So it looks like US House Speaker Nancy Pelosi will visit Taiwan. Local media said she will arrive at 3:30 pm London time tomorrow, which is 1430 GMT, 10 am in New York and 10:30 pm local time. That's absolutely prime time for markets so liquidity won't be a problem.
She will reportedly arrive at Taipei Songshan Airport and take a covid test, then stay at a hotel before meeting Taiwan President Tsai Ing-Wen in the morning.
Chinese President Xi told Biden last week that 'those who play with fire will perish by it' in a warning against the visit but the US was undaunted. Now that her departure is confirmed, we can already see see how the official state line is changing. Here's Hu Xijin was was formerly a major China mouthpiece, though he's semi-retired now.
A few hours ago she would 'ignite a powder keg' and now it's that she might 'start a spiral of escalation'.
The reality is that it doesn't make any sense for China to attack Taiwan right now.
If you assume China is going to invade Taiwan at some point (and who really knows?), then during this visit would be the absolute worst time. It raises the stakes immensely and even a mistake could prompt nuclear war.
Sure, it's a bit of a snub but it's not some kind of unforgivable insult.
The US wants to sell some weapons to Taiwan and so it will. Big deal.
If China ever does plan an invasion, US intel will know about it long before it happens. An operation like that takes many months of planning and there are spies everywhere. Pelsi wouldn't be going if she knew bullets were about to fly.
The only questions that matter:
1) Would the US military defend Taiwan in an invasion?
2) When is the best time for China to invade?
On question 1, I think the answer is 'no' because the risks of nuclear war are too high. On question 2, I worry that now would be a good time. The US is stretched politically in Ukraine and inflation is biting. They can't deploy the same playbook of sanctions against China because it would boomarang dramatically on US growth/inflation.
But is it possible that the US wouldn't respond militarily or economically? That certainly sounds foolish. So I'd have to assume they send as many weapons to Taiwan as possible and hit China with some sanctions that don't really bite (nowhere near the level of Russia). The problem may be that it will be very difficult to supply Taiwan during an invasion. I'd imagine it's certainly within the capabilities of China's navy to blockade an island and would the US military risk breaking that blockade?
Maybe.
So ultimately, you're left with a terrible situation to trade. So if an invasion ever were to happen, then it's a pure risk-off trade and I wouldn't be in a rush to fade it.
But I don't think this is the event that immediately triggers an invasion or open conflict. The market doesn't look overly worried either. For now, it's Chinese equities that have been hit hardest so I suspect that's the dip to buy.
