Taiwan is headed for a pivotal presidential election on Jan. 13 that will shape its fraught relationship with China—and signal to investors possible scenarios for an increasing geopolitical conflict between the U.S. and China.
It’s part of a busy election year where half of the world’s population heads to the polls. It’s also more important than in the past because Taiwan’s relations with China are far more tenuous than during the last election in 2016.
Elections in the island of just 24 million people also have supersize influence for the global economy as it is the hub for semiconductors —and home to
Taiwan Semiconductor Manufacturing,
which makes most of the advanced semiconductors crucial to power the digital economy.
With Chinese leader Xi Jinping describing Taiwan as the most important and sensitive issue in the U.S.-China relationship, this election is a must-watch for investors.
For decades, the island has been self-governed with high level of personal freedoms, even as Beijing has claimed it as a territory. In recent years, Xi has emphasized reunification, including by force, if needed. Meanwhile, the U.S. has stuck to its ambiguous commitment to a “one-China” policy. But President Joe Biden has broken precedent in recent years and said several times the U.S. would defend the island in the event of a China invasion.
Polls show that the majority of Taiwanese don’t want unification nor complete independence, instead favoring the delicate status quo that has persisted for decades.
The election could rattle that balance in a way that could potentially undo a brief reprieve that came from a Biden-Xi summit in December where the two leaders vowed to keep their burgeoning rivalry from spilling into a geopolitical conflict.
Polls show a tight three-way race, with Vice President Lai Ching-Te, of the Democratic Progress Party (DPP) that supports sovereignty, with a slight lead over former policeman-turned-Kuomingtang party (KMT) candidate Hou Yu-ih, and Ko Wen je, the former mayor of Taipei and member of the populist newcomer Taiwan People’s Party (TPP).
The main difference between the parties is how they view improving relations with Beijing. “The KMT sees value in engaging mainland in inducing restraint on China’s part,” Richard Bush, nonresident senior fellow in the Center for East Asia Policy Studies at Brookings, said at a recent briefing. “The DPP is much more skeptical of China’s intentions and is disinclined to believe the engagement tried in 2008-2016 will work so it is more [focused] on trying to deter China from misbehavior and as part of that rely more on the U.S.”
Efforts by Beijing to undermine social cohesion on the island is creating uncertainty about how willing some voters may be to grasp at something new—like the upstart third-party candidate—or how quickly sentiment about maintaining the status quo could shift, cautioned Shelley Rigger, Brown Professor of Asian Politics at the Brookings briefing.
Analysts are watching not just who wins but to what degree Beijing reacts. “The big long-term concern is that Beijing loses hope in a peaceful unification and starts to believe the only option is to use force,” Brian Page, fellow with the China Power Project at the Center for Strategic and International Studies tells Barron’s.
How Beijing reacts will also determine the immediate market action. The iShares Taiwan exchange-traded fund is up 19% in the past year while the iShares MSCI China exchange-traded fund is down 14% as the country’s economic recovery sputters.
If Beijing views the results as a positive, such as a KMT victory, they could lighten pressure on Taiwan and also push back on some U.S. restrictions aimed at hobbling its ability to develop advanced technology.
A KMT win could boost Taiwan and Chinese-oriented stocks as a Beijing-friendly leader might reduce the risk of a conflict in the near-term, said Rory Green, head of China and Asia research for TS Lombard.
Less clear is how Beijing feels about the TPP’s Ko, in part because he has been more circumspect about cross-straits relations, Page adds.
Though the DPP has a lead, analysts caution against drawing conclusions. President Tsa Ing-wen’s approval ratings have taken a beating and the weak economy has dented satisfaction with the party. History isn’t kind either, with the incumbent party typically losing when the economy is in a slog, and power switching parties every eight years since Taiwan began democratic elections for president in 1996.
If DPP manages to hold on to power, Beijing is likely to ratchet up tensions, squeezing the administration economically, diplomatically and militarily to intimidate them, said Kharis Templeman, research fellow and project manager at the Project on Taiwan in the Indo-Pacific Region at the Hoover Institution during the Brookings briefing.
With a DPP victory, China could respond with the playbook used during recent escalations, including increased military drills used during former House Speaker Nancy Pelosi’s visit in 2022. If any escalation is seen as temporary, initial market reaction could be relatively subdued, according to a trio of authors who looked at potential fallout in a paper
for the Center for Strategic and International Studies.
But if the reaction diverges from what China has used in the past, financial companies and multinationals could beef up plans for financial disruptions, according to the paper.
For now, analysts’ biggest concern is an accidental conflict, especially if Beijing leans on military drills to ratchet up pressure. In the event of a collision between Chinese and Taiwan fighter jets, the market would react immediately, with U.S.-listed Chinese companies and those with China or Taiwan links likely to take the biggest hits in anticipation of sanctions, according to the paper.
If a conflict turns into a military one—or looks like it could—the authors expect the fallout in the market to surpass the hit that could come from sanctions, with China and the global economy paying a severe price even if the U.S. and its allies weren’t united in imposing restrictions.
Such scenario planning is likely to ensue in the weeks after the election, especially in the event of a DPP win, and that could limit how much investors want to pay for stocks caught in the middle.
Beijing may not react immediately, requiring investors to keep an eye on how the situation unfolds in the months following the election. Another potential tripwire could be what happens in the U.S. presidential election—and if the U.S. takes a more isolationist stance and in turn nudges Taiwan to rethink the status quo.
Write to Reshma Kapadia at [email protected]
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