Beijing's military forces executed their most extensive show of force around Taiwan to date this week, yet global markets appeared largely unimpressed. The "Justice Mission 2025" exercises, which kicked off Monday and continued through Tuesday, saw Chinese warships, fighter jets, and missile units encircle the self-governed island in what Beijing called a "stern warning" against separatist forces and foreign interference.

The operation was China's largest military exercise near Taiwan by total coverage, spanning a record seven zones—some closer to Taiwan's shores than any previous drills. Taiwan's defense ministry tracked 89 Chinese military aircraft, 14 naval vessels, and 14 coast guard boats operating around the island on Monday alone, with additional warships spotted in the Western Pacific.

A Record Arms Sale Triggers Record Drills

The timing was no coincidence. The exercises began just 11 days after the United States approved an $11.1 billion arms package for Taiwan—the largest in history. The sale, which includes advanced fighter jets and missile defense systems, drew immediate condemnation from Beijing's defense ministry, which warned that China would "take forceful measures" in response.

Adding fuel to the fire, Japanese Prime Minister Sanae Takaichi stated last week that Tokyo's military could potentially intervene if China were to take action against Taiwan—a significant departure from Japan's traditionally cautious stance on cross-strait tensions.

"This is a stern warning to the separatist acts of Taiwan independence forces and the interference of external forces."

— Chinese Eastern Theatre Command, People's Liberation Army

Markets Tell a Different Story

Perhaps the most remarkable aspect of the week's events has been the financial markets' response—or rather, the lack of one. Taiwan's benchmark stock index didn't just hold steady during the drills; it actually rose 0.3% to hit a fresh all-time high during Tuesday morning trading.

The resilience reflects a pattern that has emerged over the past several years. Investors have grown accustomed to periodic Chinese military exercises near Taiwan and have largely priced in the geopolitical risk. Short of an actual conflict, markets appear to view these demonstrations as political theater rather than genuine precursors to military action.

When asked about the exercises Monday, President Donald Trump downplayed concerns, citing his "great relationship" with Chinese leader Xi Jinping. "Nothing worries me," Trump told reporters. "I don't believe he's going to be doing it," in an apparent reference to a potential invasion.

TSMC: The $300 Stock With a $300 Billion Risk

The sanguine market reaction belies a very real vulnerability at the heart of the global technology supply chain. Taiwan Semiconductor Manufacturing Company (TSMC), which produces approximately 70% of the world's advanced semiconductors, remains the single most critical chokepoint in global manufacturing.

TSMC shares, trading around $300, have climbed 45% in 2025 as artificial intelligence demand continues to surge. But the company's concentration in Taiwan represents what many analysts consider the largest single-point-of-failure risk in the global economy.

Any military action—even a blockade short of invasion—could trigger immediate shortages of chips used in everything from iPhones to automobiles to data centers. The scenario keeps corporate supply chain executives awake at night and has accelerated TSMC's diversification efforts, including new fabrication plants in Arizona, Japan, and potentially the United Arab Emirates.

Travel Disruptions Tell the Real Story

While markets shrugged, the exercises imposed very real costs on ordinary travelers. Taiwan's aviation authority reported that more than 100,000 international passengers were affected by flight cancellations and diversions around the military zones. Domestically, over 80 flights carrying some 6,000 passengers were scrapped entirely.

The disruptions serve as a reminder that even without a shot fired, China's military can impose meaningful economic friction on Taiwan when it chooses to do so.

What Investors Should Watch

For now, the consensus view among market strategists is that the status quo will hold. China's economy remains heavily dependent on TSMC-manufactured chips—a fact that creates a powerful incentive to avoid destroying the very infrastructure Beijing claims it wants to reunify with.

But the exercises represent a clear escalation in scale and proximity. Should tensions continue to ratchet higher—whether through additional arms sales, political provocations, or miscalculation—investors may eventually need to reassess the risk premium attached to Taiwan-exposed assets.

Until then, the market's message is clear: drill all you want, but don't expect investors to panic.