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Taiwan made big headlines last August and earlier this year when China did mini blockades and US officials met with Taiwanese leaders. Since then, it’s largely been out of the news. But the situation is deteriorating at an alarming rate. The US has essentially thrown its official policy since 1979 in the trash can and is provoking China in the worst possible way. Meanwhile, China has shown every possible indication of preparing for war in the next 18 months, with three identifiable windows for action. China will HAVE to act to secure its interests and save face. It has gotten so dangerous for them that there is no way they will let this continue.

Backgound

First, a quick reminder of what the US and China’s actual positions are on the island of Taiwan. Taiwan was a province of China for hundreds of years. In 1949, the communists took over China, and Taiwan seceded to become its own country, officially protected by the USA. In the 1970’s China and the US re-opened ties, and one outcome of that was a new policy on Taiwan.

As of 1979, the US’s official policy is that Taiwan is a part of China, and that one day they will sort out their re-unification. Sort of like recognizing a couple is separated, won’t divorce, and will eventually reconcile. The US has zero official defense guarantees to Taiwan. It does not recognize Taiwan, has no embassy or diplomatic relations with Taiwan, and communicates via intermediaries. The US also has agreed not to have its leaders meet Taiwanese leaders. Biden earlier this year gaffed that we would defend Taiwan- Blinken had to go to Beijing and the administration back on script.

China’s view is resolute that Taiwan is a part of China. It wanted to achieve a re-unification before 2049 (100^th anniversary of the PRC). They have proposed for decades a system similar to Hong Kong. The last few years have effectively seen this solution discarded by Taiwan and now China too. The rhetoric the past 18 to 24 months has been very hawkish and China has been threatening reunification by force. They believe that the US is arming Taiwan and is pushing for independence. It has to stop them both before it poses a military threat to China’s Belt and Road and its facilities in the South China Sea.

Last year, Taiwan unleashed several provocations and tested a blockade for two weeks. They mockingly sent drones over Taiwan occupied islands near China. They condemned Taiwan and in the October Party meeting, they all but guaranteed an impending invasion. We spoke of escalation last year, but were not certain if it was an invasion then or not. And there was no invasion. But that October Xi and the CCP made numerous incremental preparations for war, and said that the country faced “High Seas and Storms from a Major Event”. Hmmm what would event might that be?

Overview of the Current Situation

What has happened in the past few months? Not a lot of good news. First, a document that we have discussed before emerged from the Chinese Foreign Ministry called “US Hegemony and Its Perils”. It’s a comprehensive indictment of US policy in all fields, and essentially a call for the US to stop messing around in the Chinese sphere of influence. This is about as close to a declaration of war without saying it as we have ever seen. Some journalists with a better understanding of Chinese history have said that it’s closely patterned off of ancient Chinese official declarations of war, and so is in fact a start of war. But we cannot confirm that. If it is, Taiwan is going to be the first battlefield.

Then the Chinese have refused to talk to the US Defense Department on multiple occasions. Anthony Blinken and Janet Yellen went groveling to China in the past month, and came back with nothing.

This statement was released in May, which shows just how determined Chinese officials are. When will people accept this language at face value? It never makes the front page of the New York Times.

From the article:

A recent increase in exchanges between the U.S. and Taiwanese militaries is an “extremely wrong and dangerous move,” Defense Ministry spokesperson Col. Tan Kefei said in a statement and video posted online.

China’s People’s Liberation Army “continues to strengthen military training and preparations and will resolutely smash any form of Taiwanese independence secession along with attempts at outside interference, and will resolutely defend national sovereignty and territorial integrity,” Tan said, in a reference to Taiwan’s closest ally, the United States.

But the headline that is certain to make China act came last week. The Taiwanese Foreign Minister revealed that the island nation has been talking to the US about joining its ‘nuclear shield’ policy.

Source: SCMP

To call this a redline for China would be the understatement of the year. This a red alert for China! This is de facto recognizing Taiwan as a nation, arming it with potential nuclear weapons, 100 miles off the Chinese coast. And it means that in the event of a conflict over Taiwan, the USA would use nuclear weapons against China itself. China cannot allow this, similar to the red alert for Russia of NATO ballistic missiles or nuclear weapons in Ukraine.

