about identity - a far more powerful force. Did the UK liberate the Channel Islands in 1945 to save face, or because we saw them as an indivisible part of the UK? Ditto the Falklands in 1982, or sending troops to Northern Ireland.

Before anyone claims to know the mind of the Chinese, I suggest you read what they think, in their own words :
The Taiwan Question and China's Reunification in the New Era
Resolving the Taiwan question and realizing China's complete reunification is a shared aspiration of all the sons and daughters of the Chinese nation. It is indispensable for the realization of China's rejuvenation. It is also a historic mission of the Communist Party of China (CPC). The CPC, the Chinese government, and the Chinese people have striven for decades to achieve this goal...

Soon after its founding in 1921, the CPC set itself the goal of freeing Taiwan from colonial rule, reuniting it with the rest of the country and liberating the whole nation, including compatriots in Taiwan. It has made a tremendous effort to achieve this goal. The CPC is committed to the historic mission of resolving the Taiwan question and realizing China's complete reunification....

National rejuvenation has been the greatest dream of the Chinese people and the Chinese nation since the modern era began. Only by realizing complete national reunification can the Chinese people on both sides of the Straits cast aside the shadow of civil war and create and enjoy lasting peace. National reunification is the only way to avoid the risk of Taiwan being invaded and occupied again by foreign countries, to foil the attempts of external forces to contain China, and to safeguard the sovereignty, security, and development interests of our country. It is the most effective remedy to secessionist attempts to divide our country, and the best means to consolidate Taiwan's status as part of China and advance national rejuvenation. It will enable us to pool the strengths of the people on both sides, build our common home, safeguard our interests and wellbeing, and create a brighter future for the Chinese people and the Chinese nation. As Dr Sun Yat-sen, the great pioneer of China's revolution, once said, "Unification is the hope of all Chinese nationals. If China can be unified, all Chinese will enjoy a happy life; if it cannot, all will suffer."

Note section 3 - "China's Complete Reunification Is a Process That Cannot Be Halted". Essentially they have a plan for "One China" by 2049 that will see the likes of HK and Macao incorporated without any of that residual democracy nonsense, and likewise for Taiwan.

Meanwhile this is one view of how they see the US : Chinese No Longer Recognize the America They Once Admired (NYT, paywall)

Meanwhile this is the Pentagon's annual assessment of the Chinese military - behind the jargon you get a feeling of "we don't particularly fancy our chances even without further investment on their part" (China's defence budget is already about 4x Russia's)
https://media.defense.gov/2022/Nov/29/2 ... -CHINA.PDF

Which may be why some US analysts are now seriously suggesting this :
https://press.armywarcollege.edu/cgi/vi ... parameters
the United States and Taiwan should lay plans for a targeted scorched-earth strategy that would render Taiwan not just unattractive if ever seized by force, but positively costly to maintain. This could be done most effectively by threatening to destroy facilities belonging to the Taiwan Semiconductor Manufacturing Company, the most important chipmaker in the world and China’s most important supplier. Samsung based in South Korea (a US ally) is the only alternative for cutting-edge designs. Despite a huge Chinese effort for a “Made in China” chip industry, only 6 percent of semiconductors used in China were produced domestically in 2020.27 If Taiwan Semiconductor Manufacturing Company’s facilities went offline, companies around the globe would find it difficult to continue operations.28 This development would mean China’s high-tech industries would be immobilized at precisely the same time the nation was embroiled in a massive war effort. Even when the formal war ended, the economic costs would persist for years

The other obvious weaknesses to target would be China's dependence on imported food, oil and other raw materials. Although they import only 8% of their food, that still represents a huge amount in absolute terms, and their leadership are well aware of the role that food supply problems have played in past rebellions, so they're super-sensitive about it. Hence measures like this :
https://www.cfr.org/article/china-incre ... ts-problem

[Dod101]

And behind all of that lays 'face'. Taiwan was never part of greater China and it was subject to Colonial rule pre 1921 only in the eyes of the Chinese. They are as much colonialists as anyone else was.

There is none of that so called 'demcracry nonsense' certainly in Hong Kong nowadays. I do not know about Macao now but since it was always much less democratic than HK (not that HK had much democracy anyway) I imagine that it has none either.

China was essentially torn apart by the western powers for most of the 19th century and they were unable to do anything about it but in 1921 or thereby when this was apparently written, the CPC was anxious to right these wrongs and, largely motivated by 'face', to reassert themselves.

Dod

[tjh290633]

Taiwan was ruled by Japan before WW2. Our agent was brought up under that regime. It was Formosa, of course, the Portuguese word for Beautiful. Does China have any historic claim to the island?

TJH

[Dod101]

Taiwan was ruled by Japan before WW2. Our agent was brought up under that regime. It was Formosa, of course, the Portuguese word for Beautiful. Does China have any historic claim to the island?

TJH

I think this has been covered before. As you say before the Japanese laid claim to it, it was Portuguese for a long while. It 'belongs' to China only in the eyes of the Chinese, and I have little doubt that the tract cited by Hallucigenia is motivated by 'face' and especially now that the Chinese nationalists are making such a success of their Island and its economy.

Dod

[gryffron]

Moderator Message:
Moved to Global Topics from High Yield - general.
If you want to talk about economic and investment impacts of China/Taiwan, the discussion can stay here.
Any further discussion of the politics will be moved to the CAN.