It is obvious: apart from perhaps a few ultra-belligerent CIA, Guoanbu (Chinese secret services) and FSB (ex-KGB), nobody has an interest in a war in Taiwan. Not only because the latter could start the third world war, which, for once, would reduce the planet to nothing and would thereby solve all the problems of Humanity, but above all, because without going to this end, it would plunge the world into an even deeper recession than that of 2020.
However, after having already been greatly weakened by the pandemic, then the war in Ukraine which caused the return of stagflation (high inflation and economic stagnation), the world economy would not recover from this new shock. And this, in particular because the United States and the Euro Zone, which are already in recession for the first and in the process of falling into it for the second, have already used up all their budgetary and monetary policy cartridges. In other words, in the event of a new crisis, they will have no means of restarting the machine.
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Faced with this very probable new “descent into hell” in the event of a conflict in Taiwan, some could then see in it the perfect opportunity for China to definitively become the world’s leading power, insofar as, unlike the United States and of the EMU, the Middle Kingdom still has substantial leeway to support its economy, and in particular colossal foreign exchange and gold reserves.
However, China is not yet ready to take up this new challenge. Certainly, it is already the big winner of the last crises (whether it is the coronavirus pandemic, the war in Ukraine or the inflationary outbreak). However, to become the first world power both from an economic and financial point of view, it is not enough to have a GDP higher than that of the United States, which is already the case if we measure the Chinese GDP. in purchasing power parity dollars (i.e. by isolating the differences in purchasing power between the United States and China) and will soon be in current dollars.
Indeed, to go further and become the true “masters of the world”, the Chinese need to have a currency capable of competing with the dollar and replacing it within the international monetary system. However, such an eventuality remains impossible as long as China’s financial space is closed and, therefore, the yuan is not an international currency. In other words, the Chinese are not yet “mature” enough, both economically and financially. For the time being, they have no interest in starting this match, because that would suppose creating a strong yuan, which could break their growth.
They will therefore not make the same mistake as the Japanese, who at the end of the 1980s and the beginning of the 1990s decided to strongly appreciate the yen, which, in a few quarters, went from 200 to 80 yen for a dollar. This strategic error was fatal to them, since this overvalued yen quite simply burst all the Japanese financial bubbles and plunged the Japanese Archipelago into deflation, which is still not completely over today.
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What to underline that at the scale of a country, as with that of a company or an individual, a bad choice can be very expensive and very long. Particularly pragmatic, the Chinese will therefore not engage in battle against the United States and the dollar without having a great chance of winning.
In addition, let’s not forget that with 3,000 billion dollars in foreign exchange reserves and around 1,000 billion dollars in US Treasury bonds, a too sharp drop in the dollar would be a disaster for the valuation of Chinese assets denominated in this currency. A war with Taiwan would also have the same effect and would deprive the Chinese of their two security cushions (foreign exchange reserves and US Treasury bonds) denominated in dollars. Also, let’s not forget that Uncle Sam is China’s largest trading partner, with nearly 18% of its exports. At the same time, 19% of American imports come from China. In other words, if bilateral China-US trade stops, these two countries will experience a recession as severe as it is lasting.
This is why, despite a facade of opposition, the Americans and the Chinese will do everything to ensure that nothing changes and in particular to avoid a war in Taiwan. At least in the short term. Because, let’s face it, China intends to become the world’s leading economic power and make the yuan the international currency of reference. But only when its economy is strong enough to support a sustainably strong currency. It will then open its financial markets, allow the yuan to appreciate massively and may require the OPEC countries and its trading partners to denominate their commercial transactions in yuan.
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This prospect will certainly not take place before a good fifteen years. However, if it happens, the United States will become an “emerging country”, riddled with debt, no longer able to operate the “printing money” at will, nor finance its deficits thanks to the hegemonic role of its currency. The recession will then take hold across the Atlantic, but also on the “Old Continent” which, as usual, will suffer even more than Uncle Sam.
In this context, if the dollar falls definitively from its pedestal, the planet will experience a much more serious and lasting crisis than that of 2008-2009 or even than the one we have been experiencing since 2020. That is why, unless Washington and Beijing decide to engage in a suicidal strategy, it will not take place immediately, inciting the Chinese and the Americans to agree whatever the cost, including on the Taiwanese question.
Marc Touati, economist, president of the ACDEFI firm and author of 7 economic best sellers
His new book, RESET II – Welcome to the world after, will be released on September 1, 2022.
You can also find his video chronicles on his Youtube channel
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