China: North Koreans Should Always Pay Their Debts


March 8, 2017: The government openly asked North Korea to stop its nuclear and ballistic missile tests and implied that if North Korea complied China would persuade the United States and South Korea to halt their military preparations to deal with a North Korean attack. North Korea was apparently not impressed.

The government is also warning the U.S. of a new arms race because of THAAD. South Korea wants THAAD for protection from North Korean missile attack and the United States notes that China has been spending heavily on weapons since the 1990s and has been forced to cut back because of economic problems. The Chinese never admits it but they object mainly because THAAD would also make South Korea less vulnerable to intimidation by Chinese ballistic missiles and encourages other Chinese neighbors (Japan, Taiwan, and so on) to do the same. South Korea openly refused to comply with the Chinese threats in 2015 and South Korean public opinion became even more enthusiastic about the high tech and very expensive (over $100 million per launcher and associated equipment) THAAD system. China sees South Korea more of an ally of the United States and a potential wartime foe than as an ally in attempts to keep North Korea from doing anything that would cause major economic and diplomatic problems (like starting a war using a few nukes). South Korea ignores the Chinese threats noting that China has backed (militarily and economically) Kim family rule since 1950 and is the one country in the world that could shut down the Kims quickly. China has been getting closer to doing just that. Popular opinion in China, despite government efforts to control it, has become increasingly hostile to North Korea and pro-South Korea. That is having an impact because now the Chinese government is openly pointing out to North Korea that even with nuclear armed ballistic missiles they would quickly lose any war with South Korea, the U.S. and Japan (all of them linked by mutual defense treaties).

North Korea had already been told in 2014 that China would not come to the aid of the current North Korean government if the government collapses or starts a war. Since 2014 China has cracked down on North Korean use of China for illegal imports and exports. Nothing seems to work for China when it comes to North Korea (or South Korea for that matter). This is humiliating for the Chinese leaders and while the government does not discuss this, many Chinese do discuss this disrespect and the Chinese leaders pay attention to that. But what can China do about an increasingly troublesome and disrespectful North Korean leadership? North Korea’s traditional allies China and Russia, have found that, unlike in the past, they now have little sway over the North Korean government. The Russians can ignore all this but China cannot. To make matters worse China has found itself being publicly insulted by North Korea, something that was unknown until Kim Jong Un came to power. In response China began publicly criticizing things that were wrong in North Korea (mismanagement, nuclear weapons, criminality in general). China sent senior officials to North Korea in late 2015 to spell out the consequences in some detail. That did not fix the problem. As usual with North Korea this could get very interesting. Especially since China offered a carrot as well as a stick. Following the 2015 warning Chinese censors were ordered to suppress popular criticism of North Korea and to have state controlled media say nice things about Kim Jong Un for a while. Thus China offers North Korea a choice; cooperate and be rewarded or continue to offend their “elder brother” and suffer the consequences. North Korea has not cooperated and China is reluctant to deliver consequences (the removal of Kim Kong Un) that will work.

Taming The Generals

At a recent meeting of the senior leadership everyone was reminded about how important it was to eliminate corruption in the military and for the military to keep in mind that its primary loyalty is to the CCP (Chinese Communist Party). A growing number of junior officers are indicating that they are not focused on that aspect of their military duties. The government has been taking several steps to educate everyone. In November 2016 Chinese leader Xi Jinping persuaded the senior members of the government to add to his titles one (translated as “core” or “core leader”) that makes him equal to communist China founder Mao Zedong. No other Chinese leader since Mao Zedong (who died in 1976) has had that kind of power. While Mao has become popular with many Chinese, those who lived through the 1960s see Mao as a major failure. That is what led to the economic reforms that have transformed China. Xi Jinping has, as expected, used this Mao-grade power to deal with the corruption that still persists in the senior ranks of the government and military. To demonstrate that as soon as Xi was declared a core leader the Communist Party Central Committee announced punishments for many senior party officials for corruption. Since then there have been regular announcements about senior officials being accused or punished for corruption. There are accusations that Xi is using the anti-corruption campaign to purge the government of officials he considers insufficiently loyal. There is some truth to that but so far there have been no false accusations but some corrupt officials have escaped punishment so far and many of those appear to be cozy with Xi and his cronies. The anti-corruption effort against senior officials has been going on since 2012.

