China: Priorities Foreign and Domestic

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December 14, 2021: The traditional Chinese name for their country is Zhongguo, which is usually translated into English as “middle kingdom”. But a more literal and accurate translation is “everything under the heavens.” Until the 21st century this mainly meant adjacent land areas. But now China points out that “everything” means the South China Sea, portions of India and the Russian Pacific Coastal region. The Zhongguo tradition also means China does not have allies, just powerful trading partners (the West in general) and client states like North Korea, Pakistan and others who deny the status, like Russia. That has always been the Chinese outlook and it hasn’t changed.

Some things have changed. China finally underwent the Industrial Revolution during the last three decades. While that made China an economic superpower, China is no longer a self-sufficient "continental" power, as it had been for thousands of years. Now China is dependent on international trade to keep its economy going. Treating foreigners with disdain and often deceiving and exploiting them has consequences. The most immediate example is how China is dealing with its current debt crises and the possibility of a major economic disruption. China is seeking to make its enemies suffer for this, instead of itself, and so far that appears to be working.

Less hostile foreigners can also be a problem. This can be seen in the problems China is having with its two nuclear-armed clients; Russia and Pakistan. Both these clients have used their connections with China to carry out aggressive actions against weaker neighbors.

China supports this misbehavior because China is also an empire trying to reclaim lost territories. That some of those territories are currently Russia’s Far East is not officially discussed in Russia or China but is no secret to many Russians and Chinese. That is a problem for another day as currently Russia and China support each other’s imperial ambitions in Ukraine and the South China Sea and help each other out to deal with any associated problems, especially the UN or economic sanctions.

Another reason China is watching Ukraine carefully is because China is violating an international maritime borders treaty it signed by claiming all the South China Sea. What happens to Russia for violating the 1994 agreement to protect Ukrainian borders in return for Ukraine getting rid of its Cold War era nukes is of interest to China. Russia simply says the 1994 agreement does not apply and that attitude will influence what China does with its numerous offshore territorial disputes. Another problem with violating the 1994 agreement is the message it sends to states like Iran and North Korea. The message is that if you really want to keep invaders out and dominate neighbors, you need nukes. North Korea is a minor Chinese client, Iran is neither minor nor a client and could be a problem if it builds nukes,

As for nuclear armed Russia, earlier threats to use nukes against the NATO “threat” caused momentary consternation but were soon discounted because that was all the Russians had to deter real threats while NATO, the United States and an independent minded Ukraine were not real threats to Russia. When informed that NATO, including the Americans, would respond militarily to a Russian invasion of all Ukraine, the Russia leader responded that such an attack was not going to happen because the Russian plans and concentration of troops on the Ukrainian border were an effort to see what Russia could get away with while avoiding a major war that Russian could not afford. Or something like that. With the Russians it is more realistic to depend on what they can do right now and not predictions of what they might do. Russia has not given up on its plans to regain control over Ukraine and is concentrating on keeping Ukraine weak and foreign allies unsure of what they face.

China sees major economic opportunities in Afghanistan but questions the degree to which its client Pakistan was controlling things there. Pakistani generals told China that the new IEA (Islamic Emirate of Afghanistan) government was controlled by Afghans who were veteran Pakistani agents. This included a senior member of the Haqqani Group who has been running the Taliban for several years and is now a senior member of the IEA government. Despite all that Afghanistan is still a violent, unpredictable place. The IEA, and Pakistan were dismayed to find the government Afghan treasury empty (or nearly so) when they took over. The corruption Pakistan, the Taliban and heroin cartels used to weaken the former IRA (Islamic Republic of Afghanistan) had done its job too well and the corrupted officials either moved their illicit fortunes to foreign banks or invested in property and other assets in Afghanistan, where there were few buyers able or willing to purchase them from the IEA. This was discovered when the IEA sought to auction off some of these assets to pay overdue bills for electricity imported from northern neighbors.

There is no money to pay skilled government personnel that the IEA wants (and often needs) to keep their new government going. Over $10 billion in foreign aid was kept in foreign banks by the donor nations and disbursed as needed but often delayed because of the continued corruption in the IRA government. For nearly two decades foreign donors have supplied most of the cash needed to keep the government going. The heroin cartels never represented more than ten percent of the GDP and were already “taxed” via the bribes paid to IRA officials to leave alone heroin production and smuggling to foreign markets via Pakistan. The Pakistani military got paid as well. The leaders of the 1990s Taliban understood this, some Taliban leaders of the current generation do as well, and that is one reason why the IEA leadership has so many factions that disagree with Pakistani control and how that is keeping foreign donors away.

