China: Literally A Matter Of Life Or Death

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April 26, 2015: Many people in the financial community, both in and outside China, fear that Chinese economic growth is not just slowing down but about to stall and quite possibly go into decline. Some call it the Japan Syndrome because the current Chinese situation is similar to Japan’s in the 1990s. Both China and Japan experienced explosive GDP growth for decades mainly because of highly efficient export industries. But there was something else going on in both countries that got less attention internationally; a lot of that GDP growth was sustained by massive internal spending on construction (of infrastructure, housing and all sorts of stuff both countries lacked before their spectacular economic boom). Eventually there was no more need for massive construction efforts but in both cases the government realized that it would have a lot of unemployed people if the construction effort was cut back as much as reality required. So a lot of money was borrowed until the banks got into trouble and threatened to trigger an economic depression. This forced the Japanese to make a lot of adjustments and while Japan escaped economic disaster, for over two decades Japanese economic growth has been stalled.

Now China is headed in the same direction. While Japan was able to avert economic and political disaster when faced with this problem, there is some doubt about China. That’s because Japan was a democracy while going through all this and angry Japanese could, and did, vote out of office politicians seen as responsible for the mess. China is not a democracy and Chinese leaders understand that because of that they could get a rebellion rather than unfavorable election results if there were too many people unemployed. For years now finance and economic professionals in both Japan and China have been quietly comparing notes about how best to ensure that China makes a “soft landing” during this economic crisis. Such cooperation, and what it was about, was kept quiet in both countries because Chinese leaders need to vilify Japan as part of a program to distract most Chinese from the larger and more tangible economic crises developing. Because of massive investments in China it is in Japan’s best interests to do whatever it can to avoid a Chinese meltdown. But for Chinese leaders avoiding the meltdown is literally a matter of life or death.

An example of the growing economic problems China is experiencing can be seen in how South Korea has regained its leadership in shipbuilding. In the first three months of 2015 South Korean firms received orders for 2.31 million tons (CGT or compensated gross tonnage) while second place Japan received 1.62 million tons and China 1.35. In 2012 South Korea lost its decade long battle with China to retain its lead in shipbuilding. That was because of a five year depression in the world market for shipping. This caused South Korean ship exports to fall 30 percent in 2012, to $37.8 billion. China, helped by government subsidies, saw ship exports fall only 10.3 percent, leaving China with $39.2 billion in export sales. The Chinese government has also been giving its ship builders lots of new orders for warships, which made its yards more profitable and better able to beat South Korea on price. The Chinese government also provides its ship builders with more loans, allowing the builders to offer better credit terms to customers. South Korea was still ahead of China in total orders for ships. China was not able to keep its lead as South Korea not only builds cheap but also does more complex work to higher quality standards. Chinese shipyards have been laying off workers because the new orders have been falling (and cheap loans and other government aid is harder to get). Meanwhile South Korea, which always had the lead over China in building high-tech ships, is getting more orders for these more expensive (and profitable) designs.

Chinese experts on North Korean nuclear weapons believe that North Korea has at least twenty nuclear weapons and has managed to develop the complex tech to use some of these warheads on ballistic missiles. While all this North Korean weapons tech is primitive by Chinese or Western standards, it will work. Because of the nationalist ideology used (some would say worshipped) in North Korea, China is portrayed as an ancient enemy that must be watched carefully no matter how friendly they pretend to be. Thus China sees itself at risk from these nukes, especially since the Kim dynasty that has ruled North Korea for 70 years has become more and more unpredictable and threatening to all its neighbors. A recent example of that has been North Korea arresting Chinese doing business in North Korea and accusing them of spying for South Korea. While some of those arrested may be guilty, most could also be considered spies for China. Any Chinese citizen travelling to North Korea can expect to be called in by the Chinese government to be debriefed by an intelligence analyst. To China this is normal, to North Korea it is espionage and that is punishable by death. The North Koreans are very aware of the network of Chinese spies inside North Korea. China long considered Chinese citizens immune from arrest and prosecution for spying but that is now changing, with the North Koreans using “they are South Korean spies” as an excuse to damage the Chinese intelligence network in North Korea. This, it is believed, would make it more difficult for China to stage a coup against a North Korean government that is increasingly unpopular in China.

