The Stock Market: An Unsung Hero in Preventing Conflict?

Imagine a world where war isn’t just devastating, it’s financial suicide. That’s, IMHO, the reality holding back a potential conflict between the US and China, two titans locked in an economic tango coupled with further song and dance in the Taiwan Strait. Let’s explore the surprising reasons why the stock market might be the silent guardian preventing war between these two superpowers.

To be sure, war is a financial nightmare for everyone — except the defence industrial complex. But for everyone else, disrupted trade, global markets in freefall — it’s enough to make any investor sweat. And therein lies the key to continuing constrained aggression across the Taiwan Strait: the US and China are deeply intertwined financially. As of 2020, trade between these two nations was a staggering $600 billion according to the US Census Bureau. That’s a lot of money on the line, and both sides know it.

Think of it like this: China’s invested heavily in American companies, and the US relies on Chinese manufacturing for everything from your phone to your favourite t-shirt. It’s a two-way street. Destabilise one economy, and the other goes tumbling down like dominoes. This economic interdependence creates a situation where war becomes a lose-lose proposition.

For our purposes, the stock market is like a giant scoreboard, reflecting the health of these intertwined economies in real-time. A whiff of war would send chills down the spines of investors worldwide, triggering a market crash that would cripple both China and the US. A zero-sum game, and nobody wins in that scenario.

Financial institutions understand this reality better than anyone. They wield immense influence over government decisions, and they have a vested interest in keeping things stable. War? No thanks, that’s bad for business. So, these financial institutions act as a sort of invisible peacekeeper, nudging governments towards dialogue and away from military escalation.

Here’s the bottom line: in today’s globalised world, economic power is a major player on the world stage. The US and China’s intertwined stock markets serve as a constant reminder of the devastating cost of war. It’s a complex dance, but one that keeps a potential conflict at bay.

Unpacking the Interdependence: A Web of Mutual Reliance

Let’s delve deeper into this economic entanglement. The US boasts the world’s largest economy with a GDP exceeding $21 trillion, while China follows closely behind at over $14 trillion. Their stock markets, the New York Stock Exchange and the Shanghai Stock Exchange, are powerhouses that influence global investment and economic trends.

This financial interdependence goes beyond trade. Consider the massive web of mutual debt. China is a significant holder of US debt, owning over $1 trillion according to some estimates [1]. This creates a precarious situation: a conflict that destabilises the US economy would also devastate China’s financial holdings. It’s a lose-lose proposition on a national level.

China’s Stock Market Trap

Just like with the Renminbi, China walks a tightrope between its economic ambitions and its territorial claims on Taiwan. China desires to attract foreign investment and improve its domestic economy, both of which rely on a stable and prosperous stock market. However, aggressive actions against Taiwan would likely trigger a market crash, as seen in the recent downturn. This economic vulnerability acts as a constraint on China’s military ambitions. Despite tensions rising in early 2024, China may be hesitant to take drastic measures due to the potential for spooking investors and jeopardising their economic progress. These two very simple examples speak very, very loudly in Beijing:

• February 2024 Collapse: The Chinese stock market experienced a significant downturn in February 2024, leading to a major collapse with over 1,800 stocks in the Shanghai and Shenzhen markets slumping. This event wiped out trillions of dollars in market value. Factors contributing to this downturn included a property crisis, slowing economic growth, and other economic pressures [2], [3].
• Ongoing Slump: There ongoing concerns in Zhongnanhai about China’s economic performance. Despite a global stock rally in March 2024, the economic slowdown in China continues to be a point of worry, with expectations of a mild global economic slowdown into 2024 and only a slight improvement in 2025. These concerns underscore the anxiety surrounding the potential global ripple effects of China’s economic situation. Jitters from military aggression do nothing but exacerbate these concerns and weaken Xi Jinping’s leadership. [4], [5]

Even though there has been a slight decrease in Taiwanese investment in mainland China, the economic ties remain significant. This interdependence creates a situation where China must carefully weigh its political goals against the potential economic consequences.

The Ripple Effects: Beyond Borders

The impact of a US-China conflict wouldn’t be contained within their borders. Imagine the chaos: disrupted supply chains (not the least being semiconductor supply disruptions), halted production, and a global market meltdown. Economies worldwide would falter, and countries heavily reliant on trade with either China or the US would be especially vulnerable. Take a small, developing nation that depends on Chinese manufactured goods or American agricultural products — a US-China conflict could cripple their economy. Not that either country really cares, deep down, about most small countries, the global economic fallout would be immense.

Beyond economics, there’s a human cost to consider. Millions of jobs rely on the smooth operation of the US-China trade relationship. A conflict would trigger mass unemployment across the globe, further destabilising societies and creating fertile ground for social unrest.

The Canary in the Coal Mine: Early Warning Signs

Financial markets are like a canary in a coal mine — their jitters can signal trouble ahead because they are all about expectations, pessimism and optimism. So how can we use the stock market as an early warning system for potential conflict? By closely monitoring fluctuations, analysts can gauge investor sentiment and risk aversion. A sudden dip in either the US or Chinese stock market, particularly if triggered by political tensions, could be a red flag. Aggression towards Taiwan would precipitate a dip in Chinese stocks, in turn increasing domestic economic vulnerability for Xi.

This information can be used by governments and international organisations to proactively de-escalate tensions and open diplomatic channels. Early intervention is key in preventing a conflict that would have catastrophic consequences.

The Fragile Dance: A Long-Term Challenge

The economic interdependence between the US and China is a complex and evolving situation. While it acts as a deterrent to war in the short term, it’s important to recognise its limitations. Political ideology, historical grievances, and territorial disputes can all overshadow economic considerations. But in the short turn, economic considerations and constraints are trumping (no pun intended) the military and ideological. Monitoring shifts in that balance is absolutely vital.

But, a prolonged economic decoupling between the US and China, a possibility some experts warn about, could weaken this economic deterrence. New alliances and trade partnerships could emerge (e.g. China-Russia), potentially lessening the financial blow of a conflict.

Despite these challenges, the economic interdependence between the US and China remains a powerful force for peace or, at the least, constrained tension. We shall, in the short run, continue to rely on economic pragmatism trumping physical aggression.

Originally published at https://www.linkedin.com.