China-Taiwan-US tensions: Will there be another war?
8 min read
On Tuesday last week, US House of Representatives Speaker Nancy Pelosi arrived in Taiwan on a trip, announcing an unflagging American commitment to this Chinese-dominated island that longs for independence. However, China has stepped in to condemn the highest-level US visit in 25 years as a threat to their peace and stability. Pelosi’s visit is clearly risking the worsening of the US-Chinese relations, pushing it to a new low.
In response to the visit, China launched 11 ballistic missiles around Taiwan’s north-east and south-west coasts. Japan also said that five Chinese missiles landed in its waters as well, forcing it to call for an immediate stop to the exercises before matters worsened. China viewed Pelosi’s visit as an outright challenge to its claims of sovereignty over Taiwan.
A little history of China and Taiwan
China sees Taiwan as a breakaway province that will ultimately be brought under its control, even if it means to do so by force.
The first settlers in Taiwan were Austronesian tribal people, thought to have come from modern day Southern China. It appears that the island was found in Chinese records in AD239 when an emperor sent an expeditionary force to explore the vicinity. This was one of the key factors Beijing has been using to back its territorial claims. In fact, Taiwan was indeed administered by China’s Qing Dynasty from 1683 to 1895. From the 17th century onwards, significant numbers of migrants started arriving from China as refugees escaping from hardship in their hometowns. Most were Hoklo Chinese from Fujian province or Hakka Chinese from Guangdong. Their descendants are now the largest demographic groups on the island.
Japan surrendered Taiwan after World War Two, relinquishing its control of the territory, which they had taken from China during the first World War. The Republic of China (ROC) began ruling Taiwan after emerging as one of the victors of war, with the consent of its allies, the US and UK. However, a civil war broke out in China a few years later, and then-leader Chiang Kai-shek’s armed forces were defeated by Mao Zedong’s Communist army. Thereafter, Chiang and his Kuomintang (KMT) government, together with their supporters, fled to Taiwan in 1949. They then dominated Taiwan’s politics for many years, with Chiang establishing a government-in-exile in Taiwan, which he led for the next 25 years.
China is looking at this point in history to say that Taiwan was originally a Chinese province. In fact, Chiang’s ROC government-on-exile first claimed to represent the whole of China, with the full intention to re-occupy. It even held China’s seat on the United Nations Security Council and was recognised by many Western nations as the only Chinese government. However, by the 1970s, the UN switched diplomatic recognition to Beijing and the ROC government was forced out. The recognition of the ROC government diplomatically had fallen drastically. The Taiwanese are pointing to the same history to argue they were never part of the modern Chinese state that was first formed after the revolution in 1911, or at the People’s Republic of China that was established under Mao in 1949.
Now, Taiwan’s legal status remains unclear despite having all the characteristics of an independent state and a political system very much different from China.
What is China and Taiwan like today?
The relationship between the two did improve in the 1980s as Taiwan eased their regulations on visits to and investments in China. But that clearly didn’t imply that Taiwan did not intend to draw the line between the two nations. China proposed the “one country, two systems” option, claiming that Taiwan would be allowed significant autonomy should it agree to come under Beijing’s control. Taiwan rejected the offer, while Beijing insisted that Taiwan’s ROC government is illegitimate.
Chen Shui-bian and his party, the Democratic Progressive Party (DPP), openly backed “independence” when Taiwan elected him as president in 2000. China then issued a so-called anti-secession law in 2005, a year after Mr Chen was re-elected, stating China’s right to employ “non-peaceful means” against Taiwan if it attempted to “secede” from China.
The animosity between both parties continued. Eight years later, in 2016, the election of Taiwan’s current president, Tsai Ing-wen, and her victory of a second term in 2020 with a record-breaking 8.2 million votes further strained the relationship between the two. At that point in time, Hong Kong was in the midst of chaos, with major protests against the mainland’s growing influence. In response to the protests, China then implemented a national security law in Hong Kong, clearly displaying yet another sign of Beijing’s assertion.