The timing is pretty clear, as it was rehearsed last year and we have discussed before. Weather wise, the only two windows that are open for invading Taiwan are in March and in October. If China wanted to have an effective invasion in October, it would be best to blockade the island ahead of time. We guess that a two or three month blockade would be more than enough to see the island deprived of food and fuel and vulnerable to a quick strike. The Chinese have rehearsed a blockade several times in the past two years and constantly fly airplanes into Taiwanese air space, so they would be prepared to implement this. The Taiwanese Defense Ministry releases statements like this daily, showing the amount of incursion.

The Military Scenarios from Here

So starting around early August into November, be prepared for tensions to skyrocket. And then two more windows next year- next April and next October. China has essentially two ways to retake Taiwan. The first is a blockade to starve them out, as Taiwan is a huge importer of food and energy. The second would be to launch a quick, massive strike rapidly followed by an amphibious invasion when the conditions look right. The initial strike would be a massive, Desert Storm style bombardment to knock out all the key points on the island and the innumerable artillery and military systems dotting the island.

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After that initial strike, China would have to capture and hold the impressively fortified beaches of Taiwan. That task is formidable – it would take 3 to 5 days just to transport all the troops and equipment to be able to land, and then would have to be continually resupplied for weeks in order to establish a beachhead. They would almost certainly have to seize a port in order to make this operation work. From there, it could move on the two major cities and major transportation points.

These two are not mutually exclusive- it could be a blockade followed by an invasion weeks later, or a blockade could be a complement to the invasion.

Without foreign assistance, the Chinese Navy and Air Force would ground down Taiwanese troops, given the vast discrepancy between population size and military capabilities. There would be fierce fighting at the landing sights. China would have to send more waves of troops, similar to the Korean war. But Taiwan would eventually run out of the supplies to conduct a war.

We encourage anyone looking to dig into this more thoroughly to hit the Project 2049 website or read their book The China Invasion Threat by Ian Easton. It goes through all scenarios and variables in great detail and we rely on it much of its findings.

The Global Response

How would the rest of the world react, if we one day woke up with Chinese missiles and jets raining over Taiwan and troops on boats? First, let us remind you before the media muddies the water: No nation has an obligation to do a thing to help Taiwan. Let’s go through the major players’ strategy piece by piece.

Taiwan itself has several advantages and a few disadvantages. The country has a massive geographical advantage in the initial stages even though the island is only about the size of the state of Maryland. The first advantage is that it has many small islands between itself and any coming Chinese invasion forces. All of these are rocky, small, and filled with weapons systems that could harm the incoming Chinese troops – the three green island chains are owned by Taiwan.

Secondly, its terrain is unlike the famous Normandy landing locations, which had mile after mile of long sandy beaches. Half the country is a mountain range reaching up to 12,000 ft high, which would rule out any invading force coming from the eastern side of the country. The capital city Tapiei is nestled in a valley surrounded by low and high mountains. There is a very narrow access to these valleys, so Chinese forces have to face the decision to attack it head on, at great risk, or to capture easier locations and slowly march on Taipei. All of the Chinese planning acknowledges that an invasion cannot be all at once, it has to be done in stages including occupying the outer islands.

The North and Western are also hilly, with few spots that are suitable for an amphibious landing. Chinese planners have identified only 14 beaches, and 10 ports around the country, that would work. Obviously, these have been outfitted with a warren of defenses and weapons systems that would take substantial time to cut through. Those beaches are small, and would be easily defended- they would not fall in 8 hours like some of the easy D-day locations . It’s far more likely that half of these beaches would end up more like the 1942 Dieppe Landing than D-Day for China. The likeliest landing spot is considered to be around Haihu and Linkhou, near the fourth largest city of Taoyuan and 30 miles from Taipei.

On D-Day, the Allies were able to move almost 160,000 troops across a distance of 60-80 miles in calm waters. The number reached 600,000 after the first month. The Chinese will have to move at least 150k or 200k of troops, across 150 to 300 mile distances with many rocket defenses able to attack them. It is a formidable logistical challenge.

Taiwan’s other advantage is the size of its military. Although a small country of 23m people, almost 1% of them are on active duty. Another 250k are in the reserves. Many citizens receive military training, or law enforcement training. China would face a well-trained military, whose active soldiers would equal its initial invasion force.

On the downside, Taiwan’s air defense, air force, and navy are miniscule and could be knocked out in a couple of days. Chinese naval superiority means they could easily blockade the island and prevent reinforcements and fuel shipments to the island. The Chinese air force would have almost total control over the island in the first couple weeks, which would make large Taiwanese troop movements difficult.

