China: Offers You Can Refuse

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August 19, 2021: In the South China Sea, a late July British-led international FONOP (freedom of navigation operations) in the South China Sea was revealed to be less of a proper FONOP than advertised. None of the eight ships in the task force came within 22 kilometers of any of the Chinese islands (many of them artificial) built as military bases and declared sovereign Chinese territory, despite international treaties China agreed to and a 2016 international court ruling against China. In past FONOPS the American and other warships deliberately ignored the 22 kilometer “territorial waters” rule, much to the displeasure of China. The commander of the British task force apparently had unpublicized orders to limit the impact of the FONOP, which is meant to confirm international access and defy Chinese claims to offshore resources across most of the South China Sea and control over who enters these waters. The late July FONOP was carried out by a carrier task force led by the new British carrier Queen Elizabeth, accompanied by seven other ships, including an American destroyer and frigates from the Netherlands, Britain and Singapore. There were also two other Singapore Navy ships (an amphibious assault vessel and an offshore patrol vessel. The carrier is also accompanied by a British SSN (Nuclear Attack sub) but the status of that vessel is rarely discussed because it is submerged nearly all the time.

Another problem with Chinese attitudes towards borders and territorial claims is going on along much of the 4,000-kilometer Indian border. In late 2018 China and India agreed to establish multiple hotlines along their border and also between the defense ministries of China and India. On August 1st the sixth of these hotlines was established. It connects military commanders in India (Sikkim) with their Chinese counterparts across the border in Khamba Dzong (Tibet). These new hotlines were a revival of a failed 2016 effort to work out and agree 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 several thousand armed and unarmed confrontations over the last decade as one side or the other accuses “foreign troops” of crossing the LAC. The 2016 agreement fell apart when India went ahead, despite Chinese protests, and expanded its military ties with the United States while also undertaking massive improvements to military infrastructure near the border in the areas where Chinese troops were a growing presence and a constant threat. China had taken the lead improving roads and stabling more military bases close to the border. India was catching up after 2016, building over three dozen new roads to the more remote border areas. New bases for ground troops and warplanes were built and training exercises now included tests of how well ground and air reinforcements could reach the contested border areas. China considered all this an act of aggression. The need for hotlines was now more urgent than ever and after two years China agreed to resume the hotline negotiations.

August 18, 2021: The government has begun a long-anticipated rescue effort for state-owned banks and other finance firms that are considered “too big to fail”. Such firms are defined as likely to trigger failures among large firms and lead to a major recession. The first rescue involved Huarong Asset Management; one of four asset management firms established by the government in 1997 to manage the growing bad debt problem that became very visible during the late 1990s financial crises throughout East Asia. Huarong is getting a $23 billion loan to deal with current and near-future debt and provide time to carry out an orderly sale of assets. The immediate trigger for the bailout was the release of 2020 financial results, which showed Huarong losing $16 billion and crippling its ability to meet financial obligations in 2021. If that happened Huarong would be bankrupt and that would reduce international confidence in Chinese financial institutions and the $12 trillion Chinese credit market. The severe problems with Huarong began in 2018 when Lai Xiaomin, its director since 2012, was charged with corruption. The investigation and prosecution revealed that Lai Xiaomin had received over $250 billion in bribes between 2008 and 2018. His trial was a major embarrassment for the government because Lai Xiaomin was a senior party official and a bank regulator before he took over at Huarong. He was sentenced to death and executed in January 2021.

The government has been playing down the fact that bad (unlikely to be repaid) loans totaling several hundred billion dollars threatens the stability of the entire banking system. A growing number of large firms have been unable to repay bonds that came due recently. This sort of thing would not be ominous except for the fact that the defaulting firms are carrying dangerously high debts. Most of that debt is held by banks that have dangerously large amounts of bad debt. Worst case is a number of these debt-laden banks cease operations, causing other such banks to also fail. On paper China has the resources to handle this sort of thing but as a practical matter large cash reserves are only part of the rescue solution. A greater problem is that no one knows how much bad information many banks have been reporting. A banking crash would be an unpredictable collapse of banks and other financial institutions that could disrupt, or even paralyze, the Chinese financial system for an extended period. The government has tried to deal with this vulnerability gradually but that plan was disrupted by the economic costs of covid10 in China, escalating disputes with major trading partners and Lai Xiaomin and the looming collapse of Huarong Asset Management. China has been aggressive overseas, especially with high-risk investments and threatening financial retaliation against countries that do not support China. This use of financial diplomacy often backfires when larger victims, like Australia, push back. Japan suffered a major debt crisis. A growing number of Chinese government and business leaders believe China is headed for the same fate as Japan in the 1990s, when a real estate bubble triggered a violent and long-lasting reduction in economic growth. The Japanese had allowed a huge real estate bubble to develop and when economic growth stalled for a bit a lot of the real estate loans became bad debt and that created an economic crisis Japan is still dealing with. The Japanese were angry and, as a democracy, elected new politicians. China is not a democracy and a banking crisis similar to what Japan went through in the 1990s will create a lot of angry Chinese who cannot, as the saying goes, “vote the rascals out (of office)”. In China that degree of public anger means revolution, or at least a lot more disorder. China also has a huge real estate bubble, very inefficient, compared to most Western nations, government spending policies and rapidly escalating labor shortages. There are also deficits in social spending, like taking care of the impoverished elderly. Chinese problems, in addition to being similar to those of Japan, are also considerably worse because of greater corruption, pollution and political oppression. Japan is a democracy while China is still a communist police state and that means the crises in China will not be handled peacefully as it was in Japan. Worse, for Chinese and the rest of the world, is that the Chinese financial crisis may be as poorly managed as the many state-owned firms that created the financial risks. As a police state, with the largest Internet censorship operation in the world, and laws punishing those who report news the government disagrees with, it takes longer for the details of high-level corruption to reach most Chinese. A financial system collapse would be impossible to hide, which is the main reason Lai Xiaomin was executed and the government declared the debt-crisis a matter of national security.

