TTX probes Taiwan’s financial resilience amid crises like energy disruptions and capital flight

A tabletop wargame exercise examining Taiwan’s economic resilience has highlighted how external shocks — from energy disruptions to capital flight — could rapidly cascade into systemic risks, testing the island’s financial stability, policy agility, and national security.

Scenario setting: from conflict to economic stress

On the second day of the 2026 TTX, the exercise pivoted from energy security to economic resilience, while maintaining the same overarching scenario: a post-Trump global order marked by sustained US–China rivalry, prolonged Middle East conflict, and persistent energy disruptions.

Participants were asked to consider a 2030 contingency in which escalating cross-strait tensions — potentially including blockade scenarios or coercive actions aimed at forcing political concessions — begin to impair not only security but the functioning of Taiwan’s economy, financial system, and governance capacity.

At the same time, sustained disruptions in global energy markets, particularly those linked to instability in the Strait of Hormuz, are modeled as exerting prolonged pressure on inflation, growth, and fiscal space between 2026 and 2030. The cumulative effect is a multi-layered stress environment in which capital outflows, financial volatility, payment system strain, and rising fiscal burdens may emerge simultaneously.

Mapping the risk transmission chain

Central to the exercise is the concept of a "risk transmission chain," which traces how initial shocks — particularly in energy — cascade into broader economic and financial instability. The exercise underscored that these risks are interlinked rather than discrete, with inflation, fiscal stress, and market volatility reinforcing one another.

Commenting on this dynamic, economist and former legislator Lee Tung-hao (李桐豪) warned that in a global energy crisis, Taiwan could face shortages of critical materials as countries compete for limited supplies.

Such constraints, Lee noted, would weigh on Taiwan’s overall productivity and could trigger capital outflows, particularly from foreign investors.

Hudson Institute senior fellow Riley Walters, a TTX participant, added that people must keep in mind that oil and natural gas function as distinct markets with different transmission effects, and even under worst-case scenarios such as the 1970s energy crisis, governments may still intervene through quotas and pricing mechanisms to stabilize conditions.

Financial stability and uneven impact

Lee further pointed out that Taiwan’s large corporations and wealthy individuals are already globally diversified, holding substantial foreign assets and foreign exchange exposure — often supported by policy frameworks that enable overseas investment using domestic collateral.

By contrast, Lee emphasized, small and medium-sized enterprises and the general public would be far more exposed to domestic shocks, creating an uneven distribution of economic impact.

Senior banker Chen Song-xing (陳松興) added that Taiwan’s corporate sector is acutely aware of the tense situation, and that capital reallocation has not followed a straightforward pattern of reshoring as a result.

Instead, much of the investment withdrawn from China was redirected toward Southeast Asian markets, particularly ASEAN economies, while funds returning to Taiwan have largely flowed into real estate.

In recent years, he added, a growing share of capital has been channeled into the United States — a trend supported by the government.

Government intervention: timing and triggers

A recurring theme in the exercise was how and when governments should intervene. Lee emphasized the need for clear mechanisms to determine the circumstances under which the state should step in — or step back — particularly in stabilizing energy prices.

While short-term intervention may be necessary, he stressed the importance of communicating its limits, noting that once reserves are depleted, prices will inevitably revert to market dynamics.

Former legislator Joanne Lei (雷倩) echoed this view, arguing that governments must establish explicit “trigger points” for intervention. She noted that the government must provide subsidies and that burdens cannot be borne solely by private enterprises and would require coordinated burden-sharing with state-owned entities.

Drawing on pandemic experience, she added that societies are now more aware of how quickly normal economic activity can come to a complete halt, leaving little time for reaction.

Lei emphasized the need to move from ad hoc responses toward systemic structures and data-driven frameworks, while maintaining flexibility in policy options. At the same time, she stressed that efforts to build resilience should not preclude continued dialogue and diplomatic engagement.

System resilience and exposure management

Chen, speaking on behalf of the group after the exercise, highlighted the importance of early warning systems and the calibration of policy timing, noting that both delayed and premature interventions carry risks.

Chen said that cash remains a critical instrument in crisis scenarios despite advances in digital payments. He also noted that assets such as US treasuries held by Taiwanese insurance firms could function as “hidden reserves,” while state-owned banks should play a coordinated role in stabilizing the financial system.

Chen reiterated that much of Taiwan’s corporate capital has already shifted abroad to Southeast Asia and the United States, among other destinations. This trend, he said, reflects an underlying awareness within the corporate sector of the evolving risk environment.

On cross-strait economic ties, another participant of the exercise, commentator Tu Tzu-chen (杜紫宸), added that the policy debate should move beyond a binary choice between dependency and decoupling, and instead focus on “exposure management.”

Risks, he said, should be monitored and managed through concrete, measurable indicators.

Cascading risks and policy implications

Taken together, the exercise illustrated how economic shocks — originating from energy disruptions or geopolitical conflict — can propagate through financial markets, fiscal systems, and real economic activity, ultimately affecting governance and national security.

While the scenario is anchored in 2030, participants such as Lee and Chen stressed that these risks are already unfolding incrementally and that their analyses may be of value even in different future scenarios.