Background
Taiwan recently wrapped up its midterm cycle, which saw President Tsai Ing-Wen’s party, the DPP (Democratic Progressive Party), lose significant ground to the KMT (Kuomintang). In the aftermath of the disappointing results, President Tsai resigned as DPP party leader. However, she will stay on to finish her presidency ending in 2024. The headline, while shocking at first glance, can almost be anticipated. Term limits bar Tsai from seeking a third bid for the presidency regardless of how well or poorly the midterms went. The pointed takeaway commentators are missing is not Tsai’s resignation but the baseline conditions that make this rebuke of ‘strong-toward’ Beijing parties, like the DPP, troubling.
Analysis
Since the news broke in late November, many election watchers have been quick to downplay the significance of the results. Many, like Thompson Chau at NikkeiAsia and Yeh-lih Wang, a political science professor at National Taiwan University, say “the international community has raised the stakes too high. They’ve raised a local election to this international level, and Taiwan’s survival,” and Chau notes “Some observers may try to interpret the outcome as a pivot by Taiwanese toward China…. a more balanced assessment would be that it is simply down to fairly common midterm swings away from the governing party.” Some onlookers also attribute DPP losses to the incongruence of national messaging in local elections. The traditional distinction between midterms and national elections in Taiwan is the central focus on local issues than the all-encompassing China-Taiwan relationship. In campaigning for her party, Tsai staged the threat from China as the central theme, interjecting what’s historically been perceived as a national issue into local politics. Huizhong Wu from the Associated Press notes this incongruence as depressing interest from voters, “Tsai had spoken out many times about “opposing China and defending Taiwan” in the course of campaigning for her party. But the party’s candidate Chen Shih-chung, who lost his battle for mayor of Taipei, only raised the issue of the Chinese Communist Party’s threat a few times before he quickly switched back to local issues.” However, we believe that onlookers like Chau, Wang, and Wu aren’t considering the baseline conditions that make this swing an important barometer of the Taiwanese palette for a ‘strong-toward’ Beijing stance and worthy of international (particularly U.S.) concern.
During Tsai’s second term, China’s unprecedented bellicose actions steered the relationship to uncharted territory, ensuring incredibly tense cross-Strait relations. In the wake of House Speaker Pelosi’s visit to the country in August, China held large-scale military drills. To underscore just how dramatic in scale these drills were, we’ve included the below.
Source:AFP (Agence France-Presse)
Chinese drills were held inside Taiwan’s air defense identification zone and territorial waters upending inbound trade and threatening subsea cables connecting Taiwan to the internet (impacting communications, banking, services, etc.) To any other country in the world, actions like these would represent a declaration of war without the actual declaration. Under such unprecedented circumstances, we would reasonably anticipate fervent anti-Beijing sentiment to carry on into the elections, leading to strong support for the DPP. Instead, the rebuke of national messaging against this backdrop means either dangerous apathy from the Taiwanese population or a desire to back down from a strong stance toward China, not just “common midterm swings.”
Less enthused voters leave party platforms more muted, meaning external geopolitical events should play an outsized role. Turnout for the midterms trended low for Taiwan at just below 60%. In a political environment where voters don’t care or see a difference in party or politician, votes are often cast against rather than for a candidate or party. Cindy Sui, at VOA, notes an anecdote from DPP voter Caroline Teh “Tsai Ing-wen didn’t hold a party primary to select candidates, she selected whoever she wanted … so [DPP supporters] wanted to make her look bad.” In the case of the midterm results, voters have clearly voted against Tsai and the DPP’s strong stance toward China. During a time of cooler cross-Strait relations, we agree this would indicate more common midterm swings, but against the current political backdrop, we observe this reproach from the DPP as a concerning signal. Geopolitical events like massive Chinese drills and military espionage normally jolt a populous into action, particularly when party platforms matter less to voters as they represent the ‘tipping of the scales’ in the national mood (example – Pearl Harbor). Events like these flying in the face of Taiwan and not stimulating voters under a unified anti-Beijing stance sets a dangerous precedent both for what Beijing thinks it can get away with and not lose reputational capital on the island and may indicate a trend of the continued will of the Taiwanese population to resist China in the long-term.
