Why I’m Not Afraid for Taiwan
Jason Hsu, Ph.D.
Chairman & CIO
This article was originally posted on March 4, 2022 and was reposted on March 30, 2022 as the inaugural article for Jason’s new LinkedIn Newsletter—The Bridge. Please click the banner below to subscribe.
I hesitate to post right now because I don’t want to distract from the tragedy playing out in Ukraine. But many friends are also concerned about how recent events will impact the China-Taiwan relationship. For those asking my opinion, I predict China will deescalate with Taiwan in the coming years because it simply has too much to lose by invading—and too much to gain through patience.
Many pundits are speculating that Russia’s aggression will embolden China to invade Taiwan. As is often the case, this speculation comes mostly from a casual reading of the popular press. As an investment firm specializing in greater China—Rayliant has offices in Taipei, Shanghai and Hangzhou—I care very much about the China-Taiwan relationship. I was also born in Taiwan, where my parents still live, and where I am a professor in international finance at the Taiwan National University of Political Science, where I was B-School colleagues with former Taiwan President Ma and current President Tsai.
In short, I monitor the Taiwan situation very closely. And my view is that while Russia’s invasion of Ukraine is a terrible tragedy, it is likely to improve—not exacerbate—the China-Taiwan problem.
Reason 1: The Cost of Conflict
Beijing, as advised by its more militant faction, has been testing U.S. resolve ever since Biden took office. The biggest risks during this period have been (1) accidental engagement during “fly-over” provocations; and (2) over-confidence of an easy victory if conflict escalates. But Russia’s invasion of Ukraine has given Chinese analysts numerous data points to re-consider the costs and risks of full-on conflict with the West. And, at the same time, has provided the dovish faction, which prefers diplomacy and peaceful reunification, talking points to restore balance in the conversation on Taiwan.
Over the past week, it seems increasingly likely that Russia’s invasion of Ukraine will end in strategic failure – even if a face-saving victory can ultimately be claimed by Putin. Beijing is watching keenly and is taking note. The West knows that as well. Perhaps, Beijing could tolerate significant military losses to invade Taiwan. Perhaps, Beijing is willing to ignore its own citizens who would not support substantial casualty to Taiwanese citizens, with whom they share a common, language, culture and heritage. But, the cost and scope of the crippling sanctions being applied to Russia and its oligarchs has forced Beijing to reconsider the economic and political cost of a Taiwan invasion. In fact, because of China’s greater economic entanglement with the West, comparable sanctions levied against China could hurt far more than they will against Russia. China is the world’s biggest seller and creditor. It has now realized that the West is not beneath seizing assets and denouncing debt in a spat. Through its invasion of Ukraine, Russia has proven just how costly it would be for China to follow suit in Taiwan.
Reason 2: The Value of Peace
Even as the cost of war becomes evident, the value of a peaceful China-Taiwan relationship is growing. In the coming months, China will have a chance to ascend as the more sensible and mature leader of the global communist brotherhood. The West will work with China and honor Beijing for managing and reining in Russia’s belligerence. Indeed, Western leaders are openly appealing to Xi to help negotiate with Putin to end the conflict in Ukraine. The West is well aware of the bigger game being played in the shadows. If China stays on the fence, even if it isn’t perfectly sincere in its neutrality, the world could stave off an undesirable plunge into Cold War 2.0. Western leaders have been willing to interpret China’s abstention from the UN resolution to condemn Russia as “an encouraging sign” of rational neutrality rather than support for Putin. The EU thus far has pursued an approach that is polar opposite to the popular press. Whereas the media has quickly painted China as an affiliate of Russia in forming a new front against the West. The EU, publicly, has only focused on China’s neutrality, its critical role in bringing about peace and its unique ability to dialogue with Putin. The West knows the harm of pushing the world’s second largest military and economy to join “Putin’s Axis of Evil”. It is in everyone’s interest for China to be Switzerland, at a time when even Switzerland has stopped wanting to be Switzerland. Being the swing vote, the player who can change the balance of power with a simple tilt—that is a newfound global influence that Xi has craved since taking office. It will also be a lucrative global role for China that the leadership in Beijing would not want to jeopardize.
It is a foregone conclusion that Russia will widely adopt CIPS (China SWIFT), and it will likely adopt RMB as its primary reserve and settlement currency. China will likely be the biggest buyer of Russian crude, natural gas and palladium. In fact, Russia’s Gazprom just announced a new pipeline deal, which will deliver 1.8 trillion cubic feet of natural gas a year to China via Mongolia. There is an enormous economic advantage to being the only viable buyer for the world’s most important resources from Russia. There should be little doubt that China will also seek to establish itself as a top exporter of derivative materials based on petroleum and palladium–essentially playing intermediary to facilitate critical resource trading with Russia that global economies are not ready to forgo.
