Taiwan’s Big China ETF Bust Shows Extent of Financial Decoupling

Taiwan’s economic and financial decoupling from China has deepened with the near-collapse of what was once the world’s largest Chinese bond exchange-traded fund market.

It’s the latest example of the widening gap in relations between the two economies over the past decade due to geopolitical tensions, Western-led derisking of supply chains and China’s economic slowdown. And no matter the outcome of January’s critical presidential election in Taiwan, the decoupling — from markets to finance to investments and trade — is likely to continue.

As of early this month, local ETFs that track Chinese bonds, including sovereign and policy bank notes, have seen their total assets under management plunge more than 94% from a peak of over NT$180 billion ($58 billion) in 2019, according to data compiled by Bloomberg.

On Track to Vanish

Taiwan isn’t alone in retreating from China. The cratering value of those ETFs echoes the broader investment landscape, in which global funds have fled China’s bond market due to the nation’s vast yield differential with the US.

But Taipei’s relationship with the world’s second-largest economy is particularly scrutinized, given its role at the center of US-China geopolitics. The consequences of next month’s election are massive, with voters positioned to choose between a ruling party determined to maintain Taiwan’s political independence and an opposition that wants closer ties with Beijing.