More trouble between China and Japan

S P SETH

Since I last wrote on this subject (Daily Times, November 20), the situation has further deteriorated requiring just a spark to ignite a bonfire. I am referring here to the sovereignty dispute between China and Japan over an outcrop of uninhabited rocks jutting out of the East China Sea, which Japan and China respectively call Senkaku and Diaoyu islands. Late last month, China declared an “air defence identification zone” covering a vast swathe of East China Sea over and around the disputed islands, including some in South Korea-claimed maritime zone. What it means in effect is that any foreign aircraft entering China’s zone will be required to notify Chinese authorities of their flight plans as well as maintain radio contact or else face unspecified “defensive emergency measures”.

With Japan adamant about its sovereignty over the disputed islands, China apparently decided to force the issue with its air defence zone. Whether or not this policy was clearly thought through with a follow up Plan B in the event that China’s directive was flouted, is not quite clear. Indeed, the US, Japan and South Korea all decided to ignore the Chinese identification zone by flying their military aircraft without communicating their flight plans, with one important difference though. Which is that the US authorities have advised their civilian airlines to comply with the Chinese directive but insisting that this does not mean the US acceptance of China’s position. Japan, though, has advised its airlines to ignore the Chinese directive. After appearing to fumble on its follow up response, Beijing is slowly refining its approach which is a combination of avoiding any military action while reinforcing their position with scrambling fighter jets and carrying out “routine patrols”. Beijing seems to be conveying the message that it has the capacity to enforce its security environment if it were threatened.

An important motive for China to declare its “air defence identification zone”, apart from putting Japan on notice, likely was to test the limits of the US resolve, in what Beijing considers essentially a bilateral territorial issue between China and Japan. The US has tried not to take a formal position on the sovereignty issue but has acknowledged Japan’s administrative control as well as stating unequivocally that the Senkaku islands are covered under the US-Japan security pact. In other words, the US will be bound militarily to protect Japan if these islands came under attack from China. During his recent Japan visit, later followed by trips to China and South Korea, the US Vice President, Joe Biden, was critical of China’s action as an effort to “unilaterally change the status quo”, saying that it had raised “the risk of accidents and miscalculation.” China, though, has reportedly called the new zone a fact of life that the world needed to accept.

 China’s action has also invited criticism from Australia as a close ally of both the US and Japan. And it invited a strong reaction from Beijing and a stern warning to Canberra to “correct” its mistake and avoid damaging their bilateral relationship. Australia appeared unfazed at the Chinese reaction, with its Foreign Minister, Julie Bishop, arguing that Canberra has a stake in the region and therefore, opposes “action by any side [referring obviously to China] that we believe could add to the tensions or add to the risk of a miscalculation in disputed territorial zones in the region.” Indeed, Australia has taken a very strong stand despite some concern that it could seriously affect economic ties with its largest trading partner. But Prime Minister Tony Abbot pointed out “China trades with us because it is in China’s interest to trade with us.”

Abbot has been much more forthright in both emphasizing the centrality of Australia’s defence ties with the US and Japan as well as the dangers arising from China’s unilateral move to change the status quo. To quote Abbot, “We are a strong ally of the United States, we are a strong ally of Japan, we have a very strong view that international disputes should be settled peacefully and in accordance with the rule of law and where we think this is not happening, or it is not happening appropriately, we will speak our mind.” In China’s view, this trilateral US-Japan-Australia nexus amounts to containing China. There is a strong sense in China that a number of regional countries simply can’t stand its rise. As Zhu Feng, a professor of international relations at Peking University reportedly said, “Whatever China does, it always attracts critics. Let the critics go on, and we’ll do what we do.” He added, “China is going through its rise--- we just have too many jealous neighbours.” In other words, China is not going to worry too much about its neighbours and, for that matter, the United States.

There are two important factors guiding this national view. First is China’s strong sense of humiliation in the past by foreign powers, focusing most on Japan for its wartime crimes. What follows from this is that China must be strong and united and not show any weakness in pursuing its “core” interests, including in the East China Sea. China is, therefore, keen to prove to itself and to the world that it is not going to be trifled with any more, and must re-establish its pre-eminent ‘historical’ role in the region. The problem, though, is that China’s perception of its ‘historical’ role is coming into conflict with the concept and reality of today’s nationalism, which is at the core of international relations. Some of China’s neighbours, that might or might not have been tributaries at one time of China’s Middle Kingdom, as it was then known, are now independent and they contest China’s ‘historical facts’.