Defense Spending

For the third year in a row China has slowed the growth in its defense budget. For 2017 spending will be up 7 percent versus 7.6 percent in 2016 and 10.1 percent in 2015. These annual Chinese increases peaked from 2005-2009, when they were 15-20 percent a year. Chinese defense spending for 2017 will be $145 billion, which is 1.3 percent of GDP, That’s about a third of what the U.S. spends (as a percentage of GDP). According to NATO reporting standards (which take into account the many different ways you can calculate military spending) China is believed to spend about 50 percent more on the military than it admits. That would make 2017 military spending over $210 billion. The decrease in spending increases over the last few years is a result of the international recession that began in 2008. China was hurt by this more than it likes to admit and has internal problems (corruption, inflation, pollution, labor shortages) that have hurt their economy. Japan is not just buying new weapons, but also paying for the increased costs of sending warships and warplanes out to intercept Chinese intrusions on Japanese borders.

Treating The Affluence Disease

The government relaxed the “one child” policy in 2015 and basically turned it into a “two child” policy. Young couples did not respond as expected. So the government is offering cash incentives to couples who have a second child. Recent surveys have found that 60 percent of young couples are reluctant to have a second child mainly because of the expense involved. In 2016 there were nine percent more births which was only 1.3 million more babies and not enough to make a dent in the growing shrinkage of the working age population (which declined over four million in 2016). The government had expected three million more births a year. It appears that China has, since implementing the one child policy in the 1980s, managed to acquire the “affluent mother” syndrome. That means better educated and paid women refuse to have a lot of children. South Korea, Japan and Singapore already suffer from this as does most of the industrialized world.

Economic Threats

The most urgent threats to the government are economic. This is mainly about too much debt and how much of that debt is uncollectable (“bad” debt). To make matters worse Chinese banks are suspected of using the same deceptive banking methods (trying to repackage bad debt as good debt) that brought on the 2008 financial crises in the United States. That economic crisis went worldwide and the Chinese government was forced to use a lot of debt to keep the economy moving. But if too much of that debt is bad there is increased risk of an economic crises that would halt economic growth and take years to fix. The government has made this worse by allowing economic data reporting to be “adjusted” to suit the needs of local (provincial) officials. That was bad enough (and is now being fixed) but during several decades of rapid economic growth this flawed data allowed the state owned banks (which still dominate the economy) to lend too much money. Thus debt in China keeps rising. It went from 254 percent of GDP (nearly three times what it was before 2008) in 2015 to 277 percent in 2016 and unless the government can develop some solutions it will be over 300 percent by the end of the decade. What makes this pile of debt trap so toxic is that, much, if not most of this debt consists of loans that the borrower cannot repay, or not repay in a timely fashion. This is reflected in the rising (54 percent more in 2016) incidence of bankruptcy. The government would prefer to avoid the bankruptcy process because it is embarrassing, turns bad debt into losses and exposes details of how the bad debt mess works. The growing bad debt problem, more than the South China Sea dispute, is what keeps Chinese leaders up at night. GDP growth is slowing, it was down to 6.7 percent in 2016 and the new American government is openly discussing economic retaliation against China. That is scarier than the American military because it can be more safely used by the Americans and the Chinese government refuses to discuss this vulnerability for obvious reasons. It is believed that nearly $600 billion worth of these loans are uncollectable. Chinese banks are trying to avoid writing off these bad loans (which hurts bank profits and puts some of them out of business). Many banks are repackaging the bad loans in an attempt to sell them off for far more than they are worth. Chinese banks call these new items WMPs (wealth management products) and assure buyers they are legitimate but offer these bond-like securities with much higher interest rates than other corporate or bank bonds.

The Other Western Threat

In late February the military held large (as many as 10,000 armed troops each) parades in Xinjiang province. The largest of these parades was in the provincial capital where the threat of renewed anti-government demonstrations and violence is greatest. Most of the troops for these parades were flown in just for the occasion. The message was clear; resistance is futile. Smaller military demonstrations have been held in Tibet.

Western China has always been a threat to the government. In the northwest (Xinjiang province) there are many Turks (Uighurs and other Central Asian minorities) while in the southwest (Tibet) there is an area that had been independent from 2012 to 1951 and most ethnic Tibetans prefer independence. But these two western areas comprise over a quarter of Chinese territory but have only two percent of the population. The territory is largely dry and in the case of Tibet extremely high and cold. Thus Xinjiang has about eight times the population of Tibet but only a third more territory.