This newfound geopolitical role will be a bonanza for China. Xi will use this influence to establish his legacy as one of China’s most transformative leaders. Mao established the Party; Deng opened up China and brought prosperity; now Xi has transformed China into a true global superpower. The political and economic value of China’s “swing vote” role, and the value that role presents to Xi in the coming years, far outweigh the value of a costly invasion of Taiwan now. After all, Taiwan will always be a stone throw away; the island isn’t going anywhere. China’s marine and naval capabilities are converging toward the U.S. over time. The value of patience is substantial.
Reason 3: The Role of Dissent
It is important to recognize that while Xi is the undisputed leader of the CCP, Xi is not the Party. Beijing is not China. There are powerful factions, some visibly soft-spoken and others, influential in the shadows. One would be underestimating the complexity and the delicacy of Chinese politics and political process, if one naively assumes a one-man show. Note that the previous two presidents (Jiang and Hu) are both still alive and their sphere of influences remain; they are respected party elders, who have elevated many of the most powerful members in the party and in the military. And the princelings each represent a powerful influence within the party. Some control regional politics and resources, and others different military units inside China’s massive but decentralized armed forces.
Potentially the most important battle raging on is the debate within China between its powerful political elites on the proper path forward for China, as it continues to emerge and leverage its significant economic and geopolitical influence. The show of force from the West is extremely valuable as exhibits for the doves within the CCP to champion a collaborative diplomatic approach. Otherwise West’s muscle flexing does little to deter the hawks in China who want a fight and are committed to ignoring rational analysis. Plenty of people in China and in the top echelon of the CCP are willing to speak for peace, prosperity and diplomacy out of either purpose or rational self-interest. Don’t underestimate that influence.
Reason 4: The Impact on Taiwan Politics
Predicting politics is a dangerous game, but Beijing will likely spend the next few years observing what impact Russia’s invasion of Ukraine has on local Taiwan politics. Prognosticating on Taiwan elections is one of Beijing’s favorite and most important activities; Taiwan voters’ sentiment toward the Mainland ultimately drives the internal debate inside the CCP regarding eventual peaceful re-unification or armed invasion.
The West’s response to Russia’s invasion of Ukraine not only provides data points to Beijing’s military top brass but also to the people of Taiwan. Many Taiwan voters likely have concluded that “U.S. support” won’t translate to military support for Taiwan in an invasion. Cutting China off from SWIFT is quite a bit different from having the U.S. Pacific fleet get in between PRC’s advancing forces and Taiwan. This uncomfortable realization may help the struggling KMT (the opposition party) in the upcoming Taipei City mayoral election, which often sets the tone for the presidential election afterward. KMT’s advocacy for a better relationship with China and respecting the “one-China” policy has been its chief weakness but perhaps now might be a strength. Certainly, the incumbent DDP party’s assumption of U.S. military protection has come under serious challenge by local media pundits as Taiwanese crave for analysis on the tragedy unfolding in Ukraine and its very direct implications for Taiwan.
The potential shift in public sentiment and the fortune of the KMT party in the next election will dictate Beijing’s calculus as much as any Western economic sanction and military might on display in reaction to Putin’s aggression.
Whatever one may think of China’s values or political system, its leaders have thus far seemed to have made rational decisions. I expect it to continue doing so. Russia’s invasion of Ukraine has laid bare the military, economic and political cost of a unilateral invasion, which will undermine China’s hawks and strengthen its doves. Equally, the lack of Western commitment and actions to deter Russia’s military advance will weigh heavily on Taiwanese politics as the path of diplomacy with Mainland China or antagonizing Beijing are again debated. The war in Ukraine has likely reduced the delusion that lives in the mind of both the Beijing hawks and the supporters for Taiwan independence. This gives hope to a less antagonistic relationship, when those eager for a fight reassess the true cost of a fight. More importantly, the current situation presents to Xi a unique opportunity to ascend as one of the most important global leaders—he will be counted on to reign in Russia by the West and he will be Russia’s best and only hope to avoid complete economic collapse if international sanctions remain. Both will reward China and honor Xi for playing the middle well. Thus, I predict China will deescalate with Taiwan in the coming years because it simply has too much to lose by invading—and too much to gain through patience.
This article was first published to Jason Hsu’s LinkedIn Newsletter—The Bridge:
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