China: The Dreaded Two Front War

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June 4, 2019: The American trade war with China is escalating and that has included an open discussion of grievances that, at the insistence of the Chinese, were never acted on or even discussed openly. That is why this trade war is about more than unfair trade practices. It is also about decades of getting away with stealing trade secrets, violating patents and illegal restrictions on foreign firms entering the Chinese market. Chinese rulers believed no American government would risk the voter backlash, because of short-term damage to the American economy, which would ensue if the U.S. sought to curb unfair or illegal Chinese trade and IP (Intellectual Property) practices. That Chinese assessment was correct until 2018 when it suddenly wasn’t. The worst nightmare suddenly became a reality and at a particularly bad time for China. That was because for the last few years China had been going through a painful economic readjustment from a “growth at any cost” policy to a more prudent “clean up the corruption and accounting fraud before there is a major economic collapse” approach. The Chinese leaders were not just deceiving foreign trading partners but their own people and each other about economic issues. Senior Chinese leaders saw this change in economic direction coming a decade ago and have been trying to clean up their domestic mistakes without triggering a major recession or worse. But now, with the Americans trying to deliver “an offer you can’t refuse” to China, the Chinese find themselves ill-prepared to ignore (as in the past) the foreign threat.

China has several potential weapons to use against the Americans, but none of them are having the desired effect. Rare Earths and telecommunications dominance, two trade war weapons China was depending on to help them out are suddenly becoming Chinese vulnerabilities. Neither of these items is a new threat for the rest of the world and many foreign victims have been quietly preparing for years to retaliate.

Rare Earths are a Chinese monopoly that backfired when China earlier tried to exploit their market dominance. In early 2014 the WTO (World Trade Organization) ruled that China had violated trade rules with its 2010 restrictions on rare earth exports. Back in 2010, China tried to use its near-monopoly on the production of "rare earth" metals to jack up prices. The reaction from the rest of the world was widespread, vigorous and hostile.

"Rare earths" are 18 different ores that are found in tiny quantities all over the world. Because they are expensive to extract and refine, many mining companies don't bother. But in the last century, more and more rare earths have been found to have useful applications in metallurgy, electronics and other areas. In the last few decades, China has extracted rare earths more cheaply than anyone else and driven nearly all foreign rare earth mining operations out of business. But because of the 2010 Chinese threat, other countries began reviving their rare earth mining operations, even if it required government subsidies. In 2012 many of these nations asked the WTO to examine the situation and decide if China’s rare earths policies had violated WTO rules. The WTO concluded that China was guilty but China did not accept this assessment and basically ignored the WTO. The 2019 American trade war brought forth Chinese threats to halt rare earth exports. That fell flat as the Americans said they would cope and are resuming domestic rare earths production while using stockpiles and other suppliers to get by in the meantime.

Then the Americans doubled down by going after one of the largest Chinese trade practice offenders; Huawei. For many American and other Western firms, this is a long-sought retaliation against Chinese smartphone and telecommunications giant Huawei. Founded in 1987 by military veterans who still had connections in high places, Huawei used that form of protection to plunder Western tech secrets and ignore foreign patents whenever possible. Many foreign competitors were told if they wanted access to the growing Chinese market, they had to keep quiet about what Huawei had “borrowed” from them. Most foreign companies complied, but none forgot. Now decades of grievances against Huawei are suddenly threatening the very existence of Huawei, or at least greatly reduce its power and potential. The Americans put sanctions on Huawei specifically, cutting it off from American tech. That means Huawei smartphones can no longer use Android (or at least not the most current versions, or receive updates). American suppliers of microchips are also halting shipments. China says it can produce the needed components domestically and has been developing another operating system for their smartphones. But ramping up the domestic production of needed microchips and getting a new operating system accepted by the market takes time. Actually, getting a new operating system accepted by the export markets will be particularly difficult and even getting domestic users to accept it will not be easy. In theory it can be done but in practice, it is one of many desperate measures the normally prudent Chinese are being forced to fall back on.