In the meantime, the US has been doing some tight rope walking. Its earlier call on China to “rescind” its decision on air flight zone doesn’t appear to have been repeated. On the question of civilian flights, as noted earlier, the US authorities have advised their airlines to notify their flight plans as required by the new Chinese directive, but without conceding China’s territorial position. During his recent visit to Japan, China and South Korea, Biden seemed keen to contain any escalation over over-lapping air defence zones of these three countries. While eschewing any counter-measures, military or otherwise, Biden was at pains to emphasize to its regional allies that the US’ Asia-Pacific “pivot” or rebalancing, as it is now called, remains solid.

In other words, the US nexus of security alliances with its Asian partners remains a corner store of its Asian policy. At the same time, Beijing has been told that US-China relationship is crucial for Asia-Pacific region. These signals might appear contradictory and they are, but the US believes that it can somehow pull through its policy of competing and contending with China while still creating sufficient common ground to maintain peace in the region. It is a herculean task, and if the experience of history is anything to go by, it is unlikely to work over a period of time. 

Note: This article first appeared in the Daily Times.

Contact: sushilpseth@yahoo.com.au  

China-Japan heightened tensions

S P SETH

The spat between China and Japan over their maritime dispute is entering a dangerous phase with potential to ignite a military confrontation. China lodged an official protest with Japan the other day when its ships entered an area in the Pacific and disrupted Chinese live ammunition military exercises. According to Colonel Yang Yujun, a defence ministry spokesman, “Not only did this interfere with our normal exercises, but endangered the safety of our ships and aircraft, which could have led to a miscalculation or mishap or other sudden incident.” He called it “a highly dangerous provocation” leading China’s defence ministry to make “solemn representations to the Japanese side.”

Both sides are determined to maintain their ground, with Japan insisting that it wouldn’t allow China to change the maritime status quo by military means. To this end, Tokyo is beefing up its armed strength and marshaling together a regional front, as China also has contested maritime boundary disputes with some other regional countries. Prime Minister Shinzo Abe reportedly said recently that, “There are concerns that China is attempting to change the status quo by force [in Asia], rather than by rule of law. But if China opts to take that path, then it won’t be able to emerge peacefully.” And he added, “So it shouldn’t take that path, and many nations expect Japan to strongly express that view. And they hope that as a result, China will take responsible action in the international community.”

Prime Minister Abe’s statement would seem to suggest two things. First, that Japan is anointing itself as the leader of a regional coalition to forewarn China against any military action to change the status quo. It is not clear if Abe has the authorization of the countries concerned to be speaking on their behalf, although he did have a series of summits with regional leaders recently. But, in the absence of any repudiation by countries contesting China’s maritime/territorial claims, it would seem that a political regional front, at the very least, is shaping up against China. Second, Tokyo has made it abundantly clear that it will refuse to budge from its position, even backing it up with military means if necessary. Even though the US is maintaining silence on saber rattling between China and Japan, it is clear that the two countries are allies with mutual obligations in a military conflict. In other words, the on-going brinkmanship has consequences that go beyond Japan-China bilateral relationship.

Ever since Shinzo Abe took over as Prime Minister last year, Japan has toughened its resolve to face up to China’s assertive claims of sovereignty over the Senkaku islands, which China calls Diaoyu. He recently said that “the security environment facing Japan is becoming ever more severe.” Japan is taking concrete measures to beef up its defences. It has raised defense expenditure, as has China over the last few years. It is scrambling jet fighters reacting to Chinese air and naval visits near disputed islands, and is threatening to shoot down Chinese drones if flying over Japanese air space. China says that it would be an act of war, and so it goes on. As part of its defence preparedness, Japan recently unveiled its biggest warship since WW11, which is more like an aircraft carrier. The ship reportedly has a flight deck nearly 250 metres long, and is designed to carry up to 14 helicopters. Its unveiling, in the context of growing tensions with China, gives it a special meaning.

Japan, at the same time, is keen to amend its pacifist constitution, which prohibits it from waging war. Although it has a defence force, it is supposed to be purely defensive. The government is slowly trying to get around Article 9 of the constitution that ties it down to a pacifist role. Indeed, Taro Aso, Japan’s deputy prime minister, recently suggested to follow the example of the Nazi Germany by simply scuttling the constitution, imposed on Japan by the victorious United States after WW11. That raised some hackles and the minister backed off, saying he was quoted out of context.

