The US’ shock capture of Venezuela leader Nicolas Maduro last week has led not only to discussions about Washington’s projection of its power but also of Beijing’s ability to do so. Commentary pages have debated what — if anything — the US operation in Venezuela might mean for China regarding its intentions for Taiwan.

That question is open-ended. Fundamental to debt traders and issuers, however, is what any potential action in Taiwan may mean for markets in the region.

Unlike the limited market impact seen from the operation in Venezuela, potential Chinese action in Taiwan would “feel closer to early-Covid repricing”, Isaac Stone Fish, CEO and founder of consultancy Strategy Risks, told 9fin.

“Venezuela matters regionally, but you can route around it. Taiwan can’t be swapped out or worked around in any realistic time frame. Not without breaking things.”

To be sure, China’s military drills around Taiwan have so far been focused on blockading the island rather than either a head-on invasion or a Venezuela-style operation. It’s understood that this potential slower application of pressure on Taiwan’s shipping and trade is designed to avoid a direct confrontation and thus minimize the chances of creating any one flashpoint which, by itself, could trigger intervention from foreign militaries.

Bond market impacts

In the event of either a war or a blockade of Taiwan, the first outcome would be a drastic capital flight away from all nations in Asia, Natixis senior economist Gary Ng told 9fin.

“Money will flow to US Treasuries and gold amid a broad selloff in Asian debt markets. Even Japan would feel too close to be considered a safe haven.”

Instead, it may be Chinese debt that proves to be something of a relative haven.

“The reaction to Chinese onshore debt would be largely limited as only about 10% of its sovereign bonds, for instance, are held by investors outside of mainland China,” Ng said, adding that even among bondholders outside of the mainland, a good proportion are investors based in Hong Kong — who may be inclined to wait and see. ”So there’s limited downside for onshore bonds and I wouldn’t expect volatility.”

Offshore debt would be subject to greater volatility but mainland investors may ultimately be able to offer support, Ng said, adding that China’s central bank would step in too, and may have quite a manageable task in steadying China’s debt yields.

Sectoral impacts

After an early and broad-based selloff, which would pay little attention to issuer fundamentals, various sectors would later find themselves at differing ends of the risk spectrum.

Tech hardware firms may be among the most likely to see spreads widen amid uncertainty over Taiwan’s ability to continue to produce semiconductors. Restrictions on the availability of chips wouldn’t only hurt the chip manufacturers themselves but also South Korean and Japanese gadget makers that rely on them, not to mention auto manufacturers globally.

Stone Fish pointed to four sectors at high risk in the event of military action:

• The financial sector, particularly for companies with exposure to Taiwan, mainland China or Hong Kong
• The electronics supply chain, from chipmakers in Taiwan down to assembly firms and buyers of semiconductors
• Shipping, logistics and airlines, as disruption risk gets priced “instantly” in trade and transport
• Real estate and property-linked credit in Hong Kong and mainland China, due to its sensitivity to refinancing conditions.

Ng pointed to similar sectors but noted the size of the impact on financial firms would most likely depend on whether the US or others apply sanctions forcing banks and lenders to decouple from China — and on how long those restrictions remain in place.

Timing

Ng told 9fin it would be harder for Beijing to remove Taiwan’s leader in a Venezuela-style operation than it was for Washington to do so last week, adding that a blockade of the island is more likely.

This approach — referred to as slicing the salami — means a successful operation may create a situation in which Beijing has no need to invade Taiwan militarily but instead achieves its goals by coercing the island’s domestic policy.

“If Beijing takes over in three months then people could continue on with a new status quo,” Ng said.

But while that strategy may be designed to avoid a full and international military confrontation, it nevertheless may not prevent the US or others applying sanctions — something Ng sees as both more likely and as the true source of serious trouble for investors.

Ultimately, Ng said, “it’s a US-China question — how much will each party fight their corner?”

Domestic vs international

To return to the issue of whether the US’s sidestepping of international law to conduct its operation in Venezuela would encourage Beijing to do the same, Ng says this is a moot point. “I don’t think China thinks about international law regarding to Taiwan, so I don’t think US actions in Venezuela would persuade China to act differently.”

After all, given China doesn’t consider Taiwan to be an international counterpart — but rather a domestic one — Beijing is unlikely to be concerned about what is written in laws governing international conduct.