South China Sea: storm clouds gathering

S P SETH

Australia is not a high roller internationally, except by virtue of its delicate position as China’s biggest trading partner and one of the US’ closest allies. Which makes Canberra tread warily between the two in the midst of the storm clouds gathering over South China Sea slands, where China is expanding its territorial control and strategic influence and the US is now seriously seeking to challenge it. The point, though, is that however much Canberra might try to appear even-handed, it simply can’t because its strategic priorities by virtue of its US alliance leave no scope for any ambiguity.

Australia’s white paper on defense, which formulates a large expansion and modernization of all elements of its defence forces, is largely couched against a backdrop of regional tensions from China’s activities in the South China Sea, including building military facilities on a whole swath of reclaimed land from reefs and shoals. In a broad statement, it says that “while it is natural for newly powerful countries [read China] to seek greater influence” but the problem is that some (China) “sought to challenge the rules that govern actions in the global commons of the high seas, cyberspace and space in unhelpful ways, leading to uncertainty and tension.”  As US allies, Australia, along with Japan, would hate to see China dominate and control the Asia-Pacific region. Other regional countries, like Vietnam and the Philippines, contest China’s sovereignty claims over South China Sea Islands. It is, therefore, a highly charged matter and has the potential of becoming a regional powder keg. Compounding it is the disputed sovereignty issue between China and Japan over the Senkaku islands in the East China Sea.

China’s rising economic and military power, and US’s diminishing but still considerable power, is creating a situation where they both are now competing and contending, particularly in the Asia Pacific region. The US’ preoccupation with Middle Eastern wars and turmoil enabled China to expand its political and strategic space in the region, causing nervousness and fear among some of its neighbors as Beijing laid sovereignty claim and control of island chains in South China Sea, which they too claimed and their claims seemed more valid by virtue of their proximity to these islands.  

The regional tensions over South China Sea show no sign of easing. If anything, it is getting worse. China has built military structures on new and old islands. It regards the expanse of waters around them as its exclusive zone for exploring and extracting minerals, and it is feared that it might start to regulate and interfere with the free movement of commercial shipping, and right of passage. And to assert the principle of freedom of navigation through these waters, the US has lately sent a naval ship or two to test China’s intentions. Australia is also being urged to assert its right of “freedom of navigation” and Canberra agrees with it in principle. The US is keen that other regional countries should be part of such ‘right to freedom navigation’. Vice-Admiral Jose Aucoin, Commander of the Japan-based US 7^th Fleet reportedly said in Sydney recently that it would be valuable for other countries, including Australia, to challenge Beijing’s assertiveness than leave it to the US to be “portrayed as the US versus China” issue. He emphasized that, “The scale and the speed of the reclamation of China has been alarming…but… we’re [the US] going to sail, fly, operate in these waters and be prepared for any contingency.” In other words, the US, preferably with its regional friends and allies, is determined to challenge China’s unilateral claims in South China Sea.

China, of course, regards the US as an outside power bent on creating mischief and trouble and would like to edge it out of the region. While neither the US nor China is seeking conflict, they both seem to not only hold their ground but also to press ahead to assert their respective position. Beijing simply wants the US and other regional countries to accept its claim and assertion of sovereignty as a historical fact, a kind of Monroe Doctrine that the US proclaimed in 1823 declaring domination of the American continent. China, it appears, hopes to establish domination of the Asia Pacific region with its growing power.  

Even as Beijing is laying down its regional strategic architecture, it has contended that its installations on newly reclaimed lands are for humanitarian reasons, for search and rescue and so on. But the latest satellite imagery showed that China has deployed surface-to-air missiles on Woody Island, part of the Paracel chain claimed also by Vietnam. This is said to be in clear breach of President Xi Jinping’s commitment/assurance that China wouldn’t militarize the island chains. And the US Secretary of State, John Kerry, was quick to point out that he would make “very serious” representations with Beijing over the deployment. He reportedly said, “When President Xi was here [on a US visit], he stood in the Rose Garden with President Obama and said that China will not militarize in the South China Sea.” Kerry went on, “But there is every evidence, every day, that there has been an increase of militarization of one kind or another. It’s of serious concern.”

