China’s economy is facing multiple challenges, including a real estate debt crisis, rising youth unemployment, and a decline in factory output.

These issues are exacerbated by tensions with major trade partners like the U.S. and EU, threatening China’s export-driven growth.

The increase in domestic protests has pressured the government, potentially making it more dangerous.

There is a risk that China might turn to aggression, particularly towards Taiwan, which is crucial for the semiconductor market.

Geopolitical tensions have already prompted supply chain shifts away from China to other countries.

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China’s economy has been hit on many different fronts lately…

First, the country faced a debt crisis in the real estate. Recently, there have been conversations about how the government is trying to bail out the sector with efforts to push regions to buy homes outright.

Then, a record number of young people have faced unemployment, putting more pressure on the government.

As if these weren’t enough, bad news came from the production side. China’s factory activity reported a contraction in May after experiencing solid growth in the first four months of the year.

This decline in manufacturing combined with rising tensions with the country’s biggest trade partners, the U.S. and EU, has dealt a big blow to China’s export-focused industries.

This is extremely concerning since export is the flagship of the Chinese economy to achieve its 5% economic growth target.

Economic growth is crucial for China to maintain political stability and enhance its global influence. Failing this will put the government in a tough position.

As the economy worsens, the Chinese government finds itself increasingly cornered, and it’s making them more dangerous.

Working-class protests increased more than threefold in the last quarter of 2023 compared to the same period of the previous year.

The government needs to shift the focus of unhappy people to somewhere else, so they don’t turn on the regime. One effective strategy is threatening or going to war with a country.

When China and war are mentioned, Taiwan comes to mind. CCP believes Taiwan needs to be reunified with the mainland.

On top of that, Taiwan holds a 68% share of the semiconductors market. So, a potential takeover might help China to catch up in the chip competition that they are losing so far.

Such an attack would have a significant initial cost to China, and Taiwan could defend itself in the short term.

Currently, it seems that the cost of war would outweigh its benefits.

However, the risk is still there, and the current economic outlook of China might be a trigger for it.

The world is highly reliant on Taiwan for semiconductors… and such a war would endanger countless industries.

In the last couple of years, supply chain investments have been shifting away from China to countries like the U.S. and Mexico due to geopolitical tensions.

China-Taiwan tensions don’t seem likely to end… this is why we should expect investments in the homeland to continue.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research