Amidst all the chaos in the US and the Middle East, it is important to keep an eye on developments elsewhere. One particular pocket of emerging risk comes from Taiwan.
In the short term, a particular point of vulnerability relates to falls in the US dollar against the Taiwanese dollar, and its impact on Taiwanese life insurers. These hold roughly US$700bn in US bonds, mostly corporate bonds [1], accounting for 6-7% of the US corporate bond market [2].
Because the exchange rate of the Taiwanese dollar and US dollar has been broadly stable in the past, a lot of this of the currency risk is unhedged. Even that which is hedged is often done on the basis of rolling 3-month hedges [3], [4]. However, a recent spike in the Taiwanese dollar against its US equivalent has led to currency losses [5]. As a result, Fitch has placed many Taiwanese insurers on downgrade watch [6]. Fitch noted that the insurers should have sufficient capital to withstand a 10% appreciation in the Taiwanese dollar from start 2025 levels, but recent appreciation isn’t too far away from this level [7].
To protect against further losses, insurers are likely to increase currency hedging and/or reduce their exposure to US dollar assets. However, there is a risk that this could lead to further appreciation of the Taiwanese dollar. Worse, such further appreciation could cause failures among Taiwanese life insurer. which would have catastrophic effects for Taiwan’s economy given that their assets are c.140% of GDP, far higher than most countries [3].
Even if they don’t fail, solvency concerns could trigger mass lapses. There is the potential for a “doom loop” of currency losses leading to forced disposals of US bond assets to prevent further losses. This would in turn lead to a spike in US bond yields and spreads which would spread the carnage globally.
As if the potential failure of its life insurance industry wasn’t enough, Taiwan is also in the cross-hairs of the Trump administration owing to its large trade surplus with the US. In 2024, the goods trade deficit alone was US$74bn, the sixth largest, ahead of Japan, South Korea and Canada [8]. As a proportion of GDP, its overall current account surplus is around 15% of GDP, far higher than its Asian peers [3].
Such surpluses are linked to Taiwanese life insurers unhedged investments in US bond assets. The surpluses would push up the Taiwanese dollar unless counter-balanced by Taiwanese purchases of US dollar assets. While the Taiwanese central bank holds c.US$600bn of US dollar assets as part of its reserves, it has had to taper purchases in recent years to avoid being labelled a currency manipulator by the US. Conveniently, Taiwanese life insurers have filled the gap with their US bond purchases, which has helped keep the Taiwanese dollar from appreciating until now [3].
Keeping the Taiwanese dollar lower than it would have been has helped Taiwan’s exporters and contributed to the large trade surplus, but it has drawn the ire of Trump who has threatened it with a 32% tariff as part of his “Liberation Day” tariffs on the 2nd April. Taiwan has sought to alleviate this by offering to buy more US good and encourage further investment in the US [9].
Aside from trying to pre-empt tariffs, Taiwan also needs to keep Trump onside so as to maintain US support in the face of China. Trump has previously questioned this support. In doing so, he risks encouraging China in its campaign to re-unify Taiwan.
On this, Xi Jinping has reportedly ordered the PLA to be ready by 2027 to invade Taiwan if required [10], but being capable of performing such an operation is not the same as actually planning to do so [11]. Personally, I am sceptical on whether Xi Jinping would order the PLA would launch such an invasion, even if it was capable of doing so. Such an invasion would be bigger than the US invasion of Okinawa in WWII [12], and possibly bigger than the D-Day landings, which is a huge ask for an army that hasn’t fought a war in over 40 years. Casualties could be high, and there is a risk the invasion would fail, leading to serious loss of face for Xi Jinping.
I do think however that Xi Jinping could take actions short of an all-out invasion. I have written repeatedly on the risk that the China could seek to capture Kinmen and Matsu which currently belong to Taiwan but are just off the coast of mainland China. These could be viewed as “low hanging fruit" which could be easily taken. The Institute for the Study of War has set out a scenario for how China could just do that through a campaign of coercion [13].
Going beyond Kinmen and Matsu, rather than a full-scale invasion, I would be more worried about a Chinese blockade of Taiwan to subjugate it and force re-unification. This might be akin to the US naval blockade of Cuba in 1962, taking advantage of Taiwan’s heavy reliance on imports of oil, gas and food [14]. It could also be accompanied by Chinese incursions into Taiwanese airspace, effectively closing this off [15]. These actions would bring the risk of conflict with the US, which might feel compelled to help Taiwan break the blockade.