There are now reports of stationing of radar systems and fighter aircraft and all sorts of military facilities on the islands. China is reported to have reclaimed more than 1200 hectares of artificial land on reefs and shoals in the area. This has led Admiral Harry Harris, head of the US Pacific Command, to say that China is “clearly militarizing” the disputed waters of the South China Sea, and he quipped, seriously though, that, “You’d have to believe in a flat Earth to think otherwise.” Pointing to the dangers ahead, he said that, “Regrettably there are missiles and fighter aircraft and guns and other things that have been placed into the South China Sea and this [is] of great concern to everyone who transits and relies on the South China Sea for peaceful trade.” In other words, China’s activities in the South China Sea are a threat to global trade.

But China is steadfast. A Chinese foreign ministry spokeswoman has said that, “China’s deployment of limited, necessary defence facilities on its own territory [islands in the South China Sea] is its exercise of its right of self-defence to which a sovereign state is entitled under international law.” The problem, though, is that it is contested sovereignty. But such semantics are lost in international power play. And China feels pretty confident that it will have its way. When asked at a press conference if Australia and Japan, together with the US, were intent on containing China, its Foreign Minister Wang Yi said with a straight face, “… I also don’t think that any country or power in the world can stop that rise.”

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

China’s economic travails

S P SETH

Even as President Xi Jinping strengthens his political grip by way of further asserting the monopoly control of the Communist Party of China (CPC), the country’s economy is refusing to exactly follow the political dictates. The middle of last year saw turbulence in China’s stock market raising questions about the health of the economy. The arbitrary measures taken to dampen down such turbulence by directing institutional (state owned/controlled) investors to buy or not to buy stocks might have worked for a while but they failed to address the real problem. Which is that Chinese stocks are over valued with inbuilt bubbles waiting to bust as soon as there is an opportunity. And the opportunity arrived early in January when the economic data about weakness in the manufacturing sector was revealed. At about the same time, Chinese authorities depreciated their currency to give them an advantage in export sector. Whether or not that will translate into more exports is an open question because this can lead to competitive devaluation of competing economies. However, this tends to frighten investors leading to the flight of capital from China. Subsequently, though, the Chinese authorities sought to support the currency by buying it.  All in all, this tends to raise doubts about the health of the Chinese economy, which has not been performing as well as in the past when averaging a growth rate of over 10 per cent. At present, its growth rate is around 7 per cent, and there are fears that it might continue to fall. China’s economy is still growing well by comparative standards but there are serious problems and bottlenecks that, unless resolved, could create social and economic issues at home.

After the 2008 global recession, China’s economy continued to perform well with an expansive economic stimulus programme. This was not only good for China at the time but was also good for the world, particularly the resource rich countries like Australia, Canada, Brazil and South Africa. Under its stimulus programme, money poured into infrastructure projects, real estate, steel plants, high speed railways and so on. At the same time, the feel good effect of all the investment activity and construction pushed up the value of Chinese stocks, with the government even encouraging small mom and dad investors to invest in the market. Though many people felt rich and invested not only their savings but even borrowed money to play the market, the hype about the stock market was too good to be true.

And in the middle of the last year, the market tumbled with the authorities trying to create stability through diktat forcing large institutional investors to buy more stocks to create a semblance of normalcy. At the same time, the authorities tended to suspend trading when there was too much downward pressure. And when the stock market turbulence kicked again this month the authorities tried the same old method of imposing order but it didn’t seem to work. It was clear that what worked in the political domain, which is ruling by diktat, was not working in dealing with market fluctuations.

And there are good reasons for it. First, there is a large overhang of debt that funded the stimulus programme at local, regional and federal levels. All levels of governance vied with each other to spend borrowed money to grow the economy, as it was the guiding principle of all agencies. There was an unstated compact between the party/government that as long as economy was growing with people benefitting from it, people didn’t care much about the exercise of monopoly power by the CPC. In the process, corruption became rampant with, among other things, the arbitrary acquisition of land as long as it led to building of more apartments. Which led to a glut in the real estate market with rows of expensive unoccupied apartments. In the same way, over capacity built up in manufacturing sector, like the steel industry, with inadequate demand for construction material.

The upshot of it all was that much of the new infrastructure, real estate construction and the like, didn’t generate enough income to pay off the debts that kept piling up. At the same time, with very little real information available to the public about the state of the economy, especially the mountain of debt, the stock market continued to operate as if there was no tomorrow to settle the accounts. And that tomorrow appears to be happening sooner than expected. The overhang of debt has to be sorted out and it can no longer be wished away.