The retaliation against Huawei actually began in late 2018 when Huawei executive Meng Wanzhou was arrested in Canada at the request of the United States. Meng Wanzhou is the 46 years old daughter of a former Chinese army officer who was one of the founders of Huawei. Meng was arrested while she was at a Canadian airport transferring from an arriving flight to a connecting one. The Americans have been investigating Huawei for illegally exporting smartphones to Iran and engaging in bank fraud to enable Iran to facilitate foreign trade despite American sanctions against it. Meng Wanzhou, the Huawei CFO (Chief Financial Officer) will be extradited to the U.S. for prosecution if Meng is unable to get a Canadian court to rule against the extradition request. Canadian leaders insist that the law will be strictly observed and justice done. Her lawyers are trying to delay the extradition but her father recently said that he expects his daughter to be convicted and go to jail. Her next court date is in late September.

Huawei has close ties with the Chinese military and government intel agencies and many Western nations are refusing to use any Huawei equipment in their networks because of the potential for hidden features in Huawei gear that facilitates Chinese espionage or military operations in general. Many victims of Huawei dirty tricks are now going public with the details since it is safe to do so with Huawei and the Chinese government on the defensive. Huawei has ordered production cuts as foreign customers realize that importing Huawei is, at least for the moment, not a wise business decision.

The rest of the Chinese economy is also fearful of what comes next. There should no surprise as other nations in Asia have already been taking Chinese manufacturing jobs as China has a growing labor shortage because of the smaller generations of Chinese produced after the “one child per family” program was instituted in the 1980s. The government recently eased up that policy but it was too late. Many more affluent (than 30 years ago) Chinese women do not want to have more than one or two (or any) children. This is a common problem with affluence and has already hit Japan and South Korea. Make a lot of enemies on the way up and you can expect others to hurt you rather help you when you are on the way down, and that is what China faces now.

However, this trade war plays out, China will remain a formidable industrial power, even if forced to play by the rules everyone else does. Even without the trade war, China is faced with the problem of shifting from an economy largely dependent on exports to one that relies more on Chinese consumers. The problem with Chinese consumers is that, despite China still being a communist police state, the new wealth has been achieved by allowing a free economy to thrive. Chinese consumers are not easily manipulated because, unlike foreign suppliers and customers, the Chinese live with whatever China is doing to the foreigners. Chinese are already angry about the mistreatment they have received from the government, like air and water pollution, corruption, abuse of power and so on. While China will eventually come out of all this in one piece, for the moment the government is fighting a two-front war and victory, or survival of the current government is by no means certain.

Tiananmen Memory Wipe Fails

In Hong Kong, thousands of people gathered to commemorate the 30th anniversary of the Tiananmen Square massacre in the Chinese capital. Hong Kong is the only place in China where you can do this. Tiananmen was a spontaneous 1989 demonstration that scared Chinese officials a great deal as they saw it as potentially a Chinese version of the 1989 collapse of communist rule in East Europe. Every year at this time Chinese Internet censors are noticeably more active in a continuing effort to keep any news of the 1989 uprising from the Chinese public. Any discussion of the savage crackdown on pro-democracy demonstrators has been banned since 1989 and has been successful at keeping most Chinese from knowing the details or caring much about it. However many Chinese are aware that something happened. There are many nasty aspects of Chinese history that the Chinese are dimly aware of but not particularly curious about. In China, there is a lot to forget and good reasons for doing so. The 30th anniversary was notable in that Chinese censors apparently noted that the forbidden Tiananmen related chatter in the Chinese Internet and cell phone networks (both of them monitored, and often actively censored) had increased. This prompted senior officials to break their usual silence about Tiananmen and insist that the crackdown made it possible for the Chinese economy to continue growing. The censors noted that these announcements did not have the desired effect. Memory wipes are an ancient Chinese practice and often remarkably effective. But during the last few generations researchers have been uncovering more details about some of the ancient sages, philosophers and such who were effectively wiped from the historical record. Modern technology (lots more records and copies of them, better tools to search and find data) has made the old school memory wipes less effective. The memory of Tiananmen persists and seems to be getting stronger.