The deep hostility between China and Japan is rooted in contemporary history, starting with the Sino-Japanese war of 1894-95 with China roundly defeated and Japan emerging as a new modern power.  This came on top of China’s defeat and humiliation earlier in two Opium Wars of 1839-1842 and 1856-1860 at the hands of the British, with China exposed as a waning power and an easy prey. This encouraged Japan to make its own bid to gain territorial and commercial advantage from a declining China and hence the 1894-95 war. Japan subsequently went on to attack China during the thirties occupying Manchuria, and making further inroads during WW11 with reports of atrocities committed on Chinese people.

The bitter memories of those times are fresh in a rejuvenated and resurgent China, now keen to reclaim its ‘lost’ territories that once were supposedly part of its vast kingdom, including almost the entire Asia-Pacific region. While Japan is probably China’s most hated regional neighbor, Beijing’s maritime disputes with other regional countries are creating strategic convergence between Tokyo and some of the regional countries, like the Philippines and Vietnam, who had earlier hated Japan as much for its war crimes. China is not happy over it but attaches more importance to its national project of unifying its ‘lost’ kingdom from a bygone era. And this muddies the waters further, making it a regional issue rather than simply a bilateral China-Japan affair.

Japan is equally adamant about its territorial integrity. After its defeat in WW11 and occupation by the US, Japan was a lost country needing direction. It was also the time when the Cold War had started pitting the United States and its Western allies against the Soviet bloc. And Japan was coopted into the US bloc as an independent state but with its foreign and security policies under the US direction. With China part of the Soviet bloc in the early stages of the Cold War, Japan obviously was favoured in its, then dormant, territorial disputes. Since then these disputes have come into the open and China blames the United States for encouraging Japan on its course.

Some Chinese commentators often make the argument that the US has no business being in the Asia-Pacific region and fueling tensions. The counter argument, and indeed the US policy, is that the United States is as much an Asia-Pacific country with its Pacific coast and trade and strategic interests as China or any other regional country. In other words, the US “pivot” to Asia is a valid policy after more than a decade of wars in Afghanistan and Iraq. That makes US alliances with Japan and other Asia-Pacific countries part of its strategic axis. Which makes the ongoing China-Japan brinkmanship all the more dangerous. Unless there is a diplomatic resolution of the contested maritime disputes in the region, it is like living near a volcano that might erupt any time. 

Note: This article was first published in the Daily Times.

Contact: sushilpseth@yahoo.com.au        

Is China ready to replace US?

S P SETH

By hanging their dirty laundry for open display during the recent the fiscal crisis, the US political establishment rightly invited some serious criticism of its dysfunctional system. And the most telling came from Xinhua, the official Chinese news agency. Its commentary called on  “the befuddled world  [by events in the US] to start considering building a de-Americanized world”, including a new international reserve currency. Hitting the US hard by blaming it for the global economic crisis in the first place, the Xinhua said, “The world is still crawling its way out of economic disaster thanks to the voracious Wall Street elites.” Not letting off the US easily and highlighting risks to China’s investments in the US currency, the Xinhua pointed out that, “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.”

One can’t entirely blame the Chinese for lecturing the Americans, having been subjected to criticism from the US over a whole range of issues, though not without substance. Apart from exulting at the US political embarrassment, the Chinese have a real stake in the proper management of the US economy because they have invested over $ 1 trillion in US treasury notes and bonds. And any US default would have seriously damaged their investment in what has been generally regarded as, good as gold, US currency instruments. They should, therefore, be pleased, for that reason alone, that the US has come back from the brink, at least for the time being.

However, one may ask if the Chinese are really serious about “a de-Americanized world”, with a new international reserve currency? They certainly would like that but they have never spelled out the alternative. As Professor Jin Canrong of International Studies at Remin University has reportedly said, “We have talked about it for many years…. But in fact, the majority of China’s foreign currency reserves are still in US dollars.” Amplifying it, he added, “Since the late 1980s China has raised the idea of establishing a new world order, both politically and economically, but no one has any idea what that could be. China has been a beneficiary [of the present system], so what is the reason to change it?”