This economic necessity of fixing the economy and, at the same time, ensuring a healthy rate of growth to maintain the social compact with the people, has created a complex situation. China is at a transition period when exports that had been the vehicle of its rapid economic growth have slowed down, and to maintain a healthy growth rate of the past or close to it will need a growing internal market based on domestic consumer demand and growth in services’ sectors. Both have still to catch up and would need a radical reorientation of the Chinese economy. And with the overhang of the debt and people used to saving (and not spending as much), this is going to be a difficult task, particularly as markets do not respond well to political dictates.

As for the debt overhang, much of it is internal debt and hence not subject as much to external compulsions as foreign debt would be. But it would need to be sorted out sooner, rather than later. Otherwise, as has happened in Japan burdened with heavy internal debt, the country is in a deflationary spiral for more than 20 years after its stock market crashed. If that were to happen to China, this might rupture the social compact between the CPC and the Chinese people ensuring them a constant improvement of their economic life while they tolerate monopoly rule of the ruling communist regime.

A slowing Chinese economy is not only bad for China; it has been causing serious economic ripples in global markets.  For instance, the international resources and commodity markets have nosedived, as demand from China has shrunk to levels not seen for a long time. And, as things stand, there is not much prospect for any improvement as the global over supply from investments in these sectors, planned/undertaken when demand for these commodities/resources was high, keeps piling up.

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

US-China relations in crisis

S P SETH

There has lately been plenty of media commentary and analyses here suggesting that the US-China relations might be reaching a crunch point regarding the issue of sovereignty over old and newly reclaimed islands/islets/rocks that China claims and has occupied. Other regional countries that include Vietnam, the Philippines, Malaysia, Brunei and Taiwan, which China regards as its own renegade province, contest China’s sovereignty claims. The US comes into the picture as some of the regional claimants, like the Philippines, are US allies and others, like Vietnam, are new friends. The US, though, maintains that it has no position on the question of sovereignty but simply would like China to resolve it peacefully through dialogue with its neighbours. But, apart from this, there is a bigger issue involved here.

 Which is that China’s virtually blanket claim and its assertion through building military facilities on the old and newly-reclaimed and dredged islands/islets will turn almost all of South China Sea into its exclusive lake, thus impeding freedom of navigation through these important waterways. And it is this right to freedom of navigation the US has challenged by sending a naval ship through the 12-nautical miles exclusive zone around the Chinese claimed and dredged islands. And the US is insisting that it will continue to sail, fly and operate through these international waters. China has reacted furiously to this threat to its “sovereignty and security interests.” A Chinese foreign ministry statement said that it had “monitored, followed and warned” the US warship during its journey and it would “take all necessary measures” to safeguard its sovereignty against any “premeditated provocation.” A US statement said that their mission to cruise through the international waters “was completed without incident.”

According to media reports here, “…more than half the world’s merchant tonnage plies back and forth through this navigable chokehold between the Western Pacific and Indian oceans…” And with China claiming ownership and intent on prevailing with political and military means, there is enough fuel for a conflagration, as the US seems equally determined to challenge China’s 12-nautical miles exclusive zone through the Spratly islands.

During a panel discussion on Australia’s relations with China at a highly rated TV forum here, a Chinese panelist was asked about what would be Beijing’s reaction in such an event. He had no answer but he reiterated China’s sovereign claim over the disputed islands and the waters surrounding them. But an answer of sorts was underlined in a 2011 editorial in China’s Global Times, which bluntly warned, “If these countries [opposing China] don’t want to change their ways with China, they will need to prepare for the sounds of cannons. We need to be ready for that as it may be the only way for the disputes in the sea to be resolved.” Even accounting for its rhetorical flourish, it is quite a serious way of putting China’s “core interest” as Beijing has defined it. In other words, there is not much scope for compromise as Beijing sees it; mercifully, though, the situation remains under control.  

It was in 2011 that the visiting President Obama announced in the Australian parliament the US “pivot” to the Asia-Pacific region---a ‘rebalancing’ of US focus from a decade of engagement in the Middle East. Which meant that the US would be deploying more of its military assets in this region and intended to remain a strong Pacific power. In other words, the US was not thinking of leaving the Asia-Pacific region for China to establish its primacy. And in this respect, Australia would become an even more important regional ally. As part of this renewed regional focus, the US would rotate and station its forces and other military assets through Australia. In other words, the US will use base facilities in Australia as part of its revived Asia-Pacific strategy.