While China rejected a North Korean effort to join the AIIB (Asian Infrastructure Investment Bank), just about all the other neighbors (including Japan and South Korea) and many Western nations (like Britain) have signed on. The AIIB is part of a Chinese effort to build an alternative to Western dominated financial institutions like the IMF and World Bank. The AIIB would serve as an option especially for friends of China in Asia. Nations like Britain and Japan are joining because of the possibility of the Chinese currency (the yuan) becoming as much an international currency as the dollar and eruo. Although Britain and Japan still use their ancient national currencies (pound and yen) both are powerhouses in the international currency trading and financing markets. In effect, these two financial giants are welcoming China to the club in order to remain dominant in international financial markets. The U.S. is still trying to decide what to do, which is fine with China, Japan and Britain as all three would like to see the United States lose some of the world dominance the dollar has enjoyed for nearly 80 years. The success of the AIIB depends, of course, on China surviving its current economic crises.

One of the many things China’s neighbors keep an eye on is what Chinese spy satellites are up to. Such satellites have long been tracked visually from the ground. This has become a popular thing with amateur astronomers and since the Internet arrived what these amateurs find quickly gets around. It has been noted that so far this year Chinese spy satellites have been spending a lot more time watching Taiwan and Japan, which makes those two nations anxious. This is especially the case with Japan which has noted that flights by Russian and Chinese military aircraft close to Japanese airspace (which requires Japanese fighters to be sent up, just in case) has been increasing so much in the last few years that activity is now at levels not seen since the Cold War.

When the former head of all security in China (Zhou Yongkang) was recently indicted for corruption Chinese and many foreigners were shocked. Now they are shocked even more as it is revealed that Zhou went too far in several areas. For one, he spied on his fellow senior officials. Zhou was also involved encouraging and protecting (from exposure and being shut down) the lucrative practice of using executed criminals as sources for transplantable organs. Zhou Yongkang got away with all this because he was also a member of the Politburo, the committee of five to nine (currently seven) most senior officials from which the president of China is chosen and that membership in is the pinnacle of the career of a Chinese official. Not all Politburo members are corrupt, not personally. But all have kin who are and these family members take economic advantage of that the fact that their husband, brother, father, uncle, cousin (or whatever) is a senior official. The kin then profit from corrupt dealings. Zhou Yongkang was rare in that he got personally involved with corrupt deals and that is forbidden by law and custom (among senior officials). The government anti-corruption campaign is also going after the dirty kin, although many of these are given the opportunity to surrender all their ill-gotten gains and stay clean. President Xi Jinping is behind this latest anti-corruption push and his approval ratings with most Chinese have risen sharply as a result. Xi knows that these prosecutions are not popular with the government bureaucracy so he orders his anti-corruption operatives to first go after those who are not known to be big supporters of Xi or, like Zhou, are doing things that even other corrupt officials do not approve of. This encourages more loyalty by senior officials to Xi and his unpopular anti-corruption program. Many Chinese believed that the government (run by the Communist Party) would never actually go after Communist Party members. Yet many Communist Party officials have been quite open about the danger to Communist Party rule in China if the rampant corruption within the Communist Party was not addressed. Now it has been and Communist Party members see the possibility of long-term survival of Communist Party rule in China.

China continues to take lots of diplomatic heat for trying to enforce questionable claims on maritime real estate. Turns out that China is not alone and that this is actually an old problem. Thus in 2014 the U.S. sent aircraft and warships to challenge 19 such claims by six countries (China, Iran, Philippines, Argentina, Brazil and Venezuela). China gets most of the media coverage in this area but China is not the only one doing it. This has been such a widespread and persistent problem that, once the Cold War ended in 1991, there was finally an opportunity to get this all sorted out and an international treaty was agreed on and signed by the most nations to deal with the endless disputes in this area and all of the resulting harassment of ships and aircraft in international waters. The new treaty (the 1994 Law of the Sea treaty) recognizes the waters 22 kilometers from land as under the jurisdiction of the nation controlling the nearest land. That means ships cannot enter these "territorial waters" without permission. More importantly the waters 360 kilometers from land are considered the Exclusive Economic Zone (EEZ) of the nation controlling the nearest land. The EEZ owner can control who fishes there and extracts natural resources (mostly oil and gas) from the ocean floor. But the EEZ owner cannot prohibit free passage or the laying of pipelines and communications cables.

