China’s threats against Taiwan have steadily increased. This is relevant for us in Germany because some German companies are heavily involved in China. In the event of an invasion of Taiwan, the USA will put strong pressure on Germany to join extensive Western sanctions.
China’s threats against Taiwan have steadily increased. They reached a climax in China’s military response to the visit of Nancy Pelosi, the speaker of the US House of Representatives – although her flying visit was not historically unusual.
This is relevant for us in Germany because some German companies are heavily involved in China. In the event of an invasion of Taiwan, the USA will put strong pressure on Germany to join extensive Western sanctions. Expropriations in China are then also no longer ruled out. Such a scenario harbors considerable risks of loss for some of the German companies that are heavily exposed in China. Taxpayers and shareholders could also lose money in the process.
Jürgen Matthes heads the international economic order and business cycle competence field at the German Economic Institute in Cologne and focuses on topics such as the EU, Brexit and globalization.
It’s just stupid that we hardly know anything about the risk of losses from the China business of the relevant stock exchange companies, because hardly any reliable figures are published on this.
Whether China will invade Taiwan in the near future or not, no one knows at the moment – except perhaps the Chinese leadership around Xi Jinping. Some Western experts still believe that China is not militarily strong enough to dare a confrontation with the USA. Others believe Xi has made it his mission to incorporate Taiwan during his tenure and before he is too old. If not voluntarily, then by military force. All the more remarkable is the report that experts in the Federal Ministry of Economics expect an invasion of Taiwan by 2027, the 100th year of the founding of the People’s Liberation Army China strategy in planning: Habeck wants to make the economy more independent | tagesschau.de.
So it’s high time to think harder about the consequences of an invasion of Taiwan. Because the likelihood of this happening is now so high that secrecy about the relevance of the China business is no longer up to date. Risks of loss arise not only from slumps in profits in China, but above all from the fact that fixed assets may have to be written off on a large scale.
This mixed situation is an issue for politicians in Berlin for two reasons.
For politicians, it is therefore also a question of investor protection: In the event of an invasion scenario, the companies affected are threatened with sharp stock market price slumps. However, it is politically desirable for long-term savers to make provisions for old age with shares. If investors are unable to properly identify this risk due to a lack of disclosure, action is required. More transparency about the possible risks of loss is urgently needed.
Actually, the financial market, especially the rating agencies, should ensure more transparency, but apparently that hasn’t worked so well so far. So here is a starting point for the state. In addition, politicians should ensure that the business reports of the exposed stock exchange companies contain sufficient information about the Taiwan risks. The management report with the analysis of relevant risk factors is a possible place for this. The federal government should therefore oblige financial regulators and auditors to take a closer look and demand more disclosure in annual reports. In order to ensure comparability, politicians could, like in the banking world, specify a uniform stress test scenario for a Taiwan invasion.
If the risks of loss are disclosed and quantified to a greater extent, savers can decide whether they want to participate in the profits that are still bubbling up in China in the short term or whether they would rather sell because their investment is becoming too delicate for them. Then – and also in the case of rating warnings – falling stock prices would result, even in the short term.
More transparency requirements therefore have another charm: This gives politicians a market-economy corrective to at least somewhat limit the short-term incentives to “more and more China”.