Key Takeaways:
Taiwan opposition leader Cheng Li-wun's high-stakes meeting with Chinese President Xi Jinping aims to de-escalate tensions, yet it casts a shadow over a stalled $40 billion defense budget and the outlook for US arms sales.
TAIPEI, Taiwan (AP) — Taiwan opposition leader Cheng Li-wun’s meeting with Chinese President Xi Jinping in Beijing this week injects a new layer of uncertainty into the volatile triangle of US-China-Taiwan relations, with significant implications for a pending $40 billion Taiwanese defense budget and the shares of major American defense contractors. The visit, which Cheng called a “journey for peace,” is the first by a leader of Taiwan’s Kuomintang (KMT) party in a decade and comes just a month before a scheduled summit between Xi and US President Donald Trump.
"Beijing wants to use the meeting to reframe policy options for Taipei and Washington," said Amanda Hsiao, a China director for the Eurasia Group. "Beijing will use the meeting to portray itself as a peacemaker to Washington, in the hopes of convincing Trump that expressing openness to peaceful unification or holding off on arms sales to Taiwan for longer will be conducive to managing tensions."
The visit unfolds against a backdrop of heightened military activity and a contentious legislative battle in Taipei. China has ramped up military drills around the island, while the KMT-controlled legislature has blocked the ruling Democratic Progressive Party's (DPP) proposed $40 billion special defense budget. This budget is critical for funding arms purchases from the US, including a massive $11 billion package approved by the Trump administration last year that includes medium-range missiles and drones.
For investors, the meeting introduces a new variable into the geopolitical risk premium for defense and regional equities. The outcome could influence President Trump’s negotiations with Xi, potentially altering the pace and scale of future US arms sales to Taiwan. A delay or reduction in these sales would directly impact the order books of top US defense firms that have benefited from increased tensions in the region.
Before departing from Taipei, Cheng, who became KMT chairwoman in November 2025, emphasized the need for dialogue to prevent conflict. "If you truly love Taiwan, you will seize every opportunity and every possibility to prevent Taiwan from being ravaged by war," she told reporters. "Preserving peace is preserving Taiwan." The KMT, which favors closer ties with Beijing, accepts the "one China" principle, albeit with a different interpretation than the Communist Party. This stance allows for direct dialogue with Beijing, which refuses to engage with Taiwanese President Lai Ching-te, whom it labels a separatist.
The visit was met with mixed reactions in Taiwan. Supporters gathered at the airport to see Cheng off, while detractors protested the engagement with Beijing. The skepticism from Taiwan's government was palpable. Chiu Chui-cheng, minister for Taiwan's Mainland Affairs Council, stated that while peace is an ideal, it should not be a "fantasy," and reminded Cheng that she is not authorized to negotiate on behalf of the government.
From China's perspective, hosting Cheng serves multiple strategic purposes. It allows Beijing to project an image of being a reasonable actor open to dialogue, contrasting with its hardline stance against the DPP. By elevating Cheng's stature, Xi may be looking ahead to Taiwan's 2028 presidential election, hoping to prevent the DPP from securing a 16-year hold on power. "Xi is looking beyond Lai, to Taiwan’s 2028 presidential election," said David Sacks, an Asia-focused fellow at the Council on Foreign Relations.
The meeting is also a direct message to Washington. By engaging with a Beijing-friendly political figure from Taiwan, China aims to show that there are alternative paths to managing cross-strait relations that do not rely solely on US-supplied military deterrence. This narrative could be leveraged in the upcoming summit with President Trump, who has previously suggested he would be open to discussing US arms sales to Taiwan with Xi.
The geopolitical maneuvering has tangible consequences for the market, particularly for the US defense sector. The KMT's opposition has stalled the $40 billion special defense budget, which earmarks up to $30 billion for weapons procurement from the US. The fate of this budget is being closely watched in Washington, with two congressional delegations recently visiting Taipei to lobby for its passage. "When you pass the special budget in the Legislature, that is a signal to China, and to the rest of the world, that Taiwan is serious about peace through strength,” Sen. Jim Banks (R., Ind.) told President Lai.
Uncertainty over this budget and future arms sales directly affects companies like Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTX), and General Dynamics (GD). These firms are primary suppliers of the military hardware Taiwan seeks to acquire to bolster its defenses. Any perceived softening of US support or a prolonged delay in Taiwan's defense spending could lead to a re-evaluation of these stocks, which have benefited from the expectation of continued arms sales. The situation highlights the intricate link between geopolitical events and market performance, where a single diplomatic visit can ripple through global equity markets.
This article is for informational purposes only and does not constitute investment advice.