August 17, 2021: China has increased the pace of building a new petroleum pipeline between China and North Korea. The existing one was built in 1975 and has long needed replacement because it runs under the Yalu River. For most of 2021 China had slowed or halted construction work as a way to pressure North Korea to do what China tells it to do.

August 16, 2021: Noting the recent takeover of Afghanistan by the Taliban, China warned Taiwan and other nations that opposed Chinese territorial demands, especially in the South China Sea, that the Americans would abandon them as well. Not exactly the same situation but it made for a scary press release.

August 12, 2021: Off one of the Pescadores (Penghu) islands between Taiwan and China, a Taiwan coast guard ship challenged Hexing 566, a small Chinese fuel/supply ship, as it entered Taiwanese waters. The Chinese ship refused to turn around and it was boarded and the crew of seven arrested. The Hexing 566 was taken to a nearby port and impounded.

August 5, 2021: The government quietly ordered Chinese state-owned firms to violate some of the American economic trade agreements and stop buying some American products.

August 4, 2021: In the south, across the border in India (Ladakh State) Chinese forces pulled back their troops from Gorga, one of the key bits of disputed territory in Ladakh. Both nations had concentrated thousands of troops along the shore of Pangong Lake and in September 2020 both agreed to halt their operations on the Indian border and continue negotiations. The 12th round of these negotiations recently ended and China quickly carried out its agreement to pull back from Gorga. Both sides declared victory but China was the actual winner because now a thousand square kilometers of additional Indian territory along Panglong Lake is under Chinese control. By the end of 2020 the two sides had agreed to pull most of their forces back because of the frigid weather in the high mountains surrounding Pangong Lake. China has been slow to carry out all those withdrawals. These mutual withdrawal negotiations began in mid-2020 and China has regularly reneged on all or part of the withdrawal agreements. China would, however, agree to another round of negotiations. The 11th round of negotiations took place in April 2021 and China again refused to carry out all the agreed-on withdrawals. With the recent Chinese withdrawal these are still two positions that China had agreed to withdraw from but has not yet actually complied with yet. These numerous and often futile negotiations are standard tactics for China, which often end with China permanently in possession of some of the disputed territory.

This was not unexpected and was another example of the Chinese SSSN (Shove, Stop, Stand Fast, Negotiate) tactics, which have once again prevailed, as they have many times in the recent past. China initially expressed no interest in retreating but was willing to negotiate. These tactics are particularly when the cold weather season approaches, putting India under intense domestic political pressure to accept the Chinese offer. China believes they will prevail by repeating their SSSN and push Indian forces out of all the disputed areas along their common border. SSSN is slow and it would take decades to grab all the Indian territory claimed by China. As long as China maintains a stronger military than India and can keep more troops near the disputed border areas, India will not feel confident to defend forcefully and risk a large-scale battle on the border.

While China has been withdrawing troops from forward positions that have them within sight of Indian forces, there has been a continuing build-up of logistical capabilities. China is building more roads to the border areas and establishing more supply storage and distribution facilities. Since the Ladakh dispute is largely along the shores of Pangong Lake, China has increased its naval capabilities in this lake, which is largely in Tibet and connected to Chinese claims on Indian territory. This is the longest lake in Asia and part of the 134-kilometer-long lake extends 45 kilometers into the Indian Ladakh region. The portion of the lake shore in dispute has no native population. The only people who visit the area are soldiers from India or China. For that reason China is moving more armed boats to the lake, some of them capable of carrying fifty troops and their weapons.

Indian efforts to get China to negotiate a more permanent settlement of border disputes are not working. This is again demonstrated as India tries to get negotiations going over the new dispute on the shore of Pangong Lake. The Chinese will issue vague press releases but they will not negotiate a final settlement. Even when they negotiate a deal the Chinese tend to see these “permanent” agreements are temporary ceasefires.