Even if China did not subjugate Taiwan, such a blockade would have serious impacts for the global economy. Taiwan dominates the production of high-end chips with its TSMC, so any blockade would have far reaching impacts on AI development amongst other things.
To conclude, there is lots going on in a small island of 25m people with an area less than half the size of Ireland which could disrupt the global financial system and potentially drag the two largest superpowers into conflict.
[1] “Taiwan Life Insurers’ $700 Billion Bet on the US Is Backfiring”, Chien-Hua Wan, Cindy Wang and Betty Hou, Insurance Journal, 12th June 2025, citing end-March figures from Taiwan’s Financial Supervisory Commission. See Taiwan Life Insurers’ $700 Billion Bet on the US Is Backfiring
[2] Based on c.US$700bn of corporate bonds v total size of US corporate bond market of roughly US$11bn.
Note the IMF quoted a figure of 7% in their 2019 Global Financial Stability Report (https://www.imf.org/-/media/Files/Publications/GFSR/2019/October/English/text.ashx) when they warned against growing Taiwanese life insurer exposure to USD assets. This was based on US$400m of corporate holdings by Taiwanese insurer back then, but both US corporate bond issuance and Taiwanese insurer purchases have grown since then.
[3] “How Taiwan became a quiet bond market superpower - And why it could blow up in everyone’s face”, Brad Setser and Joshua Younger, FT, 31st January 2025
[4] “Taiwanese Life Insurers' Portfolios Have Billions of Unhedged Dollars”, Reuters, 6th May 2025 - Taiwanese Life Insurers' Portfolios Have Billions of Unhedged Dollars
[5] “Taiwan straits”, Economist, 10th May 2025
[6] Fitch Puts 5 Taiwanese Life Insurers on Rating Watch Negative; 1 on Rating Watch Evolving; Affirms 1, 15th May 2025.
[7] The exchange rate has appreciated from USD1 : TWD 32.79 at the end of 2024 to USD1 : TWD29.87 at the end of May 2025, an increase of just under 10%. Source: Board of Governors of the Federal Reserve System (US), Taiwan Dollars to U.S. Dollar Spot Exchange Rate [DEXTAUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DEXTAUS, June 14, 2025.
[8] U.S. International Trade in Goods and Services, December and Annual 2024 | U.S. Bureau of Economic Analysis (BEA), U.S. Census Bureau and the U.S. Bureau of Economic Analysis, 5th February 2025. Note the figure of US$74bn just relates to just the surplus in goods, a key focus for Trump. Per the article below, the wider trade deficit in goods and services was US$116bn.
[9] Taiwan pledges to buy more American goods as a 32% tariff looms | The Independent, Associated Press, 28th May 2025.
[10] China Orders Military To Prepare For Taiwan Invasion By 2027, U.S. Warns, Defencemirror.com. 10th April 2025.
See also: China, Taiwan, and the PLA’s 2027 milestones | Lowy Institute
[11] How DC became obsessed with a potential 2027 Chinese invasion of Taiwan, DefenceNews, 7thMay 2024.
[12] Battle of Okinawa - Wikipedia – the US invasion involved over 1/2m men and 1,300 ships to conquer an island defended by over 100,000 Japanese soldiers. By contrast, Taiwan’s armed forces have over 150,000 personnel and could call on 1.6m+ reservists.
[13] Exploring a PRC Short-of-War Coercion Campaign to Seize Taiwan’s Kinmen Islands and Possible Responses | Institute for the Study of War, Matthew Sperzel and Daniel Shats of the Institute for the Study of War; Alexis Turek of the American Enterprise Institute, 14th August 2024.
[14] China-Taiwan 2027 Deadline: How China could crush Taiwan without firing a shot - The Economic Times, 24th March 2025
[15] China is already engaged in a campaign of attrition with the Taiwanese air force through such incursions – in forcing the Taiwanese to scramble fighters to intercept, it wears out Taiwan’s aging fighter fleet, though this could be reversed if Taiwan buys new fighters from the US.
Send to friend
