Market Thinking

making sense of the narrative

Calling Elliot Carver

Print Friendly, PDF & Email

As the rhetoric for War in the South China Sea is ramped up almost 25 years after Bond villain Elliot Carver tried to do it to sell more newspapers, the good news is that, when looked at properly, China’s apparent aggression against Taiwan is more about countering what it sees as western provocations. This time, it is also about money, but the narrative is largely being driven as part of a Budget raising campaign for the Pentagon. The good news is that China is much more likely to play a long game of soft power. The bad news is that the extended Cold War rhetoric is damaging trade relations, especially in Asia, and is also slowing the opening up of global supply chains.

As we watch the last of the Daniel Craig Bond franchise and muse as to who were the best villains, as well as the best Bonds, one stands out, not so much because he was the best/worst, but because of his topicality.

Elliot Carver Tomorrow Never Dies

Elliot Carver, from Tomorrow Never Dies, a Tycoon based on a blend between Steve Jobs and Robert Maxwell, had a plan straight out of the “You furnish the pictures and I’ll furnish the War” approach of William Randolph Hearst. Elliot Carver’s plan was to start a war between Britain and China and then make millions from the coverage and permanent TV rights in China. This, of course, was back in 1997 and was probably the first and maybe only time at that point that most people ‘west of Suez’ had heard of the South China Sea. Also, for context, in 1997, the UK had just handed Hong Kong back to a much ‘smaller’ China. Then Hong Kong represented over 20% of total Chinese GDP, so the concept of a limited and even winnable war with China was not totally implausible- even for a Bond movie. Now however, even though Hong Kong has grown, it is now less than 2% of China’s GDP and a war is out of the question (so we get movies about viruses instead!)

Today however, the narrative is being driven not by media tycoons or even the AI that runs (many of) them, but by the Budgetary needs of what Eisenhower long ago called ‘the Military Industrial Complex (MIC) and while they don’t want an actual war (we hope), they do want lots of people to buy lots of weapons and equipment. Thus, once again, we are being presented with only half the story; a narrative that China is being mean and aggressive to Taiwan and the West must respond, as opposed to, the West is provoking a response from China and then using it to claim China is being mean. This ‘imminent threat’ is of course a standard trick used by the Pentagon over the years to extract more money from Congress – witness also the new ‘threat’ from a Chinese rocket test announced in the FT at the weekend. Sadly, there never seems to be a ‘peace dividend’ as the MIC always finds a new reason for a bigger Budget.

But with the withdrawal from Afghanistan (and the Middle East), the MIC is increasingly looking outside the US for customers; the new AUKUS defence pact, like the so called Quad with Australia, India and Japan, is designed not only to give the impression that this Cold War is not just bi-lateral between the US and China, but also to get other countries to pitch into the Pentagon’s coffers and buy US weapons. Meanwhile, because the US withdrawal from Afghanistan did not involve discussion with other NATO members, which together with the snub to the French over AUKUS is increasing discussions of a EU Army instead of NATO, this has meant that NATO too has just declared China to be its new major threat as part of its own need for relevance. Hence it too is upping the ‘threat’ references.

So, with all this talk of threats, do markets need to be worried about an invasion of Taiwan? Well, never say never (again, to keep the Bond meme running), but if we view this ‘in the round’, i.e. as less a unilateral act of aggression by China and more as part of an extended cat and mouse game, then the answer is no.

Consider a counterfactual.

Imagine if China had sent a large fleet to patrol off Key West to ensure ‘Freedom of Navigation’ for Cuba. On July 4th. Imagine further, if Cuba then complained that the US sent Aircraft over the fleet and in doing so breached the Cuban Defence Identification Zone at the 24th Parallel and that the world press simply reported it as US aggression against Cuba without ever mentioning the existence of the Chinese fleet?

