Scariest graph of the year

Scariest graph of the year

What if China invaded Taiwan? A war would probably lead to a global economic collapse worse than the financial crisis, and there would be no point in owning stocks. The greatest cost of war is loss of lives. But this scenario focuses on the economic impact.

Like many conflict hotspots around the world, this one has been simmering for a long time. China spent much of the early 20th century in a cycle of civil wars. The Communists won, and the Chinese Nationalist Party, the Guomindang, retreated to the island of Taiwan. Coming to the present day, mainland China (the People's Republic of China) has evolved into a peculiar communist, industrial superpower, and Taiwan (the Republic of China) into a technologically advanced democracy.

The Taiwan Strait is one of the world's most important shipping lanes. Taiwan is the world center of semiconductor manufacturing. Therefore, a war over such a small island would have a huge global impact, because semiconductors are needed almost everywhere. The production of iPhones, cars, electronics, etc., would come to a standstill around the world. Taiwan is like a vital golden screw in the world economy, without which the larger machine cannot function.

In Bloomberg's war scenario, China attacks Taiwan and the US enters the conflict to open a sea route to the island. However, China and the US would not directly strike each other's soil (a nuclear standoff across the Pacific would probably lead to even uglier GDP collapse forecasts). Economists are trying to estimate the economic impact of the first year of war: Taiwan's economy would plummet by 40%. This is based on similar developments in Ukraine in recent years. World economy 10%. In the 2009 financial crisis, the global economy contracted by 6%, so a war would be a shock of a whole different magnitude. Asian export economy 20-10%. The EU, which trades heavily with China, 10%. The consumption engine of the world, the United States, as a relatively self-sufficient economy, would get away with less, with a collapse of 7%.



China's economy would fall by about 17%. Indeed, this collapse is the best argument against war: why risk the Communist Party's legitimacy, built on economic growth and decades of rising living standards, with a risky, super-complex invasion operation? Unfortunately, the thought process of the authoritarian leaders in their 70s, isolated in their own palaces, has not been brilliant in recent years, and their decisions are not always rational, at least from the outside.

A war in Taiwan is a tail risk, fortunately with a low probability, because the costs would be huge, even if difficult to estimate. Taiwanese stocks and companies dependent on Taiwanese semiconductors, such as Apple and NVIDIA, have performed well on the stock market. So investors consider the risk to be low. But financial markets, along with the rest of the world, also managed to sleepwalk into World War I, which was considered almost impossible in the interconnected global economy of the time.

The impact of the conflict would be so great that stocks would probably suffer a big blow. Gold and cash could be a good alternative. Cash can be used to buy heavily revalued asset items. However, the most likely scenario is that the current situation will continue well beyond the present: China puts pressure on Taiwan and makes a fuss, but in practice things remain as they are. For now. Yeah, the best investment in the West would indeed be to reduce dependence on Chinese production and supply chains.