Hedge fund turned to a wargame to plan for a Chinese invasion of Taiwan
CFOTO/Future Publishing via Getty Images
- A Chinese takeover of Taiwan risks investments there and far beyond.
- A hedge fund turned to a tabletop wargame to see how the crisis could play out.
- It made clear a war would swamp tech stocks and rattle the global economy.
As China's fleets and bombers stalk the narrow strait and threaten Taiwan's seven decades of de facto self-rule, a British hedge fund commissioned a wargame to answer an increasingly pressing question: What is the optimum strategy for investors if China invades?
Taiwan is the world's leading supplier of the semiconductor chips essential to electronics of all kinds, from fighter jets and supercomputers to dishwashers, and a Chinese takeover of Taiwan's industry would immediately buzzcut exposed investors. But the wargame makes clear that would be the first wave in an economic tsunami.
"The conclusion was that most investing entities would take a huge hit and keep being hit for months to follow, with many likely collapsing," Finley Grimble, president of Knightsbridge Strategic Group, the British consultancy that designed and ran the game, told Business Insider. "Opportunities could follow a bit later though for those who survive."
Wargaming is a common technique in government and military circles to explore issues and assess potential responses. But it also is becoming popular in business as a way to prepare for crises like this that would send tremors through the world's economy and short-circuit tech stocks.
In the case of the British hedge fund, which Knightsbridge did not identify, the tabletop game began with China invading Taiwan on May 2, 2025 — two years before a reported Chinese mandate to be ready. The hedge fund players (played by actual officials of the hedge fund in question) responded by "liquidating as many of its investments as possible in all adjacent countries to the South China Sea, and rapidly reducing its exposure to investments reliant on South China Sea freedom of navigation," according to KSG's summary report.
But this still left the fund with substantial exposure to its global investment, including those in the US and Europe. The next step was to shift investments toward US government bonds, buying US dollars, and investing in South America. "The major short- to medium-term decision taken was to pull out of high-tech companies given semiconductor chip shortages were likely on the horizon, which would harm the share price of tech giants," KSG noted.
In the second phase of the game, soon after the Chinese invasion began, US forces were said to have engaged and stopped the Chinese amphibious assault, though China continued to bombard Taiwan.
In the economic sphere, the EU, as well as the US, Japan, South Korea and Australia imposed sanctions on China.
Daniel Ceng/Anadolu via Getty Images
This caught the hedge fund players by surprise: they had assumed EU sanctions were unlikely because of the depth of China-Europe trade, which reached $815 billion annually in 2023. The hedge fund "agreed that any room for avoiding a total divestment from China and the South China Sea was now completely lost, and market re-entry was probably many years away."
The final phase of the wargame began a month into the war. Global trade was said to be in crisis, the US had imposed a blockade on goods headed toward China, and there was a global rush to buy gold as a safe haven, along with US Treasury bills and high-quality US dollar assets. There was also stress on the global financial systems, including more and larger stock margin calls, more hedging, stiffer demands for collateral, higher credit spreads and deteriorating credit quality.
"Experts in finance assessed that this scenario did not look so dissimilar to the early stages of the 2008 financial crisis, the impact of Covid-19, the First Gulf War, and the Russian invasion of Ukraine," KSG noted. To be sure, China's economy is nearly nine times the size of Russia's as estimated by GDP.
The hedge fund responded by choosing to invest heavily in semiconductors manufactured in regions not affected by the war. The fund also boosted investments in the defense industry and, on the assumption that the war would drive up energy prices, also invested in oil and alternative energy.
A post-game analysis by former British government economists and security experts, as well as a former investment banker, concluded that a Chinese invasion of Taiwan would devastate the world economy far more than even the 2008 meltdown.
Governments would pump liquidity into their economies for years to come, including investing in semiconductor manufacturing. If an invasion of Taiwan resulted in sanctions on China, this might be a boon to Western manufacturers who would no longer have Chinese competition (though consumers might be unhappy as lack of competition drives up prices).
An interesting side effect would be that Chinese investment in the so-called Global South — which includes Africa, the Middle East and Southeast Asia — would probably be slashed, leaving space for other lenders to step in. "This would provide potential opportunities for new players to emerge in the Global South, particularly if loans can be collateralized," Knightsbridge noted. "A major example of this would be mining in Zimbabwe."
In the end, the value of business wargames is that they give companies and investors a chance to go beyond theory and explore the consequences of making various choices.
"It's easy to think about consequences in your own head, or in a regular meeting," Grimble said. "But a wargame allows for consequences to be examined, and that is vital for entities looking to invest enormous sums of money and compare options, or prepare mitigations and alternatives in a time of urgency."
Michael Peck is a defense writer whose work has appeared in Forbes, Defense News, Foreign Policy magazine, and other publications. He holds an MA in political science from Rutgers Univ. Follow him on Twitter and LinkedIn.
from Business Insider https://ift.tt/GdmH0WN
No comments