North Korea

China is just about at the middle of its patience with its unstable North Korea neighbor. It’s not just what’s happening in North Korea, but also the growing number of those problems that are spilling over into northeast China. North Koreans in China were often considered an asset for the economy and Chinese military intelligence. But since March seven North Korean secret police (MSS) commanders stationed in northeast China have defected. This string of defections was triggered in March when North Korea ordered a crackdown was on MSS personnel serving in China because three of them had defected. These three acted after they found that their secret bank accounts in China (where they stashed cash obtained from bribes and other illegal activities) were under observation by Chinese and North Korean authorities. North Korea sent a larger team of agents to China with an order to apprehend the three MSS defectors “dead or alive.” This panicked other corrupt MSS officials who decided it was time to run. There will apparently be more defections as North Korea seeks to crack down on corrupt officials stationed in China. The key problem here is those North Koreans working in China are there to raise cash for the North Korean government or arranging the smuggling of key items. Many of their schemes are breaking local laws or “understandings” China had with North Korea to allow the MSS to operate in China. Chinese leaders were not amused.

Many North Koreans working in China, when ordered to return home sooner than expected (because of sanctions) are increasingly refusing and risking arrest and possibly death in a North Korean labor camp for refusing to return. The reason is loans they took out to bribe officials to get them a job in China. The lenders will kill you if you do not pay. These North Koreans in China know the economic situation back home has gotten worse because they hear about the free markets offering fewer goods because North Koreans have less income in general. In areas where many factories or mines have closed, most local donju (entrepreneur) merchants are out of business or just scraping by.

The crackdown on smugglers who brought in large quantities of Chinese goods via truck and large bribes for customs agents has meant more opportunities for Chinese-Koreans, who are still allowed to travel to North Korea and back and often do so carrying trade goods which they sell in the markets. This is not a big business because these merchants can really only smuggle what they can carry across the border and that still requires a bribe. Russia is apparently defying the sanctions and not only keeping its Korean workers but accepting more of them. Many Chinese cross the border to work in the Russian Far East province and while Russia needs the workers (few Russians want to live there) Korean workers are cheaper and less of a political threat. China has claims on the Russian Far East while North Korea does not.

Despite the efforts to hide the problem, there are still Chinese, especially ethnic Korean Chinese, who do business in rural areas of North Korea and regularly chat with a wide variety of locals. What these visitors learn is passed on when they return to China. Same with North Koreans who travel to China on business. Despite being warned to not talk about such embarrassing information, enough of these visitors do provide a regular and reliable stream of accurate information about what is actually going on inside North Korea. This is passed on to the Chinese government, which has always had an accurate idea of what was really happening in North Korea and the news for 2019 has been uniformly bad.

June 2, 2019: Off the coast of northern China (Bohai Bay), a Chinese SSBN (ballistic missile carrying nuclear subs) successfully test fired a JL-3 SLBM (sub launched ballistic missile). At the end of 2018 Chinese confirmed that it had successfully tested a new JL-3 SLBM that apparently worked and demonstrated it had a range of 9,000 kilometers (5,600 miles). That is nearly 30 percent farther than the earlier, and less reliable JL-2. The JL-3 may be the first Chinese SLBM reliable enough to use regularly in Chinese SSBNs and allow them to operate at sea regularly and reliably. That has not been possible until now, mainly because earlier Chinese SLBM designs were not reliable.