Pakistan has become dependent on China for weapons, economic investment, and protection from foreign (including UN) economic sanctions. This support will disappear if Pakistan cannot deliver an Afghanistan stable enough for Chinese firms to operate. China always demanded a similar performance from Pakistan when it came to terrorist violence against Chinese in Pakistan. That violence still occurs and appears to be increasing because there are more attacks in Pakistan by Islamic terrorists or Afghan resistance groups based in Afghanistan. China sees the IEA situation more clearly than the Pakistani generals do and agrees with potential foreign donor nations that the IEA is a bad place to send aid or investment money. Several recent conferences by neighboring nations to discuss the IEA situation seem to agree that the IEA will be less successful than the 1990s version, which was expelled from Afghanistan shortly after September 11, 2001, when the Americans backed the opposition in northern Afghanistan and got Pakistan to back off, for a while. The Pakistani military saw the recent takeover of Afghanistan by the IEA and heroin cartels as a great victory. Everyone else, including the political opposition in Pakistan and all potential donor nations disagree.

December 10, 2021: Western credit rating agencies have declared that Evergrande, a major Chinese real estate firm, sitting on over $300 billion of bonds and other forms of debt, was now officially in default and unable to repay its debts. Evergrande debt is as toxic as it comes and in a normal world that can trigger the long-feared financial crisis in China. The Chinese solution was not normal. The government declared the situation was under control and that apparently means priority will be given to the many individual Chinese who are at risk of losing large down payments on apartments Evergrande has not completed or in some cases not even begun construction on. The fewer individual Chinese hurt by the Evergrande default and less damage is done to the reputation of other major Chinese real estate developers. Chinese banks and institutional investors are next in line and they are expected to write off (forgive) as much of the debt as they can. The government insists on this. Foreign bond holders, who have between ten and fifteen percent of this debt are last in line and the government is ordering Evergrande, and other Chinese real estate firms with a lot of foreign debt holders, to handle this as best they can, even though this “screw the foreigners” approach will make it more difficult for Chinese firms to get foreign investors in the future.

Over the last two months Evergrande bonds went from “high yield” (junk bond) status to default. The junk bond segment is the first to fail when a national economy suffers from too much bad (unlikely to be repaid) debt. China can avoid the bankruptcy of one real estate firm, but only for so long because several other similar firms are also close to default.

The Chinese bond market is the second largest in the world, after the United States. With debt, quality (the ability of debtors to repay) is a major factor. The quality of Chinese debt is much lower than the U.S. or the West in general and the extent of this problem was deliberately hidden by debtors, especially local governments, for decades. This makes a Chinese real estate bubble far more dangerous than previous ones encountered in major economies. China was known to have been developing a novel situation to this and now it appears that solution involves the government deciding which Chinese institutional bond holders will have to eat (absorb) a portion of bad debt in order to spare the millions of individual Chinese from suffering major losses. While this approach maintains popular faith in the financial system, Chinese institutional investors (banks, insurance companies, investment funds and endowment funds) will struggle to survive and if any of these institutions fail, many individual Chinese will see the value of their insurance and stock market holdings shrink.

The government has other problems, because covid19 caused more unemployment and bankruptcy of Chinese firms dependent on export sales. Transportation firms have taken major losses because s ince covid19 first appeared in late 2019, China has taken extraordinary measures to reduce overseas travel by Chinese and visits by foreigners. For example, so far in 2021 air passenger traffic in and out of China has declined 98 percent compared to the same period in 2019. Some airlines have been able to get more air freight work but not enough to make up for the last passenger traffic. This foreign travel ban continues because the various mutations of covid19 get back into China via foreign travel. Some must be allowed, but 98 percent of it has been declared expendable. The keeps a lot of Chinese consumer spending, that normally goes to tourism, at home where is more desperately needed,

Another embargo has been placed on information. Since September new laws punish those who report information the government disagrees with. That means it takes longer for the details of high-level corruption of government approved financial misbehavior to reach foreigners and most Chinese.

A financial system collapse would be impossible to hide, which is the main reason a major government debt management official was executed earlier in 2021 and the government declared the debt-crisis a matter of national security. That explains the emphasis on maintaining Chinese morale and faith in their government while trying to make foreigners absorb a larger portion of the debt. In this case the national security threats are both internal and external.

