China's Bullying Gambit
by James Dunnigan
April 29, 2014

China watched, and supported the recent Russian operation to take the Crimean Peninsula from Ukraine with great interest. The land grab had a bracing effect on the other countries that, until 1991, were part of the ancient Russian Empire. The Crimean operation was the second such land grab Russia has undertaken in the last five years. The first was against tiny Georgia in 2008. Many of these former Russian subjects feel that the Russians are trying to get their empire back. Ask many Russians that question and most agree that it would be a nice thing. Some Russians are more outspoken and bluntly call for the empire to be reassembled no matter what. Poland and the Baltic States managed to join NATO after the Cold War ended and are hoping that the mutual defense terms of the NATO alliance will dissuade Russia. Nevertheless all four, plus Finland, have increased their military readiness this year and are seeking assurances from the West that they will have help against Russia. Many Finns have called for Finland to join NATO, but a large minority has opposed this because of the fear it would anger the Russians. There was a similar division in Ukraine but now more Finns are thinking that NATO membership is preferable to trusting Russia to always behave. Even Sweden, never part of the Russian empire and successfully neutral since the early 19th century is thinking about joining NATO for protection from an increasingly aggressive Russia.

China sees an opportunity here. That’s because the former Soviet stans of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) have another option; China. The stans have been very receptive to Chinese diplomatic and economic cooperation. This bothers Russia, but not to the extent that threats are being made, as was the case with the former imperial provinces to the west. The stans also have a problem with never having been democracies. When the Russians conquered them in the 19th century the local governments were monarchies or tribes. When the Soviet Union collapsed in 1991, locals who were former Soviet officials held elections and manipulated the vote to get themselves elected "president for life." But many people in the Stans want clean government and democracy, as well as continued independence from Russia. China is no help with that because the Chinese prefer dictators. But China does offer more economic opportunities and protection from what happened ti Ukraine and Georgia.

Another reason for China to back Russia is the fact that China is also an empire trying to reclaim lost territories. That some of those territories are currently Russia’s Far East (areas bordering the Pacific) is not officially discussed in Russia or China but is no secret to many Russians and Chinese. That is a problem for another day as currently Russia and China support each other’s imperial ambitions (as in Ukraine and the South China Sea) and help each other out to deal with any associated problems, especially the UN or economic sanctions. China is also helping by putting economic pressure on Ukraine by suing Ukraine to cancel a $3 billion loan.

Yet another reason China is watching this carefully is because China is violating an international maritime borders treaty it signed by claiming all of the South China Sea. What happens to Russia for violating the 1994 agreement to protect Ukrainian borders in return for Ukraine getting rid of its Cold War era nukes. Russia simply says the 1994 agreement does not apply and that attitude will influence what China does with its numerous offshore territorial disputes. Another problem with violating the 1994 agreement is the message it sends to states like Iran and North Korea. The message is that if you really want to keep invaders out you need nukes. Iranians believe the negotiations to limit Iranian nuclear research and development are an effort to block Iran from getting nuclear weapons. Most Iranians see nukes as a necessity for maintaining Iranian dominance in the region. Iran has been the regional superpower for thousands of years. Once you get a taste of superpower status, it’s a hard thing to put behind you.

Russia and China are using nationalism, in this case the promise of the restoration of lost imperial territories, to distract the population from the corruption and mismanagement of their government officials. This is an ancient political technique that depends on near-total control of information available to their populations. The Internet threatens that and this is a new risk for those planning to build and maintain an empire. That’s because empires are costly and inefficient. Britain realized that by the 1940s and that’s the main reason they got rid of theirs so quickly after 1945 and why the United States never took advantage of its power to create one. But the allure of empire remains, sort of as the ultimate luxury a state can indulge. Again, the Internet spreads the bad news about the real cause, and effect of empire. China tries to cope with this by concentrating on imperial ambitions (natural resource rights from the ownership of uninhabited rocks and reefs in the South China Sea and elsewhere off the coast) that have some practical appeal. When empires involve conquered people the cost goes way up, as the Chinese are rediscovering in their northwest (Turks) and southwest (Tibetans). A growing number of Russians and Chinese are aware of these angles and are not happy about it. But both Russia and China are still police states with state-controlled media. Holding anti-government opinions is dangerous, especially if you express these traitorous thoughts in public.

To expand their empire as cheaply as possible China is relying a bullying, not battles. So in the last year the Chinese Coast Guard has received over a dozen new patrol ships. These are vessels of from 1,000-3,000 tons displacement with relatively small crews but lots of storage space and not many weapons. Coast guard ships are not usually heavily armed but the Chinese ships are increasingly being seen equipped with water cannon, extra searchlights and equipment for grappling with other ships. These tools are used to interfere with foreign fishing ships and transports that go to parts of the South China Sea that China has declared Chinese territory (even though other nations have a stronger legal claim). Using water cannon, bright searchlights (to blind the crews of other ships) and aggressive maneuvering (to include grappling with smaller foreign ships and forcibly moving them) the foreign ships can be “persuaded” to back off. The Chinese coast guard vessels will also use these tactics against foreign warships and if the foreigners shoot back the Chinese can declare themselves the victims of an unprovoked attack and call in more fire power.