May 31, 2019: President Duterte of the Philippines, speaking in Tokyo before regional leaders, asked the question everyone is concerned about; why is China claiming all of the South China Sea? The official Chinese position is that they are not claiming but reclaiming what is historically theirs. The Chinese historical documentation for this is fake and China responds to fakery accusations by declaring it all the result of foreign conspiracies. Duterte has never been shy about his desire to have good relations with China but the South China Sea claims are getting in the way with the Philippines and just about every other nation that borders the South China Sea. There are other problems out there. China also denies recent accusations that their new island bases are jamming satellite phones used by Filipino Coast Guard vessels that come by. China also denies complaints about Australian helicopter pilots, operating from Australian warships in the South China Sea, being hit with blinding laser beams sent from Chinese ships and island bases. The Chinese laser blinding efforts have been brought up before, about Chinese warships operating off the Somali coast and in nearby Djibouti. The satellite phone jamming is new but that would be possible because this year China has installed a lot of additional EW (Electronic Warfare) equipment on its South China Sea artificial islands.

May 28, 2019: In neighboring Burma local police have undertaken another crackdown on illegal Chinese banana plantations. In the last week, police have arrested nine Chinese for entering the country illegally in order to manage illegal banana operations. Some Chinese banana plantations are legitimate and registered in Burma to operate. But nearly all these Banana operations break the law in one way or another, usually by illegally expanding into state or locally owned forests and illegally using pesticides and fertilizer. For the northern Burmese tribes, China has rarely been a good neighbor and Burma is the current best example of the worst behavior by a larger neighbor.

May 27, 2019: China revealed that it is joining Russia and North Korea by developing an operating system alternative (to the Windows OS) for its military PCs and, eventually, all government PCs. This would make Chinese PCs more difficult to hack. Russia and North Korea selected Linux variants but China is seeking to create something unique. China also wants to replace Western operating systems used in many industrial situations, including router software.

May 22, 2019: Off the Chinese coast two U.S. Navy ships (a destroyer and a replenishment ship) passed through the Taiwan Strait (the waters between Taiwan and the Chinese mainland) as a form of FONOP (freedom of navigation operation). Since July 2018 the U.S. Navy has carried out Taiwan Strait FONOPs monthly. Until the 2018 FONOP such trips through the Taiwan Strait (which American warships do regularly) were not publicized, something the U.S. had been doing since 2007. The renewal of publicizing these movements annoys China which responded by having their own warships following American warships passing through the Taiwan Strait and increasing Chinese naval ship patrols around Taiwan.

May 20, 2019: In the South China Sea, an American destroyer and an Australian frigate conducted a FONOP (freedom of navigation operation) near Scarborough Shoal, which is 220 kilometers from one of the main Filipino islands (Palawan) and 650 kilometers from Chinese territory (Hainan Island) and according to international law (and a recent international court decision) is Filipino. China issues warnings and accused the Americans of troublemaking. In addition to FONOPs, American, Filipino, Japanese, Australian, Indian and South Korean naval forces held training exercises in the South China Sea recently. There has been a lot more such troublemaking in 2019. There were only five American South China Sea FONOPs in 2018. Since 2015, when Chinese South China Sea claims became a major issue, the Americans have carried out 18 FONOPS there. By early 2019 China had moved more radars and EW (Electronic Warfare) equipment and guided missiles to the Paracel islands. China also declared once more that the Paracels were part of China and China would control its territorial waters. That last 2018 FONOP was near several of the Chinese occupied islands in the Paracels. These islands had long belonged to (and been occupied) by Vietnamese. China took the Paracels by force in the 1970s. In 2012 one of the Paracel islands (Woody Island) was declared the center of Sansha, a new Chinese municipality (city). Sansha/Woody Island is the largest of the Paracels with the being dozens of smaller bits of land (some of them shoals that are underwater all the time). The Spratly Islands to the south are similar. The new Chinese "city" lays claim to two million square kilometers of open sea (57 percent of the South China Sea).

China continues its policy of not interfering with FONOPS but does sent warships to follow the foreign ships. There are two ways China can enforce its sovereignty exert control over its territorial waters. The traditional response is to attack intruders with gunfire or missiles. Then there is the preferred Chinese method of swarming around the intruder with commercial, coast guard and even navy warships and combat aircraft. This has included causing collisions (often just “bumping”). China does not want a war with the United States, mainly because of the economic risks which could lead to more unrest inside China. Interference with seaborne trade and trading relationships in general would disrupt the Chinese economy and threaten CCP (Chinese Communist Party) control. What China has demonstrated is a willingness to do everything short of war, especially if they can remain able to claim victim status.