What are the economic implications of this entire conflict?
The ties between Beijing and Taiwan’s economies have grown over the years. Between 1991 and May 2021, Taiwanese investment in China has totalled $193.5 billion. In fact, some Taiwanese citizens are concerned about how their economy may very well be dependent on China now. Those on the other end of the spectrum believe that closer business ties are less of a cause for concern as it would imply that the odds of Chinese military action are very much lower as it would cost China’s own economy.
For the rest of the world, the conflict is also a growing concern. Taiwan’s economy is very crucial on a global scale. Computer chips made in Taiwan power much of the world’s everyday electronic equipment, and we are talking about daily essentials like phones, laptops, watches and even game consoles. A single Taiwanese company, the Taiwan Semiconductor Manufacturing Company (TSMC), has over half of the world’s market, standing at 65% of the global production of computer chips. TSMC is a purported “foundry”, an enterprise which makes chips designed by consumer and military customers. It is an enormous industry, worth almost $100 billion in 2021. A Chinese takeover in Taiwan could give Beijing some control over one of the world’s most important industries, and this is indeed a cause for concern for many nations across the globe.
How does the US come into the picture?
The US has long been strategically ambiguous about the extent to which it would exert military intervention if China were to invade Taiwan. It has formally recognised only one Chinese government, in Beijing, and has legal ties with the capital rather than Taipei, sticking to its “One-China” policy. However, the US has also pledged to supply Taiwan with defensive weapons and emphasised that any attack by China would cause “grave concern”.
President Joe Biden has also established that the US will defend Taiwan militarily, yet he has ironically committed to the “One-China” policy, which clearly implied that Taiwan ought to be under China. This issue of Taiwan has further strained tensions between the US and China. Since Biden’s victory in the elections, Beijing has increased military incursions in Taiwan’s air defence zone in response to any perceived support for Taiwan from Washington.
Will there really be a war in the future?
Just last October, Taiwan’s defence minister Chiu Kuo-cheng stated that the People’s Liberation Army (PLA) would be fully capable of attacking Taiwan by 2025, making current times more dangerous than it ever was in the past 40 years. Looking at the Ukraine incursion, some are starting to feel that the Chinese threat to Taiwan may no longer be hypothetical after all. Taiwanese experts view 2024 and 2025 as an especially precarious period, holding the belief that President Xi Jin-pin might be tempted to use force if the ruling DPP wins again in the next presidential election in early 2024, or if he senses a political vacuum in the US after its next presidential election in late 2024.
Some analysts are of the view that politically, the value of China adopting some sort of military action to show its resolve and willingness to resist the US is considerably larger than before. That is if China leaders truly believe that the US will extend an unwavering security commitment to Taiwan. The US’s increasingly bitter competition with China is also adding to the risk. Should the tensions not ease in in the coming years, the probability of the outbreak of a war appears to be significantly higher.
A Trader’s View
The Australian Dollar (AUD) is often closely correlated to the Chinese Renminbi (RMB). This is so because China is one of Australia’s biggest trading partners. Therefore, any China’s economic movement may highly impact AUD.
Now let’s take a look at the AUD/USD monthly chart for analysis.
We can see that the AUD/USD is strongly supported at the 0.68 region. The rejection HammerHead candlestick at the support region shows signs of a potential push up of the price up to 0.8 region again. Therefore, we can conclude that the AUD is strengthening.
Let’s use the Russia-Ukraine war as an example. Russian Rubles (RUB) strengthened as a result of the war. Hence, in the event of a war between China and Taiwan, we can also likely see the possibility of the RMB strengthening. This can also lead to the strengthening of the AUD. The price movement will be escalated, and can easily break the 0.8 resistance region and go up even higher.
In addition, we will use the AUD/JPY monthly chart to further strengthen our analysis on the AUD. Let’s take a look.
The AUD/JPY chart clearly shows that we are in some bullish momentum, as the price has already broken the consolidation zone. The price tried to go back into the consolidation zone, but it failed. We foresee the price may continue its way up to at least 104.
