U.S. East Asian envoy says investors are overpricing Taiwan risk, calls Xi a 'very rational actor'

SINGAPORE – Investors are overestimating the risk of conflict across the Taiwan Strait, a top U.S. East Asian diplomat said, stressing that deterrence and "substantial consequences" would keep Beijing from taking the island by 2027.

While the U.S. government has often indicated Beijing's directive for the People's Liberation Army to be ready for military action in Taiwan by 2027, Beijing has never publicly confirmed the timeline.

"I actually think the most mispricing is with regard to Taiwan, where actually I think people are overpricing the risk of something happening across the Taiwan Strait," said Michael DeSombre, assistant secretary of state for East Asian and Pacific affairs, told CNBC on Thursday.

"Both China and the U.S. don't want conflict, and we're able to deter conflict," he told CNBC's Sri Jegarajah in an exclusive interview on the sidelines of the Milken Institute Asia Summit. "Concerns of that perhaps are priced at too high a level."

Beijing claims Taiwan as its territory and hasn't ruled out force to bring it under its control. The democratically governed island's government rejects Beijing's claims.

China has also sought to push Washington for a change in its longstanding diplomatic stance on the island to formally "oppose" Taiwan independence. However, the summit last month between U.S. President Donald Trump and Chinese President Xi Jinping did not yield any public agreement on Taiwan.

The U.S. President has held back approval of a new package of arms sales to Taipei worth $14 billion after an earlier package of $11 billion in arms sales to Taiwan had drawn a sharp response from Beijing in December.

Days after the leaders' summit, Taiwanese Foreign Minister Lin Chia-lung visited Arizona for the opening ​of a new de facto consulate in ‌Phoenix.

Beijing has sought to increasingly solidify its military presence near the island in recent months. A Chinese military boat was spotted along with two vessels off Taiwan's Pacific coast for the first time in August, Reuters reported, citing a surveillance report. It has also been courting Taiwan's opposition party, the Kuomintang, since last year to pull the island into its orbit as it prepares for the presidential election in 2028.

Asked whether plans to "reunify Taiwan" by 2027 were a cause for concern, DeSombre said that Xi is "a very rational actor ... To the extent that he realizes that it can't be done, or it can't be done without substantial consequences, it won't happen."

DeSombre played up the importance of keeping deterrence credible. "That's why it's important … ensuring that we have the deterrence in place with our allies and partners to make sure it does not happen."

Taiwan is the world's leading ​manufacturer of cutting-edge computer chips and TSMC, the world's largest contract chipmaker, has invested tens of billions of dollars in facilities in Phoenix. The projects have received ​significant U.S. subsidies as Washington seeks to revive domestic semiconductor manufacturing.