This post was originally published on this site
https://content.fortune.com/wp-content/uploads/2022/08/GettyImages-1242181734-e1659422190307.jpeg
A likely visit by U.S. Speaker of the House Nancy Pelosi to the self-governing island of Taiwan is spooking investors who worry that the resulting downswing in relations between the U.S. and China—and between Beijing and Taipei—could pump more risk into an already unsteady global economy.
On Monday, several news outlets reported that Pelosi would travel to Taiwan on Tuesday and may meet Taiwan President Tsai Ing-wen on Wednesday. Pelosi’s visit would be the first by a sitting speaker since Newt Gingrich traveled to the island in 1997.
China’s government has threatened to retaliate if Pelosi goes through with the visit. Beijing considers Taiwan to be a part of China and strongly criticizes any attempt to deal with the island as a separate political entity. In recent months, Beijing was warned the U.S. against formalizing ties with the island. On his Thursday phone call with U.S. President Joe Biden, Chinese President Xi Jinping highlighted China’s concerns about a Pelosi visit to Taiwan, saying, “Those who play with fire will perish by it.”
The New Taiwan Dollar (TWD) hit a two-year low on Monday, reaching 30 TWD to the U.S. dollar, a level not hit since May 2020. Other Asian currencies have gained ground against the U.S. dollar in recent days, but the NTD continues to lag, implying that geopolitical concerns are causing traders to sell their holdings of Taiwan’s currency.
“The underperformance in the Taiwan dollar is reflecting heightened geopolitical risk, rather than fundamentals,” Frances Cheung, a rates strategist at Oversea-Chinese Banking Corp., told Bloomberg.
Taiwan stocks are under pressure too. The Taiwan Capitalization Weighted Stock Index, which tracks all companies listed on the Taiwanese stock exchange, closed down 1.6% on Tuesday and down 19.3% for the year.
Shares in some of Taiwan’s largest companies—several of whom have investments in mainland China and operate globally—fell further further than the overall market. Shares in Taiwan Semiconductor Manufacturing Corporation, the world’s leading manufacturer of advanced chips, fell 2.4% as of market close on Tuesday. iPhone manufacturer Foxconn, which operates several factories in mainland China, is also down 2.4%.
Foreign investors were already pulling their funds from Taiwan’s stock market—especially from the country’s tech stocks—before rumors of Pelosi’s visit surfaced. In late June, Goldman Sachs estimated that foreign investors had dumped $31 billion in Taiwanese stocks so far this year.
How will Beijing retaliate against Pelosi visit?
On Monday, Beijing called Pelosi’s visit “provocative,” and promised “firm and strong measures to safeguard our national sovereignty and territorial integrity.”
U.S. National Security Council spokesman John Kirby says the U.S. is preparing for Beijing to retaliate with military actions, including firing missiles into the Strait or sending planes into an unofficial “no-fly zone” between Taiwan and the mainland. Kirby says China may argue that the Taiwan Strait—a major channel for shipping—is not international waters and try to block U.S. naval ships from sailing through.
On Tuesday morning, Reuters reported that Chinese planes flew close to the median line between mainland China and Taiwan, but did not cross it.
Analysts predict that China’s military actions, while provocative, may be somewhat restrained. “Expectation is that China’s reaction will mostly [be] confined with some signaling actions, instead of something really hurting [China’s] economy,” Becky Liu, head of China macro strategy at Standard Chartered Bank, told Bloomberg Radio.
But even if China refrains from military action against Taiwan, it could impose economic sanctions that constrain the territory’s economy.
On Tuesday, China announced an import ban from over 100 Taiwan-based food producers, according to local newspaper United Daily News. China has previously barred imports of Taiwanese fruits and fish alleging environmental concerns, in what was widely viewed by analysts as way to lower political support for Taiwan’s ruling party. In 2019, China stopped offering individual travel permits to Taiwan, decreasing Chinese visitors to Taiwan by 60%.
Other economies brace for U.S.-China fallout
Other markets in China also fell on Tuesday. Hong Kong’s Hang Seng Index fell 2.4% , while the Shanghai SSE Composite Index sank 2.3%.
Worsening U.S.-China relations could weigh heavily on Hong Kong, as an international financial hub that relies heavily on the mainland Chinese market. The city’s financial secretary, Paul Chan, warned that the city needed to be ready for the worst-case scenario, including a conflict over Taiwan, in a seminar on Monday, according to the South China Morning Post. The city is now in a recession after its economy shrank by 1.4% in the second quarter of 2022, its second quarter of contraction.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