December 9, 2021: Government controlled news outlets confirmed that China would attack any foreign troops that came to the aid of Taiwan if there was a war between China and Taiwan. The Chinese don’t like to use the terms “invade” or “attack” when discussing Taiwan because the official Chinese position is that Taiwan is a Chinese province that has been in a state of rebellion and outside the control of the CCP (Chinese Communist Party) since 1949. The CCP has been patient with the unruly Taiwanese but may be compelled to use force to restore Taiwan as a part of China. This announcement is a way to measure the resolve of the Americans and to see how many American allies in the region will also aid Taiwan and be the cause of a regional war that the CCP will be forced to resolve as quickly as possible. China must be careful with pledges like this because most Chinese know that a major war, no matter how well China does initially, will mean economic chaos inside China with lots of unemployment and the risk of the conflict going nuclear. Since World War II. No major power with nuclear weapons has directly attacked another.

November 24, 2021: In the North Korea capital, most foreign embassies have closed because of the covid19 lockdown. There are at least nine embassies still operating, most with a much-reduced staff. Russia and China still have a lot of embassy personnel there but now Russia has evacuated most of the embassy staff, leaving only two diplomats and some support staff. Shortages of basic supplies is part of the problem but the other issue is that there is not much for the Russians to do. China is the largest investor and trade partner with North Korea and its diplomats have much more to do.

November 22, 2021: Chinese leader Xi Jinping and Filipino president Duterte clashed at a special virtual (teleconference) China- ASEAN (Association of Southeast Asian Nations) meeting. This event was to commemorate three decades of Chinese relationships with the association members. Duterte accused China of using intimidation to conquer and take control of the South China Sea. Specifically, he accused Chinese coast guard vessels of using water cannons to prevent Filipino ships from resupplying the small military garrison on a grounded LST at Second Thomas Reef. Xi responded that the coast guard vessels were protecting Chinese territory. Xi ignored international treaties and a 2016 ruling by an international tribunal that the Chinese claims were false.

Most ASEAN members agree with this assessment but China responded by demanding that outsiders (like the United States) do not interfere with a local issue. China has put a lot of economic and diplomatic pressure on ASEAN members to either back China or not openly oppose Chinese efforts to take possession of the South China Sea.

Founded in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand, ASEAN has since then expanded to include Brunei, Burma, Cambodia, Laos, and Vietnam. Most of these nations oppose China's claims in the South China Sea. China long had a staunch (and paid for) ally in ASEAN. Cambodia blocks attempts to unify and oppose China. XI also clashed with other ASEAN leaders over the absence of Myanmar at this meeting. That was because China and ASEAN disagree over the legitimacy of the new Myanmar military government, which forced out recently elected leaders who wanted to reduce the power of the military and Chinese interests inside Myanmar. Cambodia is not as staunch ally as China would like and the failure to get ASEAN to support the new Myanmar government was a very public rebuke of China for its use of outlaw tactics. The day after this clash between Duterte and Xi, the Filipino team on the Second Thomas Reef LST were resupplied. The Chinese coast guard ships were still there but they did not interfere. Chinese media proclaimed the China-ASEAN virtual meeting a great success without dwelling on arguments Xi got into with over Chinese misbehavior against several ASEAN members.

November 21, 2021: China confirmed five of its citizens were kidnapped in an armed attack on a gold mine in eastern Congo (South Kivu province). One police officer may have been killed in the attack. China was less willing to discuss what happened the day before when Congo president Felix Tshisekedi called for a ban on issuing mining permits until Congo’s mining ministry undergoes an audit. Tshisekedi said the government must combat fraud and theft in the mining industry. He specifically targeted reforming the administration of the mining registry system which certifies and records mining concessions. Tshisekedi’s demand for a ban on new permits follows his call for a complete review of the multi-billion dollar “infrastructure-for-minerals” deal Congo struck with China during the Kabila administration.

A Congolese court sentenced two Chinese nationals to ten years and three months in prison for procuring Chinese women to work as prostitutes in Congo. A Congolese official received a ten-year sentence for giving the Chinese conspirators “courtesy visas” for the Chinese women. The court said the official had no authority to grant the visas. With a prostitution procurement trial rare in Congo, the case had drawn the attention of the local media and comments on social networks.

November 11, 2021: While India has moved more troops to face Chinese forces on the disputed borders in the northwest (Ladakh) and northeast (Arunachal Pradesh), India is still falling behind China in building infrastructure to quickly move additional supplies to the new ground and air units near the borders.

November 10, 2021: China put three Yaogan 35 satellites into orbit using one SLV (Satellite Launch Vehicle). This launch broke a record as it was the 43rd Chinese SLV used this year, which was the largest in any previous year and there are still two months left in 2021. China plans to introduce an SLV like the American reusable SpaceX SLVs and once that becomes a regular practice China hopes to dominate the world market for SLV use.

 

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