Chris’ note: Tensions are rising over Taiwan. Following Nancy Pelosi’s visit on August 2, the Chinese military encircled the island with a series of live-fire military drills. This included firing 11 missiles into the sea around Taiwan and sending 22 fighter jets into its airspace.
If this leads to war, it could drag the U.S. into a direct conflict with China. And with China’s main ally, Russia, already at war in Ukraine, we could be in something that looks like World War III fast.
I’m sure you have concerns about what’s going on. Fortunately, I recently talked with one of the world’s top geopolitical strategists, Peter Zeihan.
He’s a bestselling author. He also runs consulting firm Zeihan on Geopolitics, where his clients include the U.S. military.
And as you’ll see below, he has a different take from the one in the mainstream press. Not only is it unlikely China will invade Taiwan… Peter says it would be a shock if China survives this decade as a major power.
Chris Lowe: Communist China has claimed the right to rule Taiwan since December 1949. That’s when the communists, under Chairman Mao, defeated the nationalists in the Chinese Civil War. The nationalists fled to Taiwan and established a government there. And the communists have wanted to take it from them ever since.
We get a lot of questions about if China will invade Taiwan. What’s your view?
Peter: The Chinese position has always been that, when push comes to shove, everyone will choose China over Taiwan… that the war for Taiwan will be over so quickly that China can present it to the rest of the world as a done deal… and everyone will just move on.
After seeing what happened to Russia in Ukraine, China has no confidence that’ll happen now. The Chinese were just as surprised as everyone else that the Russians have done so badly in their war.
The Chinese strategic picture has turned inside out.
First, there are the sanctions against Russia. In less than a week after the invasion, the U.S., Europe, and most of the advanced world joined together to punish the Russians over a country that none of them had a security relationship with. This shocked the Chinese.
They know that if the West levied those kinds of sanctions against China, they’d have permanent blackouts and immediate famine.
Chris: The sanctions against Russia haven’t wiped out its economy. It’s in a recession. What makes China different?
Peter: The Chinese, unlike the Russians, import all their food and energy.
The Russians are somewhat resistant to sanctions because their country is a raw materials producer. But China is a raw materials consumer. And the math for that under a regime of sanctions is really bad.
Also, the corporate boycotts of Russia have terrified the Chinese. That consumers and shareholders might punish a sovereign state en masse for a war terrifies them. Because the entire Chinese development model is to maintain relationships with Western corporations.
The Chinese have always known that going for Taiwan is a risk. Now they know they’re looking at national collapse and mass decivilization… even if they win.
Chris: The head of China is a dictator for life, Xi Jinping. Like Vladimir Putin, he has absolute power. And he sees “reunification” of China and Taiwan as a key part of his political legacy. If Xi wants a war, won’t he have it?
Peter: Normally, this is where you bring together your leaders to come up with a new plan. Because the plan the Chinese have had for the last 40 years to take Taiwan evaporated after Russia invaded Ukraine.
The problem is Xi has killed all the people who might help him with a new plan. Xi now has a cult of personality far stricter than anything Mao instituted.
He’s the only one left. He makes all the decisions. And people don’t want to bring him information they think may anger him because they value their lives.
So this one guy is responsible for coming up with a new strategy after a 40-year plan has blown up.
What will Xi do? I don’t know. But it’s now obvious that if he goes for Taiwan, it’s the end of China as a significant modern industrial power.
Normally, I’d say there’s no way he would take that risk. But China is different. It’s a dictatorship. If Xi can stay in power for the price of a famine that kills 500 million Chinese, he may be willing to make that trade.
Chris: What about the idea that China will topple the U.S. as the world’s most powerful nation by replacing it as the provider of the world’s reserve currency? Will China take over the role of the world’s top currency issuer?
Peter: If you want your currency to be a global reserve currency, it has to freely circulate. The country that supplies it can’t overly care what its value is daily.
Since the U.S. started the globalized system in the late 1940s, the reserve currency has been the U.S. dollar. That’s because the U.S. has a huge domestic market and isn’t a major trading country. So it doesn’t need to manipulate the dollar lower to boost its export sector.
For the Chinese yuan to displace the U.S. dollar, the Chinese would need to stop manipulating their currency. They’d have to open their current account. That means that anyone in China could move their money out whenever they wanted to. And for them, it’s a hard no on all of that.
They would also have to agree to constantly import more than they export to subsidize everyone else in the world as the U.S. does now.
China is a mercantilist country. It will never do that.
Chris: So China won’t replace the U.S. as the dominant military and economic power?
Peter: Absolutely not. Even if the Ukraine war doesn’t break the Chinese economic model, China is now the fastest-aging society in human history.
Within the next decade, it’ll lose both its consumption base and its workforce.
If China survives this decade, it would be a shock.
Chris: We’ll leave it there, Peter. Thank you so much for your time.
Peter: Not a problem.
Chris’ note: Look out for more from Peter in these pages in the next few weeks. We’ll feature ideas from his new book, The End of the World Is Just the Beginning.
We’ll also give you a sneak peek at the interview colleague Nomi Prins recorded with him about the heightened geopolitical turmoil around the world… and what it means for us as investors.