The Chinese are also preparing for the possibility that the victims of this bullying might shoot back. Thus it was not surprising that Chinese Army WZ-10 helicopter gunships have been seen practicing operating from LST type amphibious ships, which have a landing pad similar in size to that found on larger Coast Guard patrol ships. The seven ton Z-10 is smaller than the 10 ton American AH-64 and also has a crew of two. The Z-10 is armed with 30mm autocannon and can carry up to a ton of rockets or missiles. This gives China immediate backup if the Coast Guard harassment tactics fail and additional firepower is needed in a hurry. Then again, a helicopter gunship coming off the back of a Coast Guard cutter can be pretty scary if you aren’t expecting it.

China is carrying out its military buildup with Chinese made weapons. One benefit of that is that is provides yet another export. Over the last five years China has displaced France as the fourth largest arms exporter in the world. While Russia had a record year for arms exports in 2013, moving $13.2 billion worth of weapons, military equipment and defense services, those sales are increasingly threatened by more rapidly growing exports from China. Russian officials admitted that they did not expect to increase weapons sales over the next few years, largely because arms sales worldwide, both for export and domestic consumption is shrinking. Currently about half of Russian sales are aircraft (jets and helicopters) and 25 percent are anti-aircraft systems. Russia still gets orders because they are cheaper than Western stuff, and nearly as good. What the Russians were less willing to discuss was the growing competition from China.

Some areas of the Chinese military buildup are for protecting China from internal threats. Thus China is now training police to be hackers. Not just imparting defensive skills, but training selected cops to launch attacks. It’s unclear what this is for although it’s most likely related to the growing incidence of Internet based criminal activity inside China. Apparently several units of police Cyber War experts are being organized. Some will probably be dedicated to helping Chinese firms and local governments improve their network security, but at least one of these new organizations will have an offensive capability, probably for harassing groups perceived as internal (foreign or Chinese) enemies of China.

There are more serious internal threats that police hackers won’t help solve. China is suffering from some catastrophic long-term problems that gets little attention in the news but are nevertheless very real and unavoidable. For example, there are several disastrous demographic problems approaching. This began in the late 1970s when, to control population growth most couples were restricted to only one child. This has been widely enforced, to the point where the average number of children per couple has been 1.7. But many of those couples aborted a child if it was a female, because much more importance is attached to having a male heir. Thus there are 35 million more males than females, and the number is growing. These surplus males are coming of age, and the competition for wives is causing problems. Women are taking advantage of their scarcity, but men are also going to neighboring countries to buy, or even kidnap, young women to be wives. This is causing ill will with neighbors.

The biggest problem, though, is the growing shortage of workers. As the population ages, all those one child families means there will be more elderly than the economy can effectively support. Currently there are 11 working age Chinese for every retiree. By 2050, there will only be two for each retiree. At that point, retirees will comprise 30 percent of the population (versus 13 percent now.) Traditionally, children cared for their parents in multi-generation households. That model is dying out, and China is faced with huge pension cost increases at the same time they expect their economy to be the mightiest on the planet. But at that point, the largest single government expense will be the care of the elderly, and this will impose crushing taxes on those of working age. Many working age Chinese are worried about this, for there is no easy solution in sight. China can relax the one-child policy, which it is apparently doing, but the newly affluent Chinese are less eager than earlier generations to have a lot of kids. To make matters worse there is not much in the way of pensions or health care for most of the elderly to begin with. The government recognizes this is a real problem but does not, and will not have the cash to deal with it.

Then there is corruption, which has been a problem for thousands of years. The Chinese government continues to proclaim its aggressive efforts against corruption. In 2013 the government said that it investigated 150,000 corruption cases and recovered over $8 billion. Most Chinese still encounter corruption daily and don’t really get the impression that the government is making a serious dent in the problem. The bigger crooks still seem to get away with it while the little guys get punished. The anti-corruption effort is not the only government program that is underperforming. The Internet censors have failed to keep out all the bad news about the Chinese economy that the government would rather not be publicized. This is mainly about the faltering growth rate (down from ten percent or more to seven percent a year or less since 2008).

China also has problems with popular sentiments that contradict official policy. Case in point is the growing anger over pollution. This is the result of three decades of rapid economic growth and a culture of corruption that allowed the pollution to grow and the government to keep it out of the news. But eventually people noticed and have been increasingly open and direct in demanding some action to deal with it. So in late 2013 the government responded in a way no one expected; pollution data was declared public data and all government organizations and businesses were ordered to make their pollution data public. Not everyone is complying but given the growing boldness of angry citizens and availability of pollution monitoring equipment, any cheaters are vulnerable to getting caught and then exposed to a public shaming on the Internet. For commercial firms this can mean lost business. For government officials this can mean more scrutiny than corrupt bureaucrats are comfortable with. With this new openness policy the government is making itself less unpopular and harnessing the power of the anti-pollution groups (who represent most of the population) for a joint effort in dealing with the dirty air and water.

