Markets see gains for China as Taliban take over Afghanistan

The takeover of Afghanistan by the Taliban is seen largely as a defeat for US influence – thus eventually affecting US markets and the dollar, and a grand opportunity for China.

 “The unraveling in Afghanistan poses questions about the US and its role in the world,” Louis-Vincent Gave, chief executive officer with Gavekal Capital, told Bloomberg.  “If it’s like the 1956 ‘Suez moment’ — a reference to the crisis that marked Great Britain’s decline as a global power — there could be far-reaching implications, he said.

“If the days of the single-superpower world are over then the fall of Kabul will be “bearish for the US dollar and the US Treasury market, and bearish for the countries ‘free-riding’ under the U.S. security umbrella. Conversely, it will be bullish for the renminbi and the renminbi bond market, as China is the rising power in Asia,” he noted.

Because it has been mired in conflict for decades, Afghanistan has been little developed in terms of economic resources or business.

“The limited presence of global companies in Afghanistan necessarily constrains its wider impact on markets, said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte. “I seriously doubt that any major companies have any operations of scale there,” he said.

China is ready, however, to seize the opportunity to set into motion infrastructure projects and business structures, some of it no doubt already planned in its Silk Road and Belt scheme. 

“China is ready to deepen friendly and cooperative relations with Afghanistan, a government spokeswoman said Monday, after the Taliban seized control of the country, AFP reported.

China has sought to maintain unofficial ties with the Taliban throughout the US withdrawal from Afghanistan, according to the report.

“Beijing has long feared Afghanistan could become a staging point for minority Uyghur separatists in the sensitive border region of Xinjiang.

But a top-level Taliban delegation met with Chinese Foreign Minister Wang Yi in Tianjin last month, promising that Afghanistan would not be used as a base for militants,” the report said.

In exchange, China offered economic support and investment for Afghanistan’s reconstruction. “The Taliban have repeatedly expressed their hope to develop good relations with China, and that they look forward to China’s participation in the reconstruction and development of Afghanistan,” foreign ministry spokeswoman Hua Chunying told reporters on Monday.

Concerns, however, that China will intervene politically in Afghanistan are unfounded, analysts say. “The truth is that China does not want to play any cards in Afghanistan, nor does it want to seek any geopolitical expansion …” wrote Qian Feng, director of the research department at the National Strategy Institute at Tsinghua University on Sunday. “China will never intervene in Afghanistan in the way the US has done in the past 20 years.”

Markets have expressed concern, however, for whether the Taliban in Afghanistan will destabilise neighbouring countries like Pakistan and India. The UN and the US Defense Department have both indicated that they fear the Taliban will make Afghanistan into a safe-harbour for terrorists.

“The Taliban in Afghanistan helped inspire the deadly Tehrik-i-Taliban Pakistan, more commonly known simply as the Pakistani Taliban. The leaders of the two groups are reportedly at odds and don’t share common goals. Even so, if there is a Taliban government in Afghanistan, certainly that’s going to embolden the Pakistani Taliban,” warns Madiha Afzal, David M. Rubenstein fellow in foreign policy at the Brookings Institution, on NPR.

But there are reports that the Taliban, this time, do not wish to turn Afghanistan into the pariah state that they made of it the last time they were in power. In recent weeks, its leaders have been in a full-court press to gain allies and influence abroad. Top Taliban leaders have been on a whirlwind international tour, visiting Iran and Russia as well as China, NPR reports.

It should be clear, however, that the Taliban themselves are not without resources. It is well-known that the group earns substantial sums in the poppy and heroine trade. But it is less well-known that they excel at tax collection and administration: The Taliban earn more  revenue from taxing transit goods and fuel than they do from the poppy trade, according to a report released by the Overseas Development Institute, a London-based think-tank.

According to the report, only nine per cent ($5.1 million) of the Taliban’s finances were earned from drugs last year, while 80 per cent ($40.9 million) came from taxing legal goods.

Meanwhile, debt issued by Pakistan and Uzbekistan has come under pressure in international bond markets, as investors worry about what form the Taliban takeover in Afghanistan will take with respect to its neighbours.

Most other markets are in a wait-and-see mode. There has been a move into gold by many investors, as there always is when international affairs become unstable. Certainly, just as the world emerges from the pandemic, the Taliban takeover adds an unwelcome element of instability.