Conclusion
We believe that commentators and observers need to include these baseline conditions in their assessments of the midterms. It’s precisely this backdrop and Tsai’s heavy reliance on cross-Strait relations that inherently put the threat from China on the ballots, and a rejection of a strong stance toward Beijing now means a contested field for the presidential election. Simply, ‘strong toward’-Beijing/quasi-independence parties like the DPP will have a more challenging fight than many are currently anticipating come 2024. While others have written off the midterms as inconsequential to Taiwan’s resolve, we believe these elections have something worrying to say about Taiwan’s current national zeitgeist.
Themes
- Semiconductors
- TMT
- Defense
- Supply chain
- Emerging Market Indices
Between now and the presidential election in 2024, much of what is true of the current cross-Strait environment could change, upending what we see as a midterm cycle signaling a Taiwanese population looking for a less fiery brand of pro-independence leadership in the face of an existential Chinese threat. Global Inflation, stagnating Chinese economic growth, internal Chinese covid unrest, and a softer diplomatic stance could all lend to a cooling period in the Strait. Conversely, continued Chinese military drills & espionage, cyber-attacks, and souring U.S.-China relations will continue inflaming tensions in the short-medium term. In either scenario, semiconductors, defense, and TMT are primed to outperform in the long run. The rub of what investors and companies need to consider is a quickly changing supply chain. Global supply chain shifts out of China are already underway, and CCP planners have taken notice, part in parcel of why they are easing some covid restrictions (though not to the extent Western media has reported). Out of this shift, countries such as Vietnam, India, and African nations are the beneficiaries of foreign capital and interest. Each is vying to be the ‘next China’ as a hub for global supply chains. We believe India and Vietnam are likely to be the winners of this race (both have increasing populations), the deciding factor will be who can provide the most stable governance. To that end, Indian and Vietnamese manufacturers are primed to deliver outsized returns in the long term. For broad exposure, we like emerging market indices focused primarily on Southeast Asia ex. China and Taiwan).
Ancillary – Epilogue
While the current state of play in the Taiwan Strait remains tense – we believe that the material risk of a Chinese invasion of Taiwan is in scope for the short-medium term and not the long term. To expand, China’s window of practical ability to wage an amphibious invasion of Taiwan (a feat that would be more technically complex than D-Day) is shrinking. The Chinese population has been declining rapidly, credited to the one-child policy of the Mao era.
Source: Pew Research Center
To many, this chart is also considered conservative as the CCP is not one to give accurate information freely. Additionally, the regime has been unsuccessful at arresting the decline through government-sponsored incentives and subsidies. This culminates in what we’re likely seeing as the zenith of Chinese power this century. As tectonic population declines take effect, negative impacts will ripple through the economy, military and subsequently significantly limit the Chinese capability to wage war. Therefore, we observe the potential risk as one that will either take place in the short-medium term (5-30 years) or won’t take place at all.
Additionally, the Chinese have been heavily disincentivized against invading Taiwan since the start of the war in Ukraine. Geopolitical strategist Peter Zeihan has a fantastic summation of all the underlying assumptions Beijing has made since the 1950s (and why since 2022, these assumptions have proven wrong). We highly recommend that you watch his video for a complete overview. To leave you with what we believe is the most pointed takeaway:
Sources:
[1] https://www.pbs.org/newshour/world/taiwans-president-resigns-as-party-leader-after-local-election-losses
[2] https://asia.nikkei.com/Politics/Taiwan-elections/Taiwan-s-KMT-has-a-mountain-to-climb-for-2024-presidential-race
[3] https://www.pbs.org/newshour/world/taiwans-leader-reelected-as-voters-back-tough-china-stance
[4] https://www.voanews.com/a/taiwan-elections-seen-as-a-warning-to-ruling-party/6852716.html
[5] https://focustaiwan.tw/politics/202211230006
[6] https://www.bloomberg.com/news/articles/2022-12-08/white-house-s-china-view-beijing-wants-stability-after-assertive-push
[7] https://www.bloomberg.com/news/articles/2021-09-16/chinese-county-to-give-cash-handouts-to-couples-to-have-babies#:~:text=A%20county%20in%20western%20China,to%20decline%20in%20coming%20years.
[8] https://www.youtube.com/watch?v=F1hmvF8yiY8
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