May 19, 2019: Pakistan, responding to Chinese complaints that about lack of security, has agreed to add more troops to the security forces already assigned to guard over 300 Chinese projects in Pakistan and the 15,000 foreigners (mainly Chinese) who work on them. The existing force has over 15,000 personnel with 9,000 being soldiers and the rest local para-military forces. This will be in addition to the special naval force that protects navy facilities in Gwadar and the waters off Pakistan.

This force has blunted threats of violence against the Chinese but has not prevented four attacks on Chinese projects and personnel since late 2018. The Chinese are running out of patience. In mid-2017 Pakistan also agreed to build a walled and restricted residential area near the port of Gwadar to house up to half a million Chinese that will eventually be working in Pakistan. The Chinese construction work on the new Pakistani Gwadar port facilities are visible to anyone on the ground or flying by and in 2017 it was noticed that some features of the new port and airport facilities are clearly intended for military use. India has long claimed China (despite denials) was planning to use Gwadar as a base for Chinese warships and naval aircraft. Pakistan never had a problem with Chinese military using Gwadar as it helps keep local troublemakers out. Pakistan has assured China that there would be no terrorist violence against Chinese working on upgrading the port of Gwadar and land links north to China. Pakistan is willing to pay a high price to get CPEC (China-Pakistan Economic Corridor) done because it means Pakistan has an ally against Iran and even Western powers that might have some violent disagreement with Pakistan. Best of all China is picking up most of the $60 billion cost. In early 2017 China and Pakistan finally signed the agreement that granted China a 40-year lease on new facilities China is building in the southwestern port of Gwadar. The lease grants China most (over 80 percent) of the revenue brought in by port and free trade zone operations. China usually imports its own workers from China to do most of the work on projects like this. By 2022 China expects to have about half a million Chinese in Pakistan, some of them with their families. The easiest way to provide protection is to have most of them live in a heavily guarded and restricted access area. Gwadar is a key part of CPEC and it has the misfortune of being in a province (Baluchistan) that does not want to be part of Pakistan. China and the Pakistanis try to ignore this by not reporting on non-Islamic terror attacks on CPEC construction projects. The government has long been accused of suppressing news of tribal separatists in Baluchistan attacking government targets and especially those related to CPEC. The separatists claim they regularly carry out attacks on CPEC construction projects, but most of their attacks are still directed at Pakistani security forces and government facilities.

May 18, 2019: Pakistan has, so far this month, arrested at least 30 Chinese men and accused them of enticing or kidnaping Pakistani women to China and sell them to Chinese men to be wives. There a growing shortage of Chinese women in China that has created a market for young foreign women. China's "one child" policy of the last few decades, and the ability to determine the sex of the child before birth led to more (20 percent more) boys than girls being born in China. There's a growing shortage of potential brides, and desperate Chinese men are willing to buy a kidnapped girl from Pakistan (or anywhere else). This crime has become common in most nations neighboring China.

May 17, 2019: Russia is apparently defying the sanctions and not only keeping its Korean workers but accepting more of them. Many Chinese cross the border to work in the Russian Far East province and while Russia needs the workers (few Russians want to live there) Korean workers are cheaper and less of a political threat. China has claims on the Russian Far East while North Korea does not.

May 16, 2019: In Venezuela, China flew in 71 tons of medical supplies. This was an effort to keep the current Venezuelan government in power. The medical supplies will not help the twenty million Venezuelans who are in desperate need of it (and much else, like clean water, food and power). These medical supplies will ensure that the few percent of the population that keeps the socialist government in power has access to adequate medical care. The government can also offer medical supplies to key groups or areas that are becoming a threat. China had flown in 65 tons of medical supplies in March and was apparently pleased with the results.

