China: Disappearing Acts

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October 12, 2018: For nearly a month now Chinese media have been operating under orders from the government to exercise care in reporting economic data. In other words, the economy is not doing well and the government wants to prevent a financial panic, especially in light of the trade war with the United States and the sanctions on Iran (a major source of oil). This media manipulation can moderate the widespread unease about the economy in China but not eliminate it. The government still lacks total control over the Internet and cell phone users. Bad news still gets around and when it has to do that despite government censorship the news has more impact. While some of this bad news comes from outside China most of it is generated internally. Chinese have learned not to trust government supplied economic data. Chinese can see for themselves indicators of economic slowdown and a rapidly mutating slang is used on the Internet to get the news past the censors.

The government knows it can slow the spread of bad news, not stop it and tries to come up with new distractions to divert public attention. The mess in North Korea helps, especially since South China Sea headlines don’t distract as well as they used to. Moreover Chinese, especially the growing number who travel abroad for business or pleasure, note that China is not well liked by its neighbors. China is seen as a bully and a threat economically and militarily. This can be seen by the eagerness of Chinese neighbors to side with the United States in its trade war with China. Many of these nations have similar disputes with China see the American efforts as beneficial for everyone but China.

The increased censorship and restrictions on what the media can report go beyond the economy. Corruption and fear of embarrassment also play a role. Current examples are how the secret police are handling Chinese victims of yet another “dangerous food and drugs” scandal. Many of the victims of Changsheng Biotechnology, the second largest supplier of vaccines in China, are seeking compensation from the government for injuries suffered from bad vaccines. In July Changsheng was accused of selling unsafe medicines and getting away with it by bribing government inspectors to ignore evidence of poor quality control that resulted in ineffective vaccines. This is the latest of many such scandals involving dangerous food products or medicines. It is why the government has been so energetic in its anti-corruption campaign but also evidence that the “war on corruption” was not going as well as the government was reporting. This latest incident was so scary that even North Korea refused to buy low-cost medicines from China because of the growing popular belief (in China and North Korea) that too many Chinese made drugs were probably ineffective.

Chinese are also upset at the increased secret police use of “disappearing” critics or high profile suspects in corruption investigations. Celebrities who displease the government, or are found to be cheating on their taxes, are “disappeared” for weeks or months until the government gets what it wants. Some of these “disappeared” are hard to keep out of the news. A current example is the September disappearance of Meng Hongwei, president of Interpol, who is a Chinese citizen who disappeared while visiting China. Meng was a senior official of the Chinese MSS (Ministry of State Security) before being selected by Interpol in 2016 to be its president. That was considered a big deal because China has long sought to get Chinese into senior positions at organizations like Interpol. The Interpol president is a largely ceremonial job but the Chinese government saw it as a step towards getting Chinese in Interpol senior management jobs. The secretary general of Interpol actually runs the operation and after what happened to Meng it may be a long time before China gets one of their own as the Interpol secretary general. When Interpol asked China what had happened to Meng they got nothing. As the international outrage spread Meng sent his resignation to Interpol on October 7th and China revealed that Meng was being prosecuted for corruption. China explained that since Meng was still an MSS (the Chinese secret police) official while president of Interpol the Chinese government had the authority to do whatever they wanted with him. China claims the same authority over anyone of Chinese ancestry, no matter where their home is now or what other country they are citizens of.

Economic Concerns

For Chinese leaders the most dangerous issues are internal (economic and public opinion), not external (the risk of foreign wars). Moreover, the real strength of China is economic and the Chinese economy is largely about production for domestic consumption. Starting in the 1980s, China set the economy free to finally get through the Industrial Revolution (which most Western nations underwent in the 1800s) with little state interference. As happened in the West, this leads to explosive growth and problems with pollution and raw materials shortages. There is also a shift of the population from the countryside to the cities. In 1980 70 percent of Chinese worked on farms but 35 years later it was only 30 percent. That shift required a more educated population and that is why in 1980 only two percent of Chinese workers had a college education while 35 years later it was 30 percent. This was all reflected in GDP, which grew from $305 billion in 1980 to $11,000 billion 35 years later. GDP growth has been slowing since 2010 and that trend will continue. This is mostly about how the decades of development are over. Most of the missing (required for an Industrial Revolution) infrastructure (road, ports, dams, utilities, housing) have now been built and, because of government corruption, often overbuilt and poorly built. Yet the government feels that it still needs inflated economic performance numbers to justify its continued dictatorship (of the Communist Party). The government was forced to admit that the decades of 10 percent a year GDP growth were over and appears to have settled on 6-7 percent a year being the acceptable new normal. But foreign analysts see five percent or (and eventually) less as the reality and a catastrophic economic collapse (because of mismanagement of the banking system) still a possibility.

