In a bold display of military might, China initiated extensive drills encircling Taiwan on May 23, a clear signal to the newly inaugurated Taiwanese president, Lai Ching-te. The exercises, involving China's army, navy, air force, and rocket force, were described as a rehearsal for sea and air patrols, battlefield control, and precision strikes.
The military exercises commenced just days after Lai's inauguration, which was attended by over 500 international representatives, including a delegation from the Biden administration.
During his inauguration speech, Lai subtly rebuffed Beijing's territorial claims while expressing a willingness to engage with China. Nonetheless, Beijing criticized Lai's speech as harmful and an attempt to destabilize cross-strait relations. Chinese state media portrayed Lai as a separatist, using the drills as a stern warning against any moves toward independence.
Experts like Ben Lewis from PLATracker noted that the drills, dubbed "Joint Sword - 2024A," were extensive, involving significant air and naval operations. The scale of these exercises is among the largest since similar drills in late 2023, focusing on outlying islands close to China, emphasizing Beijing's ability to control these strategic areas.
Taiwanese officials expected the drills and had prepared accordingly, monitoring Chinese military movements closely. Despite the drills, there was no significant disruption in Taiwan's financial markets or public life. Taiwan's stock index showed resilience, and the central bank reported normal foreign exchange operations.
Capital market remains calm
Adding to the geopolitical tension, the US is increasing tariffs on Chinese goods, which could further escalate the situation. In response to the mounting pressure, global companies are diversifying their risks. Automotive supply chain sources told Nikkei Asia that Tesla has asked its suppliers to manufacture components outside China and Taiwan. Tesla's request includes suppliers of PCBs and displays, urging them to offer products produced out of China and Taiwan as early as 2025. One supplier revealed plans to increase production capacity in Thailand to comply with Tesla's demand.
A recent Bloomberg report also cited sources close to ASML saying that the Dutch company has remote kill switches in place to disable production at TSMC's Taiwan fabs, should China invade Taiwan and seize advanced semiconductor manufacturing equipment such as extreme ultraviolet (EUV) lithography machines.
Despite these tensions, economic interactions between Taiwan and major global markets remain robust. According to Taiwan's Ministry of Economic Affairs, the island received US$10.69 billion in orders from China and Hong Kong in April 2024, marking a 16.3% year-on-year increase. Orders for electronic products surged by US$1.29 billion, or 28.5%. Simultaneously, orders from the United States reached US$14.81 billion, reflecting an 11.8% year-on-year rise, driven by a 35.8% increase in electronic product orders totaling US$1.58 billion.
The local capital market was calm despite the drill, marking a stark difference from the reaction when similar drills were conducted back in 1995. The Taiwan Stock market plummeted 10% in days during the 1995 cross-strait tension.
Although the Taiwan stock market briefly dipped in the morning, it quickly stabilized, with the weighted stock price index closing at 21,607, up 55 points or 0.26%, and a turnover volume of NT$509.8 billion. The index peaked at 21,668 during the session, both hitting new record highs. TSMC closed at NT$875, up NT$11 or 1.27%, also hitting new record highs. Hon Hai (Foxconn) closed at NT$173, up 2.37%.
The drills highlight the ongoing tension between China and Taiwan remaining the most sensitive aspect of US-China relations. While China continues to claim Taiwan as part of its territory, Taiwan asserts its democratic governance and the right to self-determination. The situation remains a potential flashpoint for future conflicts involving major global powers.