China has also been aggressive in lending money to nations that, in the long-term, can be useful to China. But in the short term these loans (to countries like Burma, Cuba and Venezuela) because these “useful allies” are also bad credit risks. Case in point is Venezuela which already has lots of foreign debt and some of it looks like it won’t get paid back. Despite desperate pleas from the leftist leadership of Venezuela China has agreed to provide another $5 billion, but only for maintenance and upgrades on Venezuelan oil production facilities. This is so China has a better chance of getting paid back the other $40 billion it has loaned Venezuela.

India has joined Burma in pressuring China to do something about the continued shipments of Chinese weapons to tribal rebels in northern Burma and northeast India. China denies this is happening and points out that many Burmese rebels have long used Chinese weapons they bought from illegal dealers in China and then smuggled into Burma. China also points out that Burmese troops also use Chinese weapons. Burma and India counter that the rebels in both countries are using weapons China did not sell to the Burmese Army. Moreover these Chinese weapons (often older and cheaper designs) are showing up worldwide in the hands of rebels, terrorists and gangsters. The point here is that China is looking the other way as a huge illegal arms sales and smuggling operation goes about its business. China is in the midst of a major corruption crackdown so these complaints from Burma and India might be addressed this time around. Then again, maybe not.

The U.S. has publicly and privately warned China that America would begin fighting back because of  continuing Chinese efforts to spy, steal and suppress media in the West, especially the United States, via the Internet hacking. This became more of an issue when China recently began using state sponsored Internet censorship technology to shut down web sites outside China that Chinese officials found “offensive”. This, the U.S. pointed, was crossing a line and retaliation would have to be used. The Chinese were caught using their own resources (the Great Firewall of China and other Chinese Internet companies) to shut down foreign websites with DDOS attacks. This sort of Chinese misbehavior was no secret in the West. It was known, for example, that in 2011 a Chinese state run TV station removed a video from its web site that showed (apparently by accident) a Cyber War tool (that can launch a DDOS attack on another site and shut it down temporarily.) The government denied that the Cyber War program was government property, but refused to comment further. The video first appeared on TV a month before the “error” was discovered and the video removed. The recent use of massive DDOS attacks on foreign websites has been called the Chinese “Great Cannon” and is seen in the West as an act of war.   

April 21, 2015: American and Filipino forces began their annual joint military exercises. This year 12,000 personnel were involved, twice as many as last year. China condemned the exercises as an illegal provocation while Filipino officials pointed out that these exercises should remind China that bullying the Philippines over illegal Chinese territorial claims involves more than just China and the Philippines.

April 20, 2015: Pakistan ordered another fifty JF-17 jet fighters, to be delivered by 2018. The first Pakistani JF-17 squadron became operational in 2010. Pakistan has already received fifty JF-17s as part of a project that began in 1992 and while it was a joint Pakistan-China development project China supplied most of the money and did most of the work. China, however, does not use the JF-17, only Pakistan. That’s largely because the JF-17 is assembled in Pakistan, although over 40 percent of the components come from China or Russia. The project has gone through several name changes (FC-1, Super 7).  The 13 ton warplane is meant to be a low cost ($20-30 million) alternative to the American F-16. The JF-17 is considered the equal to earlier versions of the F-16, but only half as effective as more recent F-16 models. The JF-17 uses the same Russian engine, the RD-93 that is used in the MiG-29. The JF-17 design is based on a cancelled Russian project, the MiG-33. Most of the JF-17 electronics are Western, with Italian firms being major suppliers. The JF-17 can carry 3.6 tons of weapons and use radar guided and heat seeking missiles. It has max speed of Mach 1.6, an operating range of 1,300 kilometers and a max altitude of 17,000 meters (55,000 feet). China has tried to export the aircraft to other countries but found that, for what it cost, it was not competitive.

April 8, 2015: A Chinese infantry battalion arrived in South Sudan for peacekeeping duty. This is the first Chinese combat unit committed to the UN South Sudan peacekeeping force.  China has sent military engineer units to South Sudan but avoided calling them combat engineers. The engineers were ostensibly assigned to support missions (improving roads and other infrastructure). The infantry unit will be assigned missions like protecting civilians and conducting patrols.

April 7, 2015: India accused China of allowing its troops to continue intruding into Indian territory despite a new agreement to avoid such activities. China replied that it would look into the incidents.

 

 

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