China’s support of Iran in the current Middle East crisis is a chilling reminder of its global aggression, much of which has recently been directed towards Taiwan. America’s capital markets are unprepared for the cataclysmic economic impact of a Chinese invasion of Taiwan and although U.S. military experts have undoubtedly prepared for all potential Taiwan scenarios, no economic response plan exists.
Without a dedicated effort by the federal government and private sector financial firms to create such a plan, the impact on U.S. markets would be devastating and could eclipse the most severe stock market crashes of the past century. The aftermath has the potential to shut the valve of capital that sustains America’s businesses, farms, and housing sectors.
Analysis conducted by my firm GTS, which makes markets for more than 900 public companies on the New York Stock Exchange with a market capitalization over $13 trillion, has estimated a short-term stock market plummet of up to 34% after an invasion, as uncertainty about the U.S. response may lead institutional and retail investors to quickly exit their equity positions while market makers struggle to accurately price stocks in this volatile environment.
This short-term crash would only preview likely long-term market devastation. Bloomberg estimates that a full-scale war in Taiwan would reduce global GDP by 10%. This drop would be almost twice what was observed in the aftermath of the global financial crisis and Covid pandemic, events which triggered peak to trough declines of 57% and 35% in the S&P 500.
The economic pain caused by these events could ultimately complicate any U.S. military response should the economy seize up and American savings become impaired.
Bipartisan legislation introduced this month in the U.S. House aims to tackle this challenge by fast-tracking the development of an economic response plan designed to manage and mitigate catastrophic market outcomes. Co-sponsors Rep. Blaine Luetkemeyer (R-MO) and Rep. Ritchie Torres (D-NY) cited the GTS analysis when introducing the bill, which would create an advisory committee under the auspices of the Financial Stability Oversight Council, whose members already include key federal financial regulatory agencies. This committee of policy makers, capital markets participants and experts on geopolitical risks would be tasked with identifying areas of risk to the financial markets and solutions to mitigate their impact. Only through active dialogue between the public and private sector can we effectively prepare for the disruption that a Taiwan conflict would have on the U.S. economy.
During Covid we all learned how dependent the U.S. is on imports from China. It is also well known that China and Taiwan help finance the U.S. deficit through purchase of U.S. Treasuries. Less attention has been focused on what a war would mean for our capital markets. Our markets are time-tested resilient, yet a Chinese invasion of Taiwan would present a drastically more intense challenge than anything in our history given how deeply those economies are integrated into the U.S. financial system.
The statistics are alarming. China accounts for almost 30% of the $1.3 trillion MSCI’s Emerging Markets Index. The U.S. has over 500 listed equity ETFs that maintain significant exposure to stocks listed in China. And as of February 2024, 256 Chinese companies listed on U.S. exchanges have a total market capitalization of $848 billion.
These are but a few of the examples of the financial interconnectedness of our respective countries and markets and the pain would reverberate across the American landscape – as approximately 58 percent of American households own stocks, according to a Federal Reserve survey. We must do everything we can to ensure the resiliency of our markets and protect American investments in pension plans, 401(k)s, IRAs, and 529 college savings plans. Together the government and private sector can meet this challenge head on, but there is no time to waste.