And how has China been the beneficiary? Because China’s currency wasn’t freely convertible, it has been able to keep its exchange rate artificially low, giving it an enormous competitive advantage in pricing of its goods for export; as well as from low (depressed) wages at home. But it hasn’t been an entirely one-way street. China’s low valued exports helped to control inflation in developed countries, not only through direct export of cheap Chinese goods but also with the US and western outlets setting up their own production lines in China to take advantage of its low production costs. Of course, China’s massive exports enabled it to build up large trade surpluses. But, by investing these surpluses in US treasury notes and the likes, it made available the same as credit to the United States and other developed countries.

Even though the US and other western countries often complained about their trade deficits, and sought revaluation of the Chinese currency to make trade competitive and balanced, they were never serious about taking on China on this, principally because it kept inflation under control in their countries. It is important to realize that inflation had been the curse of economies in developed and developing countries but that largely ceased to be an issue in rich countries with low consumer prices of Chinese goods and availability of credit for almost anything and everything. Partly, of course, the credit availability was the China magic with their surpluses invested in US dollars and, partly, a number of western countries and the United States decided to venture into floating all kinds of credit instruments creating an illusion of ever-increasing economic prosperity. The former US Federal Reserve chairman, Alan Greenspan, called it irrational exuberance but he kept the credit flowing as if the economy was on autopilot, not needing any regulation or direction. And we now know what happened, and the resulting global financial crisis is still causing havoc, with periodic political and financial gridlock in the United States. China, though, has so far weathered relatively well through the global crisis.

Ever since the 9/11 terrorists attacks in the US and the subsequent invasions of Afghanistan and Iraq, things haven’t gone too well for the United States. In the midst of it all it experienced the worst recession since the economic depression of the thirties. Even as the US has been pre-occupied with these wars, China has been consolidating its position and expanding its political horizons, particularly in the Asia-Pacific region, laying claims to a number of islands and waters around them in the South China Sea and the East China Sea. But its sovereignty there is contested by a number of regional countries, some of them with security pacts with the United States. But for the US presence and involvement in the Pacific, China would hope to sort it out with its regional neighbors.

China seemed to be cruising along well in its region with the US stuck in its wars in Afghanistan and Iraq. However, Obama’s 2111 announcement of the US “pivot” to Asia with a renewed and and expanded commitment to the region, complicated China’s regional strategy. Beijing would hope that the US’ financial and political problems, over time, constrict it increasingly from over-extending its reach in Asia-Pacific. It is not so much a matter of the US presence and involvement as the perception regionally of its seriousness and capacity to stand by its allies against China. And this recently took a hit when President Obama couldn’t even attend the Asia-Pacific Economic Cooperation (APEC) summit in Bali in Indonesia, and the East Asia summit in Brunei because of the crisis at home over the budget and the debt limit. Even though Obama’s absence was understandable but the US image as a dysfunctional superpower didn’t go well in the region. It is this perception that might push regional countries into making peace with China on the latter’s terms.

But even if this were to happen over whatever period of time, China is not prepared yet to replace the US dollar as the world’s reserve currency or a basket of currencies. With European economies in doldrums, and Japan still seeking to emerge from its two decades’ long economic stagnation, it would be difficult to put together a credible basket of international currencies to replace US dollar. And, as for China, it is economically and politically not yet in a position to become the world’s currency repository. In other words, the world might have to live with the US dollar as the world’s reserve currency for an indeterminate period.    

This article was first published in the Daily Times.

China’s faltering economy

S P SETH

During the recent trial of Bo Xilai, the ousted leader of the Chongqing metropolis of 30 million people, the People’s Daily, the Communist Party of China’s newspaper, remarked cryptically that, “Constant denials [of his crimes] will only bury you [Bo Xilai] deeper in a trap.” How true! Bo is now sentenced to spend the rest of his life in jail on corruption and reated charges. In political terms, though, his legacy would persist, having challenged the established system from within. By invoking Mao Zedong’s red flag he sought to rally people behind him, who feel short-changed by the system that favours the rich and powerful who have built fortunes through corruption and connections. Bo Xilai’s populist message is likely to resonate as China’s economic growth falters. China is still growing at around 7 per cent but it is not as good as 10 percent and above over the years. China needs a fairly steady high growth rate to soak up unemployment and to improve people’s living standards.