The United States is the only player who could realistically offer major aid. What would they do? Would they even react? We do not know if they would choose to react militarily, as it could easily to turn into a complete disaster (more on that later), but we think they will choose not to. Similar to Ukraine, they’d send advisors but shy away from direct US involvement in the conflict. We think any response would be almost entirely economic.

If they choose to act, the likeliest is to bring nearby naval and air force assets to bear. It would take several weeks to re-arm, transport, and reposition existing US army troops in other parts of Asia to actually participate in a ground war on Taiwan, making it unlikely.

What kind of assets could the US use? First is its permanent presence in the Pacific, mainly in Guam and Japan of about 30,000 sailors between the two fleets stationed there. The army presence is roughly 25,000 troops, most who would have to remain to defend South Korea:

At any one time, the US has eight aircraft carrier battle groups circling the world. Two of those are close enough to intervene- one off of Northern Australia, the other off of Indonesia. In the event of a major conflict, probably two more could be added. These locations are released every few days and obviously change frequently.

The largest advantage that the US has is its submarine fleet. A war simulation said that if the Chinese and US went toe to toe, the US advantage from its submarine fleet would allow the US to win – but it would cost half of its ships and subs in many scenarios done by CSIS. As submarines have 150 sailors each, such a conflict would lead to thousands and thousands of dead. If the US were to bring its naval and air assets in the region fully to bear, for several weeks, that force combined with the Taiwanese army could probably lead to a Korean War style stalemate.

We would put the odds of the US intervening on a massive scale as very low. We would think that there would be ‘advisors’ and ‘NATO assistance’, but the American response would be 90% or more economic. A full-on conflict would be a political disaster for any politician pushing it.

First, it would be a declaration of war on China. That would open the door for China to US military assets anywhere. With the US already heavily committed to fighting Ukraine and stationing assets in Poland and Romania, it would be over-stretched everywhere. That would move the US from being able to potentially win one conflict at a time (Ukraine or Taiwan), to instead losing three or four all at once (Ukraine, Taiwan, Middle East, potentially South Korea). Game over for US and dollar hegemony.

Secondly, any serious scenario of the US Navy, Air Force, Marines and/or Army getting involved generates thousands if not ten of thousands of casualties. Those numbers would exceed the wars in Afghanistan and Iraq. With an election one year away, this would be political suicide for the Democrats. If the Republicans win in 2024 and assume power January 2025, it would be probably be after the window for military action has occurred.

The heavy amount of CCP money that went to Biden’s family for ten years and many other prominent politicians will also no doubt influence the decision to not escalate militarily.

HyperSonic Missiles Change the Game

The most important reason we think that the USA would be foolhardy to escalate comes from a recent weapons development: hypersonic missiles. These are missiles developed over the past decade only in Russia and China – the US has canceled its program twice. The first use was in Syria in 2021, and Russia has scaled up their usage in the Ukraine war.

The advantage is that they go at speeds of Mach 9 to 15 (that’s 11,500 miles per hour) compared with regular missiles at Mach 2 or 3. US missiles defenses such as the Patriot cannot target and hit anything going above Mach 5. Russia’s new Kinzhal hypersonic missile has been deployed against Patriot missile batteries in Ukraine. Several strikes combined with other missiles completely overwhelmed the system and led to a Kinzhal blowing up a $1.2bn Patriot battery in May. It appears that the US’ best technology can be easily beaten by the Russians’ best. Alex Krainer estimates that the Russians have 30-40 Kinzhals currently and can produce 200 per year – this is not a one-off event.

Source: IAS

In addition to having access to Russian technology, the Chinese have been developing their own missile program. This technology is even more advanced than the Russian’s best so far. The DOD acknowledged that “China has deployed an intermediate-range hypersonic missile that can hit targets thousands of miles away and has a “high probability” of penetrating US defenses, according to a report.” They discuss a hypersonic missile that can reach Guam and easily evade existing missile defense systems.

China also developed a more specialized weapon, that has a range of 1000 miles and was designed to take out aircraft carriers. They have a version to be launched from shore, from ship and from airplanes. They released footage of the successful tests has already scared Western military officials silly – you can find tons of articles on the various iterations.

Journalist Pepe Escobar mentioned that between the hypersonic missiles China’s military has in possession and ballistic missiles, the Chinese feel secure from the US Navy. His sources estimate that from the time hypersonic missiles are launched to impact, the Chinese could wreck any aircraft carrier near Taiwan in only twelve minutes. And its missiles can reach further to US ships in Japan, the Philippines or Guam in under an hour.

