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China & Taiwan tension

Building tensions are mounting in Asia as China condemns Nancy Pelosi’s visit to Taiwan, a regarded territory of China by its state. The want and promise for Taiwan to be united with the mainland by Xi Jinping and the communist party, has led to military exercises encircling the island from tomorrow lasting four days as a defiant show of force.

These exercises will include “long-range live firing” and are contained to six exclusion zones with some of the areas crossing into Taiwan’s territorial waters. China’s maritime safety administration has issued multiple warnings for ships to avoid certain territories with Xinhua News Agency saying “relevant ships and aircraft should not enter the above sea areas and airspaces during this period”.

How does this affect the global supply chain you may ask?

The Taiwan Strait is the predominant route for ships travelling from Japan, China, Taiwan and South Korea to the western world, seeing 88% of the world’s largest ships by tonnage as well as about 48% of the world’s 5,400 operational container ships passing through the waterway this year. Risky shipping is the topic of conversation as even though ships can divert around the eastern coast of Taiwan through the Philippine Sea, only adding a few extra days to the journey.

These alternative routes for a north-south path pose difficulties as what’s known as the Luzon strait between these two countries comes at the time of typhoon season in the South China Sea. These global tensions have seen British firms restructuring their supply chains and severing economic ties with China in the anticipation of increased security and political tensions between the West and Beijing.

The Confederation of British Industry (CBI) director-general Tony Danker warned sudden change will only exacerbate the cost-of-living crisis. He went on to warn that the UK is needing to find new trade partners in locations across the globe such as the EU, if not corporate supply chains "will be more expensive and thus inflationary" and Britain's trade strategy will be redefined.

The combination of these factors along with China’s factory activity unexpectedly contracting in July, has led to a reverse in earlier economic momentum as sporadic Covid outbreaks weigh on the recovery. With the National Bureau of Statistics finding that a further decline occurred in the official manufacturing purchasing managers index falling to 49 from 50.2 in June. This makes it evident that China’s economic recovery is unstable and gives the communist party a bigger challenge than expected to improve the GDP growth in the third quarter.

What to keep your eye on moving forward?

Whether events escalate further will yet to be seen however, the size and scope of the military exercise areas could set the stage for the Chinese military’s most provocative actions near Taiwan in decades. Huang Huiming, a fund manager at Nanjing Jing Heng Investment Management Co. stated “We might be concerned if the drills become longer and more intense to impact supply chains, but there is no sign of that happening now,”

The sentiment with the Confederation of British Industry is that cheap goods and cheaper goods may be a thing of the past, warning a price-rise was inevitable. This will worsen the Insufficient market demand which is the main difficulty faced by China’s manufacturing enterprises at present, and the foundation for the recovery of their manufacturing industry needs to be consolidated.

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