As an analyst, one cannot help but be prudent when describing the relationship between China and Taiwan… or, to be more precise, relationships (plural) because, frankly, it’s very difficult as well as sub-optimal to treat the Chinese-Taiwanese status quo in a uni-dimensional matter. The most straightforward approach, in this author’s view at least, is seeing things from two perspectives: the political perspective on the one hand and the economic one on the other.
Politically speaking, the two nations (?) have developed the habit of agreeing to disagree. And, actually, even the “two nations” expression is inaccurate because, ironically, the only aspect both entities (the term which will be used as of this point) can agree on is that there is only one China. To simplify things, it’s important to understand that after the communists won the conflict with the nationalist forces back in 1949, the nationalists retreated to Taiwan and established the Republic of China (ROC)… which is still the official name of Taiwan. The communists, on the other hand, established the People’s Republic of China (PRC) and gained control over the rest of China’s territory (the overwhelming majority). As of that point, both entities claimed that they represent the legitimate “China” and even today’s frail geopolitical consensus revolves around the idea that there is only one China.
Economically speaking, however, there is a lot of money on the table when it comes to the relationship between China and Taiwan. From barely exceeding $50 billion in 2002 (with the figure for 1999 being roughly $35 million) to ending 2018 north of the $150 billion milestone, the economic ties are just too great to be ignored. Aside from the fact that China is Taiwan’s #1 trading partner (with roughly 30% of Taiwan’s trade being conducted with China), other ties such as language (with Mandarin being the top spoken language in Taiwan by far) are so strong that the two entities even agreed to let certain institutions such as banks and insurance providers operate in both jurisdictions.
However, as far as the trade dynamic is concerned, it is worth noting that Taiwan is trying to diversify and to that effect, Taiwanese investments in China have declined for four consecutive years. While China’s investments in Taiwan continue to grow, the growth pace has gone down and surprises when it comes to trade figures should not be eliminated from the equation.
Remaining in the “surprises” and “potential surprises” dimension, it is worth noting that a tricky trend is emerging in Taiwan (especially among the younger population), a trend which risks puts the already-frail “One China” framework to the test. More specifically, a growing percentage of Taiwan’s population is eager to identify as Taiwanese and as such, the probability of there eventually being stronger independence-oriented movements grows.
Militarily speaking, China may very well end up being willing to take its foot off the pedal when it comes to tricky geopolitical situations such as the South China Sea one so as to focus on the Taiwanese dimension, with a lot of military investments taking place to that effect. In the meantime, Taiwan (which is already one of the top 10 buyers in the military space and already allocates over 2% of its GDP toward defense) aims to increase its defense spending as well but realistically speaking, it is hard if not impossible for an entity as small as Taiwan (with just approximately 23.58 million citizens) to compete with China, especially in light of the GDP Per Capita growth rates experienced by the latter.
While Taiwan does have aces up its sleeve, primarily revolving around its relationship with the United States (a card the United States itself became more willing to remember in light of its trade conflicts with China), the imbalance between the two entities is growing and as such, the region can definitely be considered a geopolitically-challenging one.
It’s ultimately outside our control as investors what happens geopolitically, the smart (and only, come to think of it) approach is making sure all our bases are covered and that we follow all developments related to the jurisdiction(s) we are interested in very closely rather than just economic ones. ChinaFund.com, as an entity with a solid presence in China, is here to provide assistance to that effect.