All this growth made China the world’s largest exporter ($2.3 trillion a year) by 2015, displacing the United States and Germany. All this meant China was no longer self-sufficient, as it had been throughout its history. China became a major importer of raw materials. This makes China's neighbors nervous, because that's where lots of the raw materials come from, and some of the pollution (industrial waste) can go to.

China is still putting up impressive economic numbers but not enough of the ones that count. For example, a better (but less used) measure of economic strength is how much of the national wealth is in private hands (where it is more efficiently managed). Thus while China makes much of its GDP (at $11 trillion second only to the American $18 trillion) and capable of eventually surpassing the U.S., they are now losing ground when it comes to privately controlled wealth ($23.4 trillion versus $84.8 trillion). More Chinese, especially the wealthy middle and upper-class ones, are openly protesting this deception because it ultimately puts at risk all that new wealth. China now has a middle class of 400 million people who may not be able to vote to choose their leaders but are much more capable (than a largely agricultural population) of making their concerns heard by their rulers.

Correcting Korea

Recently North Korea, Russia and China joined together to ask the UN to ease up on the North Korea sanctions and to consider gradual lifting of all sanctions during the implementation of a North Korea denuclearization effort. North Korea is still negotiating with the U.S. and South Korea over that nuclear weapons deal. So far China has not interfered. At the same time, China and Russia have not cracked down some of the more blatant smuggling going on with the help of Chinese and Russian firms. Legal trade between North Korea and China is down 58 percent through the end of August compared to 2017.

All this is seen as North Korean leader Kim Jong Un exploiting the new Cold War Russia and China are waging against the West by offering to cooperate with this northern neighbors in return for assistance in beating the sanctions and scaring some freebies out of South Korea and the West. There are other reasons for the northern neighbors to help North Korea. China has a growing problem with the Americans waging a trade war (because of decades of economic scams). China is at a disadvantage in this trade dispute because China exports nearly four times as much (in dollar value) to the U.S. than the Americans export to China. This trade dispute is escalating and that is bad for Chinese businesses in general because China has tended to treat all its trading partners badly. Now those countries see a chance to get back at China.

Russia is withering away because of corruption, low oil prices and sanctions (for attacking its neighbors). China has also triggered a regional arms race and the formation of a large anti-China coalition because of aggressive Chinese territorial claims. Anything North Korea can do to distract the Americans would be useful for China and Russia. But North Korean negotiations with the Americans over denuclearization are not a major distraction for the United States. China is and China is not accustomed to that much attention and scrutiny.

Even though China has also complied with imposing many (but not all) of the sanctions on North Korea the North Koreans still believe China is an ally. That’s because China still allows smugglers to operate. North Koreans know the Chinese can shut down smuggling if they want to and have done to in the past so the fact that China is willing to cooperate with North Korea in evading the sanctions is seen as a positive thing. Then again, China is the only powerful and prosperous friend North Korea has. Russia tries but really is too broke and weak to be much help. North Korea also believes that China is willing to live with a nuclear-armed North Korea as long as North Korea is stable and not in danger of falling apart and leaving the expensive cleanup to China. South Korea is a democracy and most of the voters are not willing to provide billions of aid in return for vague assurances that denuclearization will happen eventually, maybe.

As of late-2018 North Korea is still exporting weapons (rockets, small arms and ammo are showing up in Yemen, Libya and Syria). With the help of Russian and Chines partners, North Korea is exporting its coal and importing oil. North Korea is also exporting more drugs like opium, heroin and methamphetamine (“meth”). These drugs have long been manufactured by the North Korean government for export to obtain foreign currency. The United States is organizing an international anti-smuggling patrol to counter North Korean smuggling at sea, particularly oil. The new joint patrol effort will include ships, satellites and aircraft from the U.S., Britain, Australia, New Zealand, Canada, Japan, South Korea and France.

North Korea has also been caught selling software illegally by establishing companies in China and Russia that pretend to be local but are actually staffed and run by North Koreans. These two companies quietly offer semi-legal or obviously illegal software services as well and advertise on social media. The U.S. has imposed sanctions on these firms and their key personnel (who are largely North Korean). A group of North Korea hackers has also been identified as the ones responsible for a series of international bank hacks that made off with over a billion dollars.