Xinjiang still suffers from violent attacks on security forces and recent migrants from eastern China. There was less violence in 2016 but at the end of the year three Uighurs drove into the government compound, set off a bomb and were shot dead by police. A policeman and a civilian also died. Aside from the bomb the Uighur attackers were only armed with knives. This comes as provincial authorities were about to announce how ethnic violence was way down in Xinjiang over the last year. The government has had a media blackout in Xinjiang for years but Chinese language media outside of China has been able to interview people from Xinjiang, including people who recently served in the security forces there. Those witnesses tell a different story, indicating that during 2016 there were about twenty protests and violent incidents a week in Xinjiang. Those familiar with how Chinese censors work point out that the government can get away with saying nothing is happening as long as no ethnic Han Chinese, with kin elsewhere in China, are killed. This is especially true when the dead are soldiers, police or government officials. These deaths stir up Internet chatter among the Han majority in China. The censors can suppress such forbidden chatter but cannot eliminate it. When the government does have to admit to anti-government violence in Xinjiang they describe the perpetrators as common criminals or Islamic terrorists.

The reality is that the Xinjiang problems more about the native ethnic Turk population resisting being overwhelmed by Han Chinese migration to the area. China accuses Islamic terror groups among the ethnic Turks (Uighurs) of Xinjiang for all these problems. Unhappy Uighurs are increasingly aggressive in protesting, if not attacking, the growing Chinese presence among them. The Xinjiang Uighurs never responded well to growing pressure from Han Chinese soldiers and intrusive Han government officials. Because of that many Uighurs continue to support anti-Han activity and this made it possible for some Islamic terrorists to survive and operate there for a while. Most Uighurs are found in Xinjiang province where nine million of them are now less than half the population and most of the rest are Han Chinese. The government has been publicly urging soldiers and police to be more aggressive against uncooperative Uighurs and in 2015 the security forces were told to do whatever they thought necessary to keep the peace. The government accuses Uighur activists of endangering state security and tries to keep the unrest out of the news. The same thing is happening in Tibet, where the government is using the same tools to keep everyone under control. Since 2011 several hundred have died in Xinjiang because of Uighur violence against Han rule. Thousands of Uighurs have been arrested and hundreds sentenced to prison, or death. While Islamic terrorism is seen as a major threat in the West the Chinese regard that threat in China as largely confined to Xinjiang. Despite the occasional attack, the Chinese now believe they have it under control.

March 7, 2017: The United States revealed that it had delivered the first THAAD components to South Korea.

March 6, 2017: North Korea fired another four ballistic missiles off its east coast and said this was a test of using missiles to attack Japan. Left unsaid (at least by North Korea) was that these missiles were fired while a meeting of the senior Chinese leadership was going on. The Chinese leaders noticed and were not pleased. Adding to that displeasure was North Korea also (later in the day) ordered all Malaysians in North Korea be prevented from leaving the country in an attempt get Malaysia to stop investigating the death (apparently by North Korean assassins using nerve gas in a cream form) of the older brother of North Korean leader Kim Jing Un. Chinese were angry about this as well because the older brother (and his family) had received sanctuary in China.

March 5, 2017: In the northwest (Xinjiang province) the government is testing a new security program in which they are hiring 3,000 new policemen and paying them monthly bonuses (that nearly double their already attractive salary) to those who are able keep the peace in their jurisdiction. Most of these new police jobs are being offered to local Uighurs, most of whom are Moslem and many are unemployed. Police recruits have to pass a thorough background investigation.

March 2, 2017: UN investigators revealed that they had uncovered evidence that North Korea is continuing to smuggle weapons out of the country and do business despite the many economic sanctions placed against it. The report detailed the North Korean use of contacts in Africa and other areas with lax law enforcement to handle their clandestine smuggling and financial activities. Since early 2016 China has shut down a lot of those activities within China but the North Koreans were apparently quick to adapt.

March 1, 2017: In the northeast (Jilin province) police near the North Korean border were put on alert because of reports that six armed North Korean soldiers had deserted yesterday and crossed into China. There was a time, a few years ago, when China and North Korea kept incidents like this quiet. No longer, mainly because it is happening more frequently and China believes the North Koreans are losing control with desertions in their military and security services on the rise. The last such confirmed incidents of armed deserters were in July 2016 and December 2014 and the deserters committed crimes (robbery, assault and murder) before being found. There are often no announcements of these crimes in Chinese media but the Chinese diplomatic protests are usually big news outside of China and despite Chinese Internet censorship the details of these crimes spreads rapidly into North Korea and China. Since at least 2008 North Korea has been trying to do something about the growing number of soldiers who are deserting and fleeing to China. There are always some troops who desert and just disappear inside North Korea. But more of these deserters are being found in China, and South Korea. The worst desertion incidents are the ones where the deserters take firearms with them and rely on robbery to survive. This is especially bad if they do this while still wearing their North Korean uniforms. Both China and North Korea have increased their border security but the number of people, armed or not, trying to get out of North Korea increases faster and the escapees are more desperate and resourceful. China is forming a civilian militia along the North Korean border to watch the border and promptly alert border troops if anything suspicious is seen.