Senior Chinese leaders are becoming increasingly bold in dealing with popular discontent, aware that throughout Chinese history such discontent often led to popular uprisings that brought down dynasties and made life very unpleasant for those in charge. Many of the lower ranking bureaucrats are less concerned with this as they are more interested in stealing as much as they can while they have the opportunities. But if decisions at the top can make this more difficult to do, then there will be less corruption and bad behavior by officials. The most senior people are making moves like this because they understand that they do not “rule” China as much as they preside over a huge bureaucracy which resists unpopular orders and is more responsive when the senior leadership makes decisions that simply put more pressure on bureaucrats to behave.

The other item the government wants kept out of the news is the problem in the banking system and how decades of corruption there are catching up with the government ability to keep the plundering and manipulation from crippling the economy. The fact of the matter is that there are a lot of zombie banks operating, that were essentially bankrupted by uncollectable debts (the corruption angle) that the government cannot cover for. There is also the property bubble, caused by all the building loans banks issued for stuff that is still unsold. This has caused growing downward pressure on property prices, which is lowering the net worth of a lot of Chinese. More and more Chinese (especially business owners and executives) are asking important questions about all this but the government would rather not discuss the issues.

The international financial community is getting nervous about the Chinese government’s ability to deal with this uniquely Chinese financial bubble. While in the West the usual bubble is one based on real estate or stock market speculation, in China there is a less well known bubble involving an unofficial banking system that provided loans to highly speculative (and often, by Chinese standards, illegal) undertakings. These “shadow banks” were also very corrupt, doling out bribes and fees to corrupt businesspeople and government officials. The problem is that all this off-the-books financial mischief has got its hooks into legitimate assets (as collateral or a source of cash to keep operating or expand). The number of bad loans (that are not, and probably never will be repaid) has been growing and that is threatening to reduce the cash the official banks have free to keep the economy going. If the government mishandles this mess the Chinese economy could suffer widespread bankruptcies and high unemployment. It could take several years to recover and during that time there could be a popular uprising. A dip in the Chinese economy (at $8 trillion second only to the American $14 trillion) would ripple throughout the global economy. It would be 2008 all over again, but possibly worse. So it’s not just China’s problem.

That economic growth has been good to the military. The Chinese defense budget increased again this year by over ten percent to $132 billion. Some U.S. intelligence analysts believe the real defense spending is now closer to $200 billion. Like other communist nations the Chinese keep a lot of military stuff outside the defense budget, so their actual defense spending is much higher. Official Chinese defense spending has more than doubled in the last decade. This has triggered an arms race with its neighbors. Russia is in the midst of a new military upgrade program that would increase defense spending by a third and devote over 700 billion dollars into the next decade to buying new equipment. Japan, already possessing the most modern armed forces in the region, is increasing spending to maintain their qualitative edge. A decade ago China and Japan spent about the same on defense, but now China spends more than three times as much. Even India is alarmed. Spending only a third of what China does, the Indian generals and admirals are demanding more money to cope. India and China are actually devoting a lot of their additional spending to just bringing their troops up to date. Both nations have lots of gear that was new in the 1960s and 1970s. They don't expect to be as up-to-date as the U.S., which spends over $500 billion a year, but there's plenty of newer, much better, and often quite inexpensive equipment to be had.

China insists that its growing military power is for defense only. That makes sense, as a lot of money is going into the navy, which protects the imports (mainly of food and raw materials) and exports (of manufactured goods) that are driving the unprecedented economic growth. The Chinese try to explain away the military buildup opposite Taiwan as political theater. This may be true, for a failed attempt to take Taiwan by force would not only disrupt the economy (and create a lot of unhappy Chinese) but would be a major failure by the government. Dictatorships cannot survive too many such failures, or too many angry citizens. So it makes sense that the Chinese military growth is largely for defense. But those large defensive forces can also be used to bully or intimidate neighbors, which is what the neighbors are worried about.

Despite the official Chinese line that the growing military is only for defense, the government also maintains a list of approved (as pundits for electronic media and books) retired generals and admirals who will say things that the government approves of but does not want to openly and officially discuss. This often involves the possibility of war with various potential enemies. For over a decade these guys have talked about the coming war with the United States. Now they are talking about the “inevitable” war with Japan over territorial disputes and lingering Chinese anger for all the damage Japan did to China during World War II.

China's Bullying Gambit by James DunniganApril 29, 2014

China's Bullying Gambit
by James Dunnigan
April 29, 2014