In effect, that is exactly what has just happened in the South China Sea this month, except in reverse. A large western battle fleet comprising 17 ships from 6 navies, were conducting one of their (increasingly regular) patrols in the Luzon Strait off Taiwan on China National Day, which produced the predictable response of China flying out jets. Not, as might be imagined from the press coverage, to fly over Taipei 101, but rather over an area many Km to the South West of the Island, at the very bottom of what is known as the Taiwan Military Identification Zone. This is not ‘Taiwan’s Airspace’ since technically Taiwan is not Sovereign, but also it is simply an Identification Zone, one of many overlapping ones in the region. Protocol asks that you identify if you fly into it, but it is routinely ignored – not least because, as the map the Taiwanese themselves put on Twitter shows, a large part of the zone covers the Chinese mainland! Indeed, most of the flights were closer to Hong Kong than Taipei, which is in the north east of the island.

Incidentally the counterfactual example of Cuba is particularly apt as the Hearst quote that inspired the Carver plotline was shortly before a supposed Spanish attack on a US ship in Havana harbour in 1898 during the American Spanish War. Students of history will spot an awful lot of similarities, or simply observe that technology may change but the tricks remain essentially the same.

This is both good and bad news. The good news for markets at least is that the widespread portrayal of ‘Chinese aggression’ is once again exaggerated. As our counterfactual suggested, this is a ‘normal’ defensive response to a cat and mouse provocation, not, as presented, a unilateral aggressive act, but then markets – and particularly the AI that drives the media – tend not to like nuance. Moreover, it demonstrates the rather alarming willingness of western observers in markets to believe the narrative given to them, bypassing the dictum of ‘Trust, but verify’. This is similar to the widespread commentary back in 2019 about ‘Chinese troops massing at the border’ when the Hong Kong protests were in full swing. Anybody actually living in Hong Kong could have told you that the PLA has been stationed on Hong Kong Island ever since the handover. Nor, we might remember, were they ever deployed. Risk premia were elevated unnecessarily on the back of this.

It is also worth reminding ourselves of a little bit of Taiwanese politics. Unlike Hong Kong, Taiwan has a western style democratic process with two main parties; one, the DPP, is pro Independence, while the other, the KMT, is much closer to Beijing. The ruling DPP had suffered very badly in local elections back in 2018 and looked set to lose heavily in the 2020 Presidential Elections. China, probably realising this and anticipating a pro Beijing KMT government, made an approach in early 2019 to suggest a one-party-two -systems approach for Taiwan, similar to Hong Kong. This was arguably a tactical mistake by Xi since it precipitated some tough campaigning from DDT President Tsai-Ing Weng on a virulently anti China campaign, one that was helped enormously by the protests taking place in Hong Kong at the same time and ultimately led to a dramatic turnaround and victory. The fact that the trigger for the protests was a proposed extradition bill in Hong Kong that had been demanded by Taiwan in the first place has not gone unnoticed by the mainland, even if it is not widely known in the west.

The importance of this is that, while the current Taiwan government is anti-China to the extent that it sees that as the foundation of its legitimacy, it does not mean that all the people of Taiwan are. In this sense it is (remarkably) similar to Nicola Sturgeon and the SNP in Scotland and their Anti Westminster stance, except of course that the US are not selling weapons to Scotland, nor patrolling the North Sea to ensure freedom of navigation. On the other hand, if Scotland made most of the world’s advanced computer chips and England was still the US’s main geopolitical rival then it might very well be doing precisely that. Most likely is that China will sit it out and wait for the next Election and hope to use its soft power to bring Taiwan closer. Hopefully no need for huge explosions and destruction of the Bond villain’s lair.

PS. Without spoiling the plot of NTTD, we would suggest that the Bond franchise is undergoing its own version of The Great Reset and that far from ‘Saving Big Screen Cinema’ as many are claiming, we would note that the franchise is going to Amazon where it may see a Mandalorian style reboot similar to when Disney bought StarWars. We would very much like to see a type of origin story like Pennyworth (also on Amazon), perhaps six series, each of six episodes spread over the next ten years, each one focusing on a decade of Bond, 1960s, 1970s etc. Each one could have a different actor playing Bond and each could be set against more real events, including a lot of the ‘Quiet American’ style involvement of assorted intelligence services that we now know about. A bit like The Crown, but with more guns.

Share this article