February 28, 2017: In the northwest (Xinjiang province) the government is enforcing new rules against “illegal religious activities” that are aimed at all religions and especially clergy from outside the province.

February 24, 2017: Russia generally follows Chinese policy regarding North Korea and to that end Russia is preparing to break diplomatic relations (and most trade agreements) with North Korea in light of the recent North Korean use of VX nerve gas to assassinate Kim Jong Nam, the older brother of North Korean tyrant Kim Jong Un. The brothers did not get along and the older one was under the protection of China. Russia, like China, was already angry about continuing North Korean nuclear and ballistic missile development. Russia also joined with China to try and halt South Korean plans to obtain and put into service the American THAAD anti-missile system.

February 19, 2017: South Korean officials have told their Chinese counterparts to stop the threats and economic sanctions over South Korean plans to build anti-missile defenses. South Korea points out that the Chinese threats are not popular in South Korea or in China and the Chinese leaders know it. In light of the growing popularity of South Korean culture and imports in China, and continuing threats from North Korea, there is no defensible (in public) reason for opposing South Korean anti-missile defenses.

February 18, 2017: China ordered a halt to all coal imports from North Korea. At the moment coal exports to China accounts for at more than half the foreign currency North Korea earns each year from China (which accounts for 90 percent of all North Korean legal foreign trade). This is a major problem for North Korea because there is no one else they can sell their coal to while China will have no problem finding other suppliers. North Korea will now be tempted to seize Chinese investments in North Korea in retaliation but that could trigger a final break with their only major ally.

February 16, 2017: China announced that it would do everything necessary to protect the family (a wife and two adult children) of the recently assassinated Kim Jong Nam.

February 15, 2017: China reacted promptly to the news of Kim Jong Nam’s assassination in Malaysia. At least a thousand additional troops were sent to the North Korean border. Chinese media were ordered to play down the news but the Chinese Internet was lighting up with popular outrage at this latest move by an already unpopular (with most Chinese) neighbor. Even before the latest insults (missile launches and the murder of Kim Jong Nam) many Chinese were openly calling for abandoning North Korea completely. The Chinese leaders are not willing to do that but they are angry at the continued insults they are receiving from Kim Jong Un.

February 14, 2017: In the northwest (Xinjiang province) there was another terror attack by Uighurs, apparently against Han Chinese. The three attackers were killed, as well as five non-Uighurs. The attackers were described as armed only with knives and the incident was described as riot control, not terrorism.

In Malaysia Kim Jong Nam, the older brother of Kim Jong Un was murdered, apparently by North Korean assassins. North Korea has regularly used commandos and secret agents to kill “enemies of North Korea” who were outside the country. Since the 1960s there have apparently been about ten such efforts, most of which succeeded. Failures have been more frequent of late, in part because South Korea has more intelligence and special operations resources. But this latest killing was directed more at China (a first) than South Korea or the West in general. That’s because Kim Jong Nam, his wife and two children all have citizenship in Macau (a former European colony with similar status to nearby Hong Kong). There is also believed to be an ex-wife (and one child) living in northern China. Thus Kim Jong Nam was under the protection of China and killing him is a direct attack on China. This is very bad behavior and reflects poorly on Chinese leadership and how the increasingly troublesome former ally, North Korea, has been handled. Officially, China has blamed the United States and South Korea for the North Korean misbehavior (missile launches, nukes, assassinations), arguing that if only the United States would agree to direct negotiations with North Korea there would be no problem. For a long time (especially since 2009) North Korea has insisted on direct talks with the United States, rather than six way (North and South Korea, China, Russia, the United States and Japan) negotiations. This is another smoke screen. The only negotiations that will work must include all the neighbors. The U.S. cannot make deals just with North Korea, and North Korea knows this (as does China). The Americans recognize the independence of South Korea (as does China) but North Korea still insists that South Korea is a puppet of the United States and illegally occupied by foreigners. It's all just another negotiating ploy, one that the North Koreans have been using for decades. It is unclear how much longer China will support this fiction.