There are broadly two views about the country’s future economic prospects, and consequently its social and political stability. One view is that China has already set in motion a strategy to favour domestic consumption over an export-based economy. The exports and investment (construction) sectors will still remain an important component of growth but that growth will be constrained by slowing demand for Chinese goods in the US and European countries, and over-investment in infrastructure. As economist Patrick Chovanec, one time professor at Tsinghua University and now an economic strategist with a US asset management company, has reportedly said “…China has been growing for these last several years by adding to its capacity [like Japan did], but for growth to be real, that capacity has to be used.” But the fact of the matter is that, “There’s a lot of empty ports, empty apartment buildings, empty offices, empty airports company.” Unless these assets are productively used with a fair return on investment, they are a serious drag on the banking system.

China’s large economic stimulation package, which helped stave off recession from the global financial crisis, is now creating serious problems for the economy from an excessive growth in credit in the last few years. For instance, it has led local and regional administrations to push ahead with some dubious infrastructure projects. Similarly, easy credit led them to put money into shoddy financial transactions that has over-extended the banking system.  The debt to GDP ratio is now estimated to be above 200 per cent, about that of Japan.

 A big chunk of the money went into real estate, creating the potential of a boom/bust cycle, as happened in Japan. The real estate prices are now simply beyond the means of many people. As a result, there are many empty apartment buildings. The easy availability of credit and its shoddy use has entrenched corruption even further.  And corruption, especially at high levels, tends to erode the legitimacy of the political system. Indeed, many people are becoming deeply cynical about campaigns, at different times, to eradicate corruption, as the outcome is always patchy. And when some high level party bigwigs are caught in the campaign, it is generally because they have fallen out of favour with the party headquarters, as is the case with Bo Xilai.

Bo Xilai lost his political battle to the party front line, and was dumped as party chief in Chongqing, and charged with abuse of power, bribery and so on.   His wife has already been convicted of murder of the British businessman, Neil Heywood, and was given a suspended death sentence. It is quite possible that he and his family built up a vast fortune through corruption and abuse of power. But so have many others at the top party levels.

Indeed, a New York Times investigation had found that Wen Jiabao’s family, till recently prime minister, had built up a fortune in questionable ways. Another investigation by Bloomberg also dug up  corruption material on Xi Jinping’s (the current president) family. Whether or not it is true is beside the point. The point is that if a party leader falls out of favour, he/she will pay a terrible price.  

Corruption is so entrenched in the system that most party officials, at all levels, are part of it. This is common knowledge and the people’s cynicism is understandable. Even the mighty People’s Liberation Army (PLA) is infected with it. Take the case of Lieutenant General Gu Junshan, till recently deputy chief of the general logistics department who left his post in February last year without any official explanation. He probably would be charged soon with corruption. Senior Colonel Gong Fangbin recently said in an interview with the official Global People that, “When corruption has become a type of culture, and has developed to a certain level [at the top], change becomes very difficult.” Its seriousness was highlighted by General Liu Yuan, son of a former (but disgraced) president Liu Shaoqi, at one time number 2 under Mao Zedong, who reportedly said in December 2011 that, “No country can defeat China. Only our own corruption can destroy us and cause our armed forces to be defeated without fighting.”

In the midst of it all, the example of western liberal democracy (even with its many faults) is terribly destabilizing for China’s political system. The Communist Party rulers seem quite worried about this. In this connection, the New York Times has quoted from a memo referred to as “Doctrine Number 9”, apparently emanating from the top level (s) cautioning Party cadres against perils threatening the system. These reportedly are: “Western constitutional democracy”, “universal values” of human rights, western-inspired notions of media independence and civil society, ardently pro-market “neo-liberalism” and “nihilist” criticism of the party’s traumatic past. The document goes on to say, “Western forces hostile to China and dissidents within the country are still constantly infiltrating the ideological sphere” as well as stirring up “trouble about disclosing officials’ assets, using the internet to fight corruption, media controls and other sensitive topics…”

An important element in this hypersensitivity is that the country’s economy is now at a critical point. According to Charlene Chu, the senior director in Beijing of the Fitch rating agency, “The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem and potentially into a Japanese-style deflation.” The problem is further compounded from the parallel shadow banking system operating outside the system. As Charlene goes on to say, “There is no transparency in the shadow banking system and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is.”

It is, therefore, not surprising that the top party leadership is worried at the complex interplay between the country’s economy, social stability and latent threat to the political system. But there doesn’t seem any immediate danger to the party’s rule because the state in China is very powerful, and has all the regulatory and control mechanism to deploy. Besides, it has deep pockets with an estimated $3 trillion worth of foreign currency reserves, and its debt is mostly internal.

Note: This article was first published in the Daily Times.

Contact: sushilpseth@yahoo.com.au