Let’s go through the logic here in bullet point format:

China could use these missiles to knock out most major targets in Taiwan, including underground bunkers. Doing this is in the initial phases makes an invasion far more likely to succeed

A conflict over Taiwan realistically could only see US Navy and Air Force assets intervene and they would have to react quickly

Most of US naval assets are the two fleets in Guam and Japan, and the aircraft carrier strike groups in the region (currently two, potentially four)

China and its ally Russia have a combined total of 150 and 400 hypersonic missiles and are producing more each month

US missile systems, also used by Taiwan, cannot defend against these missiles

China could launch several dozen missiles at once targeting US assets across the Pacific

They would reach their targets within 30 minutes, wreck our major assets and kill tens of thousands people (each carrier alone has more than 5,000 people, plus the surrounding strike group)

Given the overwhelming chance that upon getting involved the US would suffer a Pearl Harbor/Battle of Taranto/Prince of Wales level defeat, why get involved in the first place? And if we did choose to get involved and lost half of our Pacific fleet, the USA would have to acknowledge reality and pull back. It would take ten years to replace those ships.

We should add that all of the scenarios and estimates of a fair fight if it is China versus US and Taiwan we highlighted earlier did not include this new variable. If you include the hypersonic technological edge and deterrent to foreign navies, the battle could be tipped early on heavily towards the Chinese side.

The Economic Preparations for War

Fund manager and China hawk Kyle Bass recently gave an excellent presentation and Q&A at the Hudson Institute on the threat to Taiwan. It echoed many of the major points we have discussed: China’s military buildup, the constant Cross Straits tension, the strategic alliances to secure commodities like food and oil, and the likely windows to attack.

Bass found several fascinating details on China’s efforts to prep its economy to survive war and international sanctions:

Divesting from Treasuries, and moving many of those assets to Europe, to the tune of several hundred billion dollars

Passing a New Corporate Sanctions Law with sweeping powers to nationalize assets

Numerous announcements in Fujian province, the one closest to Taiwan, of new major hospitals, air-raid shelters, and travel bans

Chinese state owned banks are repatriating assets and withdrawing their order books

We encourage you to watch the full presentation to get an idea of how meticulously the CCP is planning ahead of time, and to understand better how heated the rhetoric has become in Beijing.

US Economic Reaction

The US and China have been locked in an escalating economic conflict for years now. Sanctions on companies and officials, bans of the others’ technologies, and blocking key deals have become routine. The US is already threatening massive sanctions for China if it assists Russia in Ukraine. A conflict over Taiwan would see the economic sanctions package that hit Russia thrown at them.

The major difference is here that China is far more important to the global economy than Russia. There would be difficult questions about implementation. The US buys $540bn worth of goods and services from China annually- would that just stop, leaving retailers’ shelves empty before Christmas? Do you confiscate China’s $800bn of US Treasuries? Do you shut out banks in Hong Kong, the #3 banking center globally, from SWIFT ? Do you go to allies to seize Chinese assets in their countries too? All of these were possible on Russia, albeit politically stupid. With China, such a Russian style sanctions package would be a political disaster and an economic neutron bomb. Explaining to Americans that Christmas is cancelled because of sanctions on China would be a political disaster to manage. Let alone a global depression. Bass speaks of a surgical way to do this and cripple China but insulate the globe. We are not quite sure of what measures he sees and their implementation, but we would like to learn more.

The final reason is that Taiwan is the global hub of the semiconductor industry, controlling 50% of capacity. The semi supply chain is incredibly integrated across three dozen countries. Making chips is an unfathomably complicated process - factories can cost $40bn, and require equipment with hundreds of thousands of components. A successful invasion would mean that China could completely block the US from this industry in retaliation for sanctions. China views the industry as a national security issue now and would likely nationalize it in Taiwan. An unsuccessful invasion or long conflict would completely screw up the world’s most important industry. We think that the US would avoid something so disruptive for a more surgical package of sanctions.

For that reason, we think we would see a broader but less severe package against China than we saw against Russia. The international community would be up in arms if it happened again. Other countries would also be mad that their largest trading partner was just deleted from global banking. They would run from Treasuries before theirs were confiscated.

As far as economic impact….a successful blockade and invasion of Taiwan would cause chaos in markets and particularly in the global semiconductor and electronics industry. Many Taiwanese assets would be nationalized by China. We think that you should watch headlines closely and be prepared to hunker down for the worst, especially as we near the October 2023 and April/May 2024 windows.

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