For a number of years there has been a steady drumbeat out of Washington DC focused on the notion that China intends to use military force in the very near future to take over Taiwan. A stream of current or retired military officers, foreign policy types, politicians, and assorted talking heads keep stating this as if it is a fact. Of course, many of these same experts also assured us that we would find WMDs in Iraq.
Because of these concerns, many U.S. ETF investors have steered clear of investing in the region. But how valid are these claims? And are U.S. ETF investors missing an opportunity as a result?
To get a contrarian view, we spoke with an expert on the region. Andy Rothman served for almost 20 years in the U.S. State Department, living in and covering Asia — in particular, China and Taiwan. He then spent two dozen years as a China investment strategist, first for the Hong Kong-based investment bank CLSA, and then for the San Francisco-based mutual fund and ETF issuer Matthews Asia. Rothman is currently the CEO of Sinology, a China-focused consulting firm. He travels frequently to Taiwan, China, and surrounding countries and is fluent in Mandarin.
Where the Story Started
Hyland: Andy, can you sum up the basic narrative we are hearing from Washington these days on the topic of China, Taiwan, and the military option — and when this narrative started being tossed around?
Rothman: It is hard to put an exact date on it, but concerns about an imminent invasion have been on the rise for several years, certainly dating back to the Biden administration and perhaps further. According to Trump’s Secretary of Defense, it is the number one thing he is focused on.
Interestingly, the U.S. intelligence community doesn’t seem to agree. The most recent “Annual Threat Assessment” report from the U.S. intelligence community does not say it expects China to use force as it presses Taiwan for reunification.
Hyland: You have been to China and Taiwan numerous times since this narrative started being heard. Is the same narrative heard in places like Taipei or Beijing?
Rothman: This is not a topic being discussed around the region. Very few people in Taiwan, including people in the military, are viewing this as a serious likelihood. People in China are even less likely to be viewing this as a realistic possibility. The average person in China essentially thinks that Taiwan is already part of China. Nobody is advocating that they need to go to war with their fellow Chinese across the Taiwan Straits.
Impracticalities of Invasion
Hyland: Are you, in your travels and research, seeing any real indications of China taking concrete steps towards an invasion that might occur sometime in the next few years?
Rothman: From a practical standpoint China invading Taiwan via an amphibious attack would be D-Day times 10. However, there are no signs that China is taking the steps towards this end. No buildup in troops, no propaganda efforts to prepare Chinese citizens for the pain, both human and economic, that would accompany such a conflict, no mass production of the sort of military equipment needed for such an effort. Yes, their Navy is building more ships, but they would need much more than that.
Hyland: What is going through the minds of China’s leaders here?
Rothman: Xi Jinpeng saw the results of Russia’s invasion of Ukraine and the global response. China is much more tied into the global economy than Russia ever was and would risk access to global trade including iron ore, oil, soybeans and semiconductors. And the military risk is huge. Russia only had to cross a land border and Putin has been bogged down for a couple of years.
With Taiwan, you are talking about 100 miles of difficult water and a more complex effort than D-Day. There are only a couple of beaches you can land on, and everybody knows where they are. Much of the year, the weather would make it too difficult.
Taking Taiwan and controlling it and putting it back into shape would be an enormous risk. It is really hard to see why Xi Jinpeng would want to take that risk, given he isn’t under domestic political pressure to do so.
China's Motivations
Hyland: What does China want then?
Rothman: Taiwan has had de facto independence for many decades. China seems fine with that. The main thing for China’s leaders is that they don’t “lose” Taiwan by having its independence become more de jure than de facto. China has been OK with the grand bargain where the U.S. has a strong unofficial relationship with Taiwan. The Chinese government is fine with that status.
Hyland: A common argument being made is that one reason, other than national fervor, for China to take over Taiwan is to get its hands on the semiconductor industry. How valid do you think that argument actually is?
Rothman: I think this has zero validity. I think if China invaded Taiwan it would lead to them getting less semiconductors — not more. Partly because of potential damage to the fab plants, and partly because those plants are totally dependent on imported supplies from other countries. An invasion would most likely lead to embargoes and the fab plants shutting down — not to China getting more chips. The fabs are also full of complex, sensitive equipment that requires continuous servicing by technicians from foreign companies. Those techs would leave if a war started, and the fabs would quickly become inoperative.
Misunderstandings and Military Needs
Hyland: Why do you suppose so many people in Washington DC are pushing the invasion narrative?
Rothman: I can only speculate. Many in Washington have always needed, for political purposes, a common enemy to rally around. For many people the answer is China. If you are in the defense industrial complex, you need an adversary that is worth spending a lot of money on, and that can be China.
Finally, there is a lot of misunderstanding about China. For example, hardly anybody in the U.S. understands that the vast majority of Chinese employees work for private companies, and that is where the growth and innovation comes from. The average Chinese person is a lot more like the average American than many Americans understand.
Investing in China
Hyland: China stocks and ETFs have underperformed U.S. equities for most of the last five or so years. However, in the last year, that seems to be changing. What is your view on investing in China, assuming a U.S. investor is not buying into the war drums about Taiwan?
Rothman: What’s happening today is a wakeup call for U.S. investors to realize they need to spend more time, not less, thinking about and trying to understand China. In recent years, it has been easy to ignore China, for both political reasons and because of performance — absolute and compared to the U.S. Plus, China’s economy seemed to be slowing.
However, now things seem to be changing. China’s economy seems to be at an inflection point and is likely getting stronger. In the U.S., there are concerns about a possible recession. From a market perspective, the MSCI China Index has heavily outperformed both the MSCI All World Index and the S&P 500 over the last year.
Hyland: What about the current news about tariffs and trade wars?
Rothman: Regardless of how that plays out, several things will not change for China’s economy. China is the world’s second-largest, and fastest growing, consumer market. China is a vital part of the global economy.
It has a large number of world class competitor companies in many industries and it represents 20% of global economic growth, which is more than the U.S. and G-7 combined. Almost none of that is likely to change in the foreseeable future. And, as for tariffs, only 15% of China’s exports go to the U.S., as China firms have been successfully diversifying their markets.
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