North Korea also has legitimate business operations, mainly those created by the new entrepreneurial class (donju) that has developed since the late 1990s as free (and now mostly legal) markets developed. The donju make themselves very useful, even coming up with joint ventures that can include government run businesses as partners. These deals are increasingly acceptable because the donju get things done, sometimes by bending the laws in ways few government officials would dare try. In effect, the donju are quietly and gradually implementing the reforms the Chinese have been urging. The Chinese, both government officials and entrepreneurs, understand and respect the donju who in turn rely on Chinese businesses to help them out with advice and guidance. Chinese business publications and books are popular with the Donju and more of these are being translated into Korean because of the growing market for that knowledge in North Korea. A lot of practical business advice and information is available on the Internet and North Korean secret police note that a lot more of the electronic media being smuggled in consists of technically legal stuff from Chinese websites devoted to business matters. The illegal stuff is similar information from South Korean websites. Chinese advice for entrepreneurs is OK, the same stuff from South Korea can get you killed. Despite that, because most smuggled media comes in on tiny and easy to conceal SD (and micro-SD) cards most of it gets through.

What it comes down to is Kim Jong Un wants to get paid because his people, especially his soldiers, are hungry and not looking forward to another four months of very cold weather, little fuel to keep warm with and not much electricity either. China is doing whatever it can to assist North Korea in getting some (or a lot) of financial assistance from South Korea and the United States. China does not provide large quantities of aid but will sell you stuff and even do it on credit if you have collateral.

The Naval Unbalance

While most of the rapidly growing Chinese fleet is directed south (the South China Sea and trade routes through the Indian Ocean, China faces a growing naval threat in the north; the modern and growing fleets of Japan and South Korea. The Japanese have 18 modern diesel-electric submarines (soon to be 22), four helicopter carriers (called “helicopter destroyers” for legal reasons), 37 destroyers (including a growing number Aegis equipped ones the size of cruisers), six corvettes and one of the largest (25 ships) mine clearing force in the region. All these ships were built in Japan with foreign components often built in Japan also (under license).

While it is not surprising that Japan should have created a modern fleet, neighbor South Korea has no recent history of shipbuilding or managing a modern fleet. The South Korean Navy was originally meant to be a coastal defense force, mainly because the main threat was from North Korea or nearby China. Since the late 1990s, it became obvious that all those destroyers and frigates being built in South Korea performed well on the high seas the South Korea Navy was rapidly becoming one of the largest and most modern in East Asia. At the same time, South Korea had become the largest builder of commercial shipping in the world.

The South Korea Navy is almost entirely locally built and has expanded enormously since the 1990s. Currently, the fleet has 16 modern submarines (18 by 2019). All these subs entered service after 1992. There are twelve destroyers (the oldest one entered service in 1998) and more are under construction. There are 13 frigates, with the three oldest from the late 1980s. The 14 corvettes all date from 1989 and the early 1990s. There are also about fifty patrol boats with the 170 ton ones 1978-94 being replaced by new 570 ton ships (18 so far, the first arriving in 2008). There are also a dozen amphibious ships including two 18,000 ton LPHs (one in service the other will be in 2020.

Together with South Korea and Japan pose the greatest naval threat to China. Although the American fleet is much larger the portion of the U.S. Navy stationed in the West Pacific is smaller than the combined South Korean-Japanese force. The Americans have the large carriers, large amphibious ships and nuclear subs but the South Koreans and Japan have most of the subs (all diesel-electric), destroyers and frigates. South Korea already has three large (11,000 ton) Aegis equipped destroyers with three more under construction. Japan also has Aegis equipped destroyers and large destroyers that function as helicopter carriers.

Iran Opportunities

China is obtaining a larger economic presence in Iran by helping Iran deal with the return of sanctions. The economic problems in Iran are partly the result of the Americans resuming most of the sanctions in November, which includes bans on buying Iranian oil. Already Iran is offering discounts to its customers to entice them to defy the Americans. China will seek, and pro-American Asian nations will get exemptions The United States announced this decision in March and that set off a financial panic in Iran, which was already suffering from massive government corruption and decades of mismanagement of the economy.

Even China and India, two major customers who said they would defy the sanctions, have cut orders because sanctions will increase shipping costs and also increase the risk of Iran going to war. Sanctions mean the cost of insurance rises and fewer shipping companies are willing to provide tankers to move sanctioned oil. China remains on good terms with Arab oil states and both Iran and the Arabs will sometimes call on China to help set up secret talks between Iranians and Arabs. China has a way of seeing problems (like Iran getting hit by sanctions once more) as opportunities. China is willing to break international law, use bribes, and generally entertain just about any proposition.