May 15, 2019: During the first two weeks of May Iran suffered several major economic setbacks that Iranian leaders had not expected. The worst one was China, a major customer for Iranian oil, announcing it would comply with the American sanctions and halt Iranian oil imports as its 180-day import waiver expired. Until mid-May China had not made it clear how it would react and is still indicating that it could keep changing its policy. The Chinese decision was enforced quickly and Iranian tankers in transit or waiting to unload at Chinese ports were told that their cargo would not be accepted. This was a major blow for Iran as China was Iran’s largest oil customer. China was buying nearly half a million barrels a day and was willing to pay in barter (thus avoiding the banking sanctions). China has lots of items, including high tech goods that Iran needed. Now all that was gone. This bad news came at the same time that European allies were admitting that their new financial system, designed to get around American economic sanctions and allow payment in hard currency, was not working and not likely to. The Americans were able to block such schemes.

May 14, 2019: In the South China Sea, American and Filipino warships trained together near Scarborough Shoal but not close enough to qualify as a FONOP. The joint exercise did annoy the Chinese but recent Chinese attempts to regulate fishing throughout the South China Sea more than annoyed the Philippines and other nations whose territorial waters are now claimed by China.

May 13, 2019: In Thailand, the army announced it is buying 60 American Stryker 8x8 wheeled armored combat vehicles. Thailand will pay $2.55 million each for 37 of the vehicles but the other 23 will be provided free as part of American military assistance. The Thai military is seeking to maintain its relationships with its long-time military ally while also developing similar relationships with China. Most Thais prefer the Americans to the Chinese but the Thai military needs an alternative source of equipment and military cooperation in case its plans for long-term military dominated rule in Thailand lead to an anti-military revolution. Moreover, many Thai generals don’t trust the Chinese as much as they do the Americans.

May 12, 2019: In the northern Burma (Shan state), police conducted three raids and rounded up 188 Chinese found to be in the country illegally. Some weapons and drugs were also seized. The Chinese were operating illegal gambling and drug operations in Burma. Some of the more recent rackets involve illegal casinos and distributing drugs (as well as getting the drugs into China). Then there are the people traffickers who entice or kidnap Burmese women to China and sell them to Chinese men to be wives. There a growing shortage of Chinese women that has created a market for young foreign women. There's a growing shortage of potential brides in China and desperate Chinese men are willing to buy a kidnapped tribal girl from northern Burma (or anywhere else). Some of the Chinese criminal gangs have become ambitious, bringing more than a hundred of their Chinese members into northern Burma to run these operations. That also offends Burmese as the Chinese almost always bring in their own labor force to build Chinese financed projects. Annoying so many Burmese has consequences as many Burmese are willing to tip off the police about what Chinese gangsters are up to. The Chinese will try to bribe the police but for major police operations that is often impossible (or simply too expensive).

May 11, 2019: In southwest Pakistan (Baluchistan), at least three Baluchi separatists attacked a hotel in the Chinese controlled port city of Gwadar, leaving a policeman, four civilians and three attackers dead. The Pakistani government has been reluctant to release details of this attack.

May 9, 2019: In the Central Pacific, the United States seized a North Korea cargo ship (the 17,000 ton Wise Honest) off the American island of Samoa. The ship was seized on the high seas using American laws that allow the seizure of such assets that were used in illegal activity. This type of seizure has long been used against international drug smuggling gangs. The Wise Honest has been caught smuggling several times but North Korea thought the Americans would not go so far as to seize it, or any of the dozen or so North Korea tankers, bulk carriers and freighters used for illegal activities. The Americans adopting these seizure tactics can do major damage to North Korean smuggling efforts because the Americans, Japanese, South Koreans and Chinese have made no secret of the fact that they are tracking and identifying North Korean ships engaged in smuggling. The Americans have a list and most of North Korea’s small merchant marine fleet is on it. North Korea demanded that its ship be returned and was ignored.

 

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