Why China could have a crack at Taiwan in the short-term...

Christopher Joye

Coolabah Capital

About a month ago, one of our top geo-political and military advisers—and far and away the most accurate forecaster on all matters China—called to say he had amended his views on the probability of the Middle Kingdom having a crack at that recalcitrant province, aka Taiwan. He was bringing forward his expected time horizon to the next 12 months.

I was surprised because our panel of around seven global advisers had generally coalesced around the opinion that China needed another 5-7 years to militarily prepare for unilateral unification with Taiwan. Internally, we disputed this judgment. We countered that President Xi Jinping had a very strong incentive to attempt unification in the short-term for three reasons.

First, nobody expected it. All the Western analysts who had perennially underestimated the speed and sophistication of China’s military modernisation, and the expansive ambitions of Xi himself, thought they had time on their side. That is precisely why Xi should move earlier: to increase the chances of success as the Western dogs napped.

Second, the current US administration presented a unique window of opportunity. Some of President Biden’s most senior security advisers privately state that they would never counsel a war with China, even if Xi attempted to take Taiwan.

Biden is all but an intellectual invalid and characterised by extreme indecision. It is highly unlikely that he would quickly resolve to wage a full-spectrum defence of Taiwan, and incur mass US casualties, without at least many days or weeks of discussion, debate and prevarication. Yet China is planning on securing Taiwan within 24-48 hours. After appropriating control of all Taiwanese power nodes and central government agencies, Beijing will coerce the execution of a formal agreement crystallising unification.

Irrespective of its authenticity, once this treaty is signed, it will be impossible for the West to do anything about it. Our gullible media will be broadcasting the news 24/7 alongside Chinese propaganda of tens of thousands of Taiwanese ostensibly celebrating unification in the streets of Taipei.

And Xi knows that the US reaction function will likely be radically varied under a hawkish republican president if Biden or his nominated Democrat successor does not win a second term.

The final motive for moving sooner rather than later is that Xi almost certainly appreciates that the US technological gap in the military domain is likely to expand dramatically with the effluxion of time. After decades of neglect that allowed Beijing to minimise the capability differential, the West has belatedly recognised the existential threat posed by Xi and a Chinese Communist Party that is maniacally focussed on neutralising all perceived risks to its power and permanence.

Within 5-10 years, the West may be able to successfully defend Taiwan should it be disposed to do so. But that is emphatically not the case today, which is why Xi must act if he is to deliver on the iconic objective of his presidential term.

So in contrast our advisers, we have always felt the probabilities were tilted towards a crisis while Biden remains president. It is deeply worrying that our very best analyst has now converged on this position.

It is incumbent on all decision-makers to prepare for the very worst possible contingency, which could easily involve Chinese ballistic missiles raining down on strategic signals intelligence and surveillance assets throughout Australia. You might want to buy a non-Western satellite phone!

If you think this sounds like hyperbole, the US has now relocated one-quarter of its entire strategic B2 stealth bomber fleet to Australia in response to the heightened tensions in the Taiwan Strait.  

For years we have gamed through these scenarios and exactly what we would do in the event kinetic conflict materialised. This has also involved deeper analysis of the real empirical risks. You can check out all of our quant research on the conflict probabilities over at our War Lab here.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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