There have even been proposals for Russia, China, Iran and anyone else interested establish a separate international payments system based on the Chinese currency (the yuan). But even Chinese bankers will explain (off the record) that this would not work because, compared the dollar, the yuan is much less stable and subject to wide and unexpected changes in value (compared to other currencies). One reason the dollar has become the primary currency for foreign trade is that it is the most widely accepted, used and, most importantly, stable of the major currencies. European countries opposed to the resumption of sanctions are establishing a barter system for Iran, to help get around the sanctions. The American see all these moves as fair game for U.S. countermeasures.

Inferior India

As India achieves a higher GDP growth rate than China and will soon have more people than China it has become popular for Indians to seek other comparisons. That does not work out well. India is playing catch-up with China when it comes to explosive economic growth and India has several serious shortcomings that China is much less burdened with. For one thing, the Indian workforce is less educated than the Chinese. This is due to the rampant corruption throughout Indian public education. China, in comparison, has far higher standards in public education. While China has problems with corruption the problem is much more severe for India, especially in the government. This means key decisions (like military procurement and educational or other reforms) are delayed for years, or decades, because of corruption and political deal-making. It’s a cultural thing and India will have to work hard to become competitive with China. On a practical level, Indian military capabilities are inferior to the Chinese because of the corruption and government sloth. For example, the Indian military cannot get needed new weapons or essential support to keep existing one operational. Efforts to improve roads and other infrastructure in border areas claimed by China are way behind schedule because of the government delays and procrastination. These are not new problems but have been around for centuries. China overcame them and if India does not China will always have the upper hand in tech, economy and military power.

October 9, 2018: President Duterte of the Philippines seems to agree with the growing number of Filipinos who believe that trying to work out a deal with China over Chinese claims on Filipino territory is not working. China talks a lot about economic benefits for the Philippines. This included talk of China investing $24 billion in various infrastructure projects, including the long talked about 830 kilometers long Mindanao railroad. By mid-2018 it has become clear that this is mostly talk and very little action. Worse, China has demonstrated that it is relentless in going after what it wants. And when China gets what it wants, it soon wants more.

October 8, 2018: Yanjun Xu, a Chinese MSS (Ministry of State Security) officer was extradited from Belgium to the United States, where he is being prosecuted for carrying out a major espionage campaign to steal American jet engine technology. Xu was arrested in April

October 4, 2018: In the CAR (Central African Republic) three Chinese were killed and three wounded by a mob of locals angry at the apparent death of a local man who was meeting with officials of a Chinese mining company. The Chinese were at a police station when attacked. The missing, and presumed dead, local man was traveling in a boat with some Chinese when the boat tipped over. Apparently, it was an accident but the mob thought otherwise.

October 1, 2018: India reports that so far this year border violations by Chinese troops are down 20 percent compared to 2017. But that still means there were 137 illegal border incursions by Chinese troops so far in 2018. In September China agreed to establish multiple hotlines along their mutual border and also between the defense ministries of both nations. This revives previous efforts to establish a hotline. In 2016 China and India have worked out and agreed to details of a hotline for commanders on both sides of the LAC (Line of Actual Control). Also known as the MacCartney-MacDonald Line the LAC is the unofficial border between India and China. The LAC is 4,057 kilometers long and is found in the Indian States of Ladakh, Kashmir, Uttarakhand, Himachal, and Arunachal. On the Chinese side, it is mostly Tibet. China claims much territory that is now considered part of India. There have been hundreds of armed confrontations over the last few years as one side or the other accuses “foreign troops” of crossing the LAC. The agreement fell apart when India went ahead, despite Chinese protests, and expanded its military ties with the United States.

September 30, 2018: In the South China Sea Chinese warships engaged in some “chicken of the sea” maneuvers when an American destroyer carried out a FONOP (freedom of navigation operation). At one point a Chinese frigate came within 40 meters of the American warship. This FONOP involved moving closer than 22 kilometers from Gaven and Johnson reefs in the Spratly Islands. China has turned these two reefs into artificial islands and built military bases on them. Contrary to international law China now claims these reefs (and most of the South China Sea) as part of China.