August 1, 2021: Down south in Myanmar (Burma), the military declared themselves the provisional government, six months after they forcibly replaced the elected government. China promptly recognized the provisional government and just called it “the government”. There were vague assurances from the military government of new elections but few voters believed the voting would be free and fair. The Burmese generals found that this coup was not as easy as the last one in 1962. This time there was much less compliance and a lot more defiance. In fact, most Burmese acted the way they voted, despite the greater firepower and, so far, resolve of the generals. The army has trashed the economy and put more and more Burmese out of work and without access to food, the Internet or the banking system. The resistance continues. The generals have become more dependent on their Chinese business partners. China had also been partners-in-crime with the generals before the last military government ended in 2010 and elections were allowed. The Chinese connection may be the vital key to victory, or fatal flaw, in the coup plan. It all depends on how much Burmese are willing to resist China. The military imported $2.5 billion worth of military gear since 2010, China provided 58 percent of it and Russia 33 percent. Now these weapons were being used against the nationwide uprising. China is also offering something new they have developed; a very effective and extensive “Big Brother” level surveillance in China and is willing to export that tech. An elected Burmese government would never divert the huge sums required to purchase and install the surveillance system. The Burmese military is another matter, especially now that it has taken over the government again. With the military back in charge China sees major export sales to Burma looming. Better surveillance capabilities will provide immediate help to suppress the rebels. China faces huge economic losses if the current coup fails. China is a major foreign investor in Burma and those projects often displace Burmese illegally and without compensation.

July 28, 2021: T he majority faction of the Afghan Taliban sent a team of senior officials to China where they met with Chinese foreign ministry officials to follow up on the recent Taliban declaration that they considered China a friend and that the Uighur Moslems from northwest China would no longer be allowed into Afghanistan once the Taliban took over. This Taliban faction has its headquarters in Pakistan and has enjoyed sanctuary there since 2002. About a third of the Afghan Taliban do not trust Pakistan or any of their friends. One of these dissident factions actively allied itself with Iran. There is a Pakistani Taliban that wants to replace the current Pakistani government and actively attacks Chinese projects in Pakistan. The Pakistan-backed Afghan factions are eager to do business with China. The main Chinese demands are to ensure that Chinese investments are unmolested and that heroin and other drugs produced in Afghanistan are not smuggled into China. The Afghan could not work out a deal with China, at least until they actually controlled Afghanistan, especially the north, where the tiny (76 kilometer) border with China is.

July 25, 2021: North Korean leader Kim Jong Un has apparently agreed to obey China from now on. China has openly criticized Kim for not adopting economic and political policies that have worked in China. Kim had earlier refused because allowing a more open and free economy as well as a more rational spending policy would mean the end of the North Korean nuclear and ballistic missile program and a weakening of the police state control the Kim family has installed over the last 70 years. That led to more and more economic sanctions. In 2021 China was the only donor of food. Until recently, China refused to send food because North Korean leader Kim Jong Un was not following orders. Kim recently wrote several letters to the Chinese leader that convinced China that North Korea would obey in the future. Among the Chinese demands was that Kim stop arresting or firing senior military and political officials for being “pro-Chinese”. Kim has long believed that China was developing friendly ties with many senior North Korea officials in order to prepare for a possible coup against the Kim family because of continued mismanagement, incompetence and disregard for China or the North Korean population. China believed that North Korea was going to end up like the Soviet Union and other East European communist governments three decades ago when all those communist governments collapsed because of poor economic performance and mismanagement in general. Kim Jong Un became obsessed with going his own way because that has long been important to Koreans in general, especially with regard to “Big Brother” China. Covid19 and continued economic pressure from China and the United States proved too much for Kim to handle. Or so it appears. For Kim to remain in China’s good graces Kim must obey all Chinese requests or else. This will not be good for North Korea and the ruling Kim dynasty. North Korea expects some prompt Chinese help with covid19 and the economy. North Korea has not been able to obtain covid19 vaccine because it does not trust the Chinese or Russian vaccines and insists on obtaining Western vaccines with a proven track record. That has been difficult, mainly because of the difficulty outsiders encounter in dealing with North Korea. The other problem is the damage done to the economy because of covid19 and continued sanctions. North Korea has a miniscule GDP (about $25 billion in 2020), which is pathetic compared to South Korea’s $1.6 trillion that is one of the ten highest in the world. On a per-capita basis South Korean GDP is more than 20 times larger than North Korean. Per capita GDP of China and Russia is more than five times larger than North Korea. North Korea is an island of poverty in a sea of prosperity.

July 24, 2021: China complained that the American TV network (NBC) that had bought the U.S. broadcasting rights to the current Olympic Games was not showing a map of China that included Taiwan and the South China Sea as Chinese territory. Taiwan has been independent of China for over 70 years and the Philippines calls large portions of the South China Sea that they have a legal claim to the West Philippine Sea.

July 23, 2021: Iraq revealed that China was the major customer for Iraqi oil, currenting receiving 40-44 percent of what Iraq exports.

 

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