Prosperity or Taiwan? Xi’s choice will determine our future: Robert Gottliebsen

Xi Jinping’s behaviour toward Taiwan will determine the economic prosperity and sharemarket performance in Australia and the region in the coming year. The contrasting ramifications of a Chinese invasion of Taiwan and the alternative strategies are not widely appreciated.

If Xi invades Taiwan then, in the current climate, it is almost certain that Joe Biden will assist by repeating his strategy in Ukraine and send weapons to the island. The US may even send troops. Around one-third of the world’s shipping passes through the South China Sea, which would almost certainly would be shut down by the naval action. Most of Australia’s exports to China, led by iron ore, would be suspended. Taiwan is the world’s leading maker of computer chips and that manufacturing would also be suspended.

Alternatively, if Xi decides not to invade but rather restores economic prosperity to a China that is currently suffering, there will be a new wave of wellbeing in the region.

The desire for what the Chinese call Taiwan’s “reunification” is strong but traditional military strategies usually cause the potential combatants to prepare well in advance for battle.

Taiwan has been preparing for this for many years and has vast weaponry and bases hidden in its mountains. But China has massive air power which is probably superior to the US.

To prepare, China would require massive stockpiling of iron ore, oil and food – something which is not happening.

Taiwanese flags on a street lane as tourists walk past in Taiwan's Kinmen islands. Picture: AFP

Nevertheless, China faces internal problems that it has not encountered for decades, and it is always tempting for strong rulers to start a war to kindle national unity as a diversion from economic problems. Chinese vaccines have proved ineffective against Covid-19, and so it has been forced into massive lockdowns to protect its health system.

This is creating great community unrest.

About 70 per cent of Chinese wealth is tied up in property, substantially more than most other nations. Many apartments have fallen dramatically in price. More than a million apartments are under construction but can’t be completed because the builders are in financial difficulties.

As Will Glasgow pointed out on Monday, a vast number of Chinese families have stopped paying instalments on these apartments, compounding the problem. Many local government banks have funded the builders and having difficulty maintaining solvency. Already some regional banks have frozen deposits, making people in other regional towns nervous.

On the positive side, there are clear signs that the central government is intervening to overcome the problem and there have been some releases of deposits in beleaguered banks.

Moreover, banks are being required to fund problem builders to enable them to complete the projects – and once again China is stimulating infrastructure spending.

China's President Xi Jinping. Picture: AFP

If these early signs gain momentum, then may indicate restoring community prosperity is currently the top priority in China. A strengthening in demand for Australian iron ore and other mineral exports which will greatly assist the region.

But the era of globalisation driving world prosperity has ended and we will see the development of power blocks. Nothing illustrates that better then the latest US decision to take another step to prevent China from dominating world technology.

At the heart of the computer-driven industrial revolution are chips. The US has fallen behind in chip manufacture but its EDA software system is the base of chip making around the world, including China.

Biden has passed legislation to invest more than $US50bn ($73bn) in improving American chip technology and production, but companies that accept the help will not be allowed to use any new technology that they develop in China.

Taiwan – along with South Korea and Japan – are pressing the US to continue to have access to the latest developments in EDA software, creating a technology power block.

The under-construction housing complex by Chinese property developer Poly Group in Dongguan, in China's southern Guangdong province. Picture: AFP

China is now working feverishly to develop EDA-style technology to become independent of the US. But China does not have the technology to build the so-called Nano 3 chips which will greatly accelerate the power of computer and mobile phone systems.

In the development of power blocks there will be a clear separation between Russia and Europe and the US chip decision will curb American technology investment in China and accelerate a separation process.

The globalised world has been one of the forces that has enabled inflation to be kept under control in the West and just-in-time supply chains have greatly increased the efficiencies in industries led by retailing.

To counter the West, China and Russia are attempting to develop an alliance based on the BRICS Consortium – Brazil, Russia, India, China and South Africa. Iran wants to join, and tentative invitations have gone out to other countries to create an alliance.

But India is expected to be opposing any expansion of BRICS. India, with its massive population of young people, is set to be a unique force. Its influence will grow not just by the consumer demands of its young people but their likely migration to many countries.