Since the 1990s China has continued to aggressively confront American ships and aircraft that come close to Chinese ships in international waters or disputed areas like the South China Sea. For example in late 2013 a Chinese destroyer cut in front of an American cruiser (the USS Cowpens) which was observing the new Chinese aircraft carrier. The Chinese ship risked a collision as it moved to within a hundred meters of the 10,000 ton U.S. cruiser. This sort of aggressiveness has not been experienced by American warships since the Cold War when Russian warships would risk collision in what American sailors came to call "Chicken Of The Sea." The Chinese are also harassing American intelligence operations off the Chinese coast. For over a decade now the Chinese have been aggressively interfering with American intelligence gathering aircraft and ships. U.S. Navy survey ship operating in international waters often find themselves approached, especially at night, by Chinese fishing boats that deliberately get in the way. In some cases, the harassment includes Chinese warships and naval patrol aircraft as well. All this is reminiscent of Cold War incidents, usually involving Russian ships harassing American ships by moving very close, or even on a collision course. This was all for the purpose of interfering with U.S. intelligence operations, especially those off the Russian coast. Earlier in the Cold War Russian warplanes would fire on American intelligence gathering aircraft, shooting some of them down. This sort of thing declined when the U.S. quietly informed the Russians that American warships and combat aircraft would aggressively return fire. By the end of the 1960s, this aggressive activity diminished to the point where it was considered a minor nuisance and even that was eliminated by a 1972 treaty. The same pattern is playing out with the Chinese but for the last few years, the Chinese have continued to protest this intelligence gathering activity so close (up to 22 kilometers from Chinese territory, an area that is considered “territorial waters”).

Iran has transferred ownership of four new cargo (container) ships to a Chinese company that does a lot of business with Iran. This transfer is apparently an effort to avoid the impact of sanctions. China has always been helpful to Iran in that respect. This maneuver did not impress the maritime insurance companies who informed China and Iran that insurance rates would have to go up no matter who owned the ships as long as they were carrying sanctioned cargoes.

September 27, 2018: Although China initially announced it would not cut oil imports from Iran that was later changed to “China will not increase oil imports from Iran.” But the reality is that Chinese orders for Iranian oil have been reduced 12 percent in September and more cuts are on the way. Until September China was importing 500,000 BPD (barrels per day). China underestimated the impact of American sanctions on the cost of transporting Iranian oil to China and how vulnerable China was to the banking aspects of the sanctions.

September 23, 2018: China threatened the United States with unspecified retaliation if the Americans did not back off on applying sanctions on Russian arms exports to China. After 2016 the Americans imposed additional sanctions against Russian weapons exports. In 2017 the United States created CAATSA (Countering America’s Adversaries through Sanctions Act) which made it difficult, and in some cases impossible, for Russia to get paid for weapons exports. China has run afoul of CAATSA because of Su-35 fighters China is buying from Russia and an even larger purchase of S-400 air defense systems. India, which has been improving diplomatic and military relations with the United States is potentially subject to the full force of CAATSA as it tries to carry out these ship and air defense purchases. India hopes to get an exemption on all or some of these purchases. India and Russia have already agreed to pay for the ships and air defense purchases without using dollars. India would pay in its currency (the rupee) and Russia could use the rupee to buy goods from India. However, full use of CAATSA seeks to prohibit even that and given the control the Americans exercise on the global banking system going full CAATSA would be a major problem for Russia and India. China may be forced to enter into a barter deal with Russia to pay for the Su-35s and S-400 gear but sees that as a major insult.

September 22, 2018: The Chinese hospital ship Peace Ark arrived in Venezuela for an eight day visit to treat some of the many Venezuelans suffering from the recent collapse of the national health system. In late 2011 the first Chinese Navy vessel (Peace Ark) to ever visit Cuba arrived for a working visit while on a world tour. The newly built (in 2010) Peace Ark has continued making short goodwill visits all over the world. Meanwhile, an American hospital ship arrived in neighboring Colombia, where it will stay longer and treat Venezuelan refugees. Venezuela refuses to accept medical aid from the U.S., or any kind of emergency aid because the Venezuelan government insists there is no emergency.

September 20, 2018: A team of 100 Chinese combat engineers and medical service troops have deployed to Congo on a one-year peacekeeping mission. This is the 22nd iteration of a rotational deployment.

September 18, 2018: Venezuela announced that China had agreed to revive the Venezuelan oil industry and increase production. In return, China would get a lot of Venezuelan oil. Details were vague but China has provided a $5 billion line of credit and agreed to send Chinese experts to undertake the restoration of the Venezuelan oil production.

September 17, 2018: The Japanese Navy assembled a force of four warships (two destroyers, a helicopter carrier and a submarine) in the South China Sea for joint exercises with Filipino and American naval forces. This included moving the Japanese warships through waters that China claimed to control. The Japanese warships also held joint training with Vietnamese ships in disputed waters off Vietnam.

September 15, 2018: Congo has declared that cobalt is a strategic mineral and therefore subject to higher mining royalties. This declaration has been expected for several months. The biggest loser is China. Copper royalties will also rise.

 

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