Adding to the problem is the aggravated escalation of the conflict around Taiwan due to the recent visit to the island of the speaker of the US House of Representatives, Nancy Pelosi. Tensions between China and the US aggravated to the limit. The stormy protest of the Chinese side turned into direct threats of military action. Now the PRC intends to regularly conduct military exercises to blockade Taiwan. Before the elections in 2024, Xi Jinping cannot show weakness in any way.
From an economic point of view, the escalation of tensions in Taiwan may result to a shortage of semiconductors and a sharp rise in the cost of technological products, which will inevitably affect the state of the economies of China itself, the United States and the whole world. Now semiconductors are the main parts in the production of almost all household devices: telephones, computers, electronics in cars. Escalating conflict threatens global supply chains. The Taiwan Strait is the main route for shipping from China, Japan, South Korea and Taiwan to the west – through it, goods made in Asian factories are delivered to the markets of Europe, the USA and other countries.
Consequences for Asia
Regardless of Taiwan, the threat of economic recession affects not only China, but the entire Asia-Pacific region (APR). Economists polled by Bloomberg evaluate The probability of a recession in China is at 20% over the next 12 months, while its neighbors Japan and South Korea are a little less fortunate, where this figure is already at the level of 25%. home reason – trade deficit, formed due to sagging exports. China is a key trading partner and sales market for both countries. It accounts for 27% of all South Korean exports and almost 22% Japanese. Accordingly, the contraction of the Chinese economy automatically affects them. The situation is also aggravated by the slowdown in the economies of the United States and Europe, no less important trading partners for Japan and South Korea.
So far, both countries are coping well with the challenges. Thus, the GDP of Korea increased by 0.7% in the second quarter against an increase of 0.6% in the first quarter. Strong consumption largely offset scant exports, even despite a series of aggressive interest rate hikes. Japanese GDP in the first quarter begged by 0.5%, but in the second it recovered sharply and increased by 2.5%. The reason was the removal of covid restrictions and the rapid growth of consumer spending.
However, inflation in Korea and Japan, although not catastrophic, still sets new records, as in the rest of the world. Consumer goods prices in South Korea grew up by 6.3% in July, the highest inflation rate since November 1998. In response, the Bank of Korea decided for the first time in history raise the key rate immediately by 50 basis points, and now it is at the level of 2.25% per annum. In Japan, which has largely struggled with deflation for the past 30 years, consumer prices peaked in May and made up 2.5%. Although inflation declined in June, it still remains above the 2% target. The Japanese authorities do not plan to do anything about this, they are still aimed at maintaining negative rates that have long existed in the country.