The two Kim brothers were never close and both spent a lot of their youth in the West. Kim Jong Nam was more attracted to the West and had recently expressed an interest in visiting South Korea. Their differences were explained in 2012 with the publication of "My Father, Kim Jong-il, and I: Kim Jong Nam's Exclusive Confession." Written by a Japanese journalist, after years of email and personal conversations with Kim Jong Nam, the book made it clear (implicitly, not explicitly) that China had sheltered the eldest (born 1971) son of Kim Jong Il for decades and some Chinese considered him a potential replacement for Kim Jong Un if the younger son does not succeed as the new ruler of North Korea. There had been recent rumors of the Chinese preparing to implement such plans and that may have led to the assassination. By tolerating the publication of the 2012 book China allowed the spread of truths that were known by many but denied officially. For example, Kim Jong Nam believed his younger brother was not capable of running North Korea and was, at best, a figurehead. Kim Jong Nam also confirmed what many have been saying, that North Korea is in very bad shape politically and economically and facing eventual collapse. Kim Jong Nam blames this on the policy of "military first" rather than "people first". He confirmed that North Korea sank the South Korean warship Cheonan and carried out the shelling of Yeonpyeong Island in 2010. Both moves were meant to intimidate South Korea and all those who were trying to halt the North Korean nuclear weapons program.

Kim Jong Nam has been living in China since 2002 because his father lost faith in his ability to become the next Kim to rule North Korea. This break became official in 2003. Kim Jong Nam was seen as too independent minded and undisciplined for the job. The Chinese quietly granted Kim Jong Nam sanctuary (and citizenship), and blocked any North Korean attempts to get him back or kill him. Kim Jong Nam has generally kept silent (as far as the public was concerned) about his views on North Korea but travelled outside the country without any bodyguards. Because China allowed the 2012 book to be published in China Kim Jong Un took it personally and saw China as an enemy not an ally.

Chinese leaders are fed up with the self-defeating behavior of Kim Jong Un, who has been in power since 2011. Face-to-face with Chinese officials Kim Jong Un is apologetic and increasingly lies about actions China considers unfriendly (to China). Pro-Chinese North Korean officials report that Kim Jong Un is paranoid and ruthless. Kim is believed to have executed several hundred senior officials since he took power. That apparently extended to Kim Jong Nam, who was often discussed in China (especially on the Internet, which Kim Jong Un knows how to use) that relations with North Korea would improve immensely if Kim Jong Nam was in charge. But the older brother always insisted that he was not interested in the job and apparently he was sincere about that. But it got him killed anyway.

February 8, 2017: Over the South China Sea an American P-3C maritime patrol aircraft encountered a Chinese KJ-200 AWACS that proceeded to turn and pass in front of the P-3C, forcing the American aircraft to change course. The two aircraft never came that close (about 300-400 meters) but the U.S. complained but China ignored the incident. The air space the encounter took place is over international waters to everyone except China which has declared that it controls the air space over the South China Sea and everyone should check with China before entering it. Most nations, including the United States, ignore this. In 2017 China is continuing to add new artificial islands in the South China Sea and base military units there, including anti-aircraft missile and combat aircraft detachments.

February 4, 2017: The new American head of the Department of Defense (and former Marine Corps general) visited South Korea (and Japan) and reaffirmed the American willingness to honor its defense treaties with South Korea and Japan. This includes continuing to sell anti-missile and other high-tech systems to both countries and a pledge to rapidly move in Aegis equipped warships with anti-missile capabilities. The new Department of Defense leader was very popular during his visits in part because of his military background and personal experience in the region as a marine officer. All this annoyed North Korea and China, who both criticized the United States for causing instability in the region. What the two communist nations are really upset about is South Korea becoming a major military (as well as economic) power in the region. In 2016 South Korean defense spending ($34 billion for that year) put the country into the top ten. The U.S. remains number one but China is second, spending four times as much as South Korea. The latest data also shows that defense spending in Asia was now 30 percent higher than all of Europe. The new American defense department head and the new president that chose him are seen by China as a major problem.

February 2, 2017: China has missed the deadline for reporting how much coal it has imported from North Korea in December 2016. China imports most of its coal from North Korea and agreed to reduce those imports by nearly half. It is unclear if China will adhere to these restrictions even though China has stopped most other imports of sanctioned items from North Korea.


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