Is the risk in the Taiwan Strait considered too high by the market? U.S. envoy rarely points out investors’ blind spots: serious overvaluation

U.S. officials believe that market investors have priced the risk of conflict in the Taiwan Strait too high. (Reuters)

[Financial Channel/Comprehensive Report] Taiwan plays a pivotal role in the advanced semiconductor supply chain, and cross-strait tensions remain the focus of the global market. A senior U.S. diplomat said investors had overestimated the risks of the prospect of conflict; he believed deterrence and the threat of significant consequences were deterring Beijing from taking action on the island.

According to reports, Michael DeSombre, the U.S. Assistant Secretary of State for East Asian and Pacific Affairs, said in an interview at the Milken Institute Asia Summit in Singapore that investors have "overpriced" the risk of conflict in the Taiwan Strait, and believed that neither the United States nor China wants a conflict, and that deterrence is still effective. As for the market's continued concerns about rising tensions in the Taiwan Strait, he bluntly said that investors' assessment of the possibility of conflict is obviously overly pessimistic.

According to reports, de Sombre said that neither China nor the United States wants a conflict, and both sides have the ability to prevent the situation from getting out of control through deterrence. When asked about external concerns that Beijing may promote unified action around 2027, he called Chinese President Xi Jinping a "rational actor" and would not take rash actions if Beijing judged that the relevant actions could not succeed or that a heavy price had to be paid.

However, he also emphasized that deterrence must continue to be credible and that the United States needs to work with allies and partners to ensure that conditions sufficient to prevent conflict still exist.

Beijing currently maintains that Taiwan is part of its territory and has not ruled out the use of force to achieve reunification; Taiwan's democratically elected government refuses to accept China's claims. China has also continued to demand that the United States change its long-term diplomatic rhetoric towards Taiwan and officially express its opposition to Taiwan's independence. However, after the summit between US President Trump and Xi Jinping last month, the two sides did not announce any agreement on Taiwan issues.

On the other hand, Trump is still holding off on approving a new arms sale to Taiwan worth US$14 billion (approximately NT$445.2 billion). Previously, the United States approved an arms sale of approximately US$11 billion (approximately NT$349.8 billion) in December last year, triggering a strong reaction from Beijing. A few days after the summit between the two countries’ leaders, Taiwan’s Foreign Minister Lin Chia-lung went to Arizona to attend the opening of a new physical consulate in Phoenix.

Recently, China has also continued to increase pressure on Taiwan's surrounding areas. In August this year, a Chinese military ship and two other ships were spotted operating off Taiwan's Pacific coast for the first time; Beijing also actively contacted Taiwan's opposition Kuomintang party, just as Taiwan was preparing for the 2028 presidential election.

Taiwan's importance to global investors goes beyond geopolitics. Taiwan is still the most important production base for advanced chips in the world. TSMC continues to maintain its leading position in advanced manufacturing processes and has invested tens of billions of dollars in building a wafer fab in Phoenix, USA. Related investments have also received large subsidies from the U.S. government, and Washington hopes to use this to rebuild local semiconductor manufacturing capabilities.

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