In Australia, the view across the political divide, backed by majority of its people, is in favour of a strong US alliance to face any threat from China. And its projection of power in the South China Sea is considered a serious threat to regional stability. It is, therefore, considered necessary to let China know that it will have costs. And for that there is need to make a stand that might require challenging the 12-mile excusive zone. This issue featured in recent US-Australia strategic talks in the US.  Australia’s new Prime Minister Malcolm Turnbull has reportedly emphasized that, “We have to stand up for a rules-based international order, which means that the strongest power [in the region] cannot just do whatever it likes…” as China is apparently doing in the South China Sea.

As regards the US naval patrol through the Chinese line, Canberra has supported the US action. Its defense minister Marise Payne said, “It is important to recognize that all states have a right under international law to freedom of navigation and freedom of overflight, including in the South China Sea. Australia strongly supports these rights.” She added, “Australia is not involved in the current United States activity in the South China Sea.”

Canberra’s dilemma is how to reconcile its primary trade relationship with China and its priority strategic relationship with the United States. China is Australia’s top trading partner and they have recently signed a free trade agreement to further boost their economic relationship. This is sustainable only if Australia doesn’t find itself in the position of having to confront China in the South China Sea as part of its security alliance with the US, if and when called upon to make a common cause. Indeed, Washington might ask Australia at some point to join the US to sail through the 12-nautical mile zone, and having supported the US action in principle and as a security partner, Canberra might not be able to get out of it. And that could trigger a crisis in China-Australia relations.

Australia is somehow hoping that it will not come to this. And some analysts in Washington and Canberra have been trying to read this into President Xi Jinping’s comment during a White House press conference, when he was recently visiting the US, that China had no intention of militarizing the Spratly Islands. On the other hand it could simply mean that China’s understanding of its new facilities on the islands is that these are civilian outposts. But Xi’s comment was picked up as a hopeful sign that China might not, after all, be pushing he confrontation button. Australia’s foreign minister, Julie Bishop, seemed relieved as she observed that, “We do note and we do welcome President Xi’s statement when he was here in the United States, in Washington, that the Chinese government did not intend to militarize the Spratly Islands [in South China Sea].” She added, “And we welcome that statement and we’ll certainly hold China to it.”

It would only mean that both China and the US (and its ally Australia) want to avoid confrontation. But both sides are trying to read their own meaning into the developing situation in the South China Sea that is increasingly tense and has the potential of becoming ugly.

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

Contact: sushilpseth@yahoo.com.au 

Xi Jinping goes to the US

S P SETH

Has the recent US visit of the Chinese President Xi Jinping cleared the air between the two countries? It is generally known that their relations are difficult, and might even be entering a hostile phase. China’s rise is tending to upset the US-led post-WW11 international order with Beijing refusing to fit into it. It refuses to accept the US narrative that China’s rise and prosperity in the existing international order is proof, if any needed, that it has gained from the present order, which continues to serve it well. And any attempt by Beijing to undermine or replace it is bound to disrupt and destabilize what is and has worked so well. For China though it is a self-serving US narrative to maintain its primacy and dominance underpinned by established international rules and institutions.

China obviously is not keen on playing a subordinate role. Apart from the fact that it is now the world’s second largest economy and is likely to overtake the US soon, its historical memory propels it to be a power centre in its own right. This historical memory is played out at two levels. At the first level, it is the humiliation heaped on China during the 19^th century when it was forced to open its markets to opium trade in the name of free trade. The country was bankrupted and virtually parceled out in the name of free trade. And later, in the thirties and forties, Japan simply went in and declared war on China. Until very recently, China had followed the advise of its late leader Deng Xiaoping to “hide your strength and bide your time.” China apparently feels that the time has come to flex some of its new muscle to assert and project its power. Therefore, at one level, China seems determined to wash off its humiliation by asserting its new power.

At another level, having been a great power historically bearing the name Middle Kingdom, its more confident leaders want to restore that glory. And there is a sense that the US-led international system is seeking to constrain and contain China. This is reflected strongly in China’s assertion of its claimed sovereignty (contested by some regional countries) in the South China Sea where it has been building military facilities in old and newly dredged islands/islets, which it regards as its own territory and waters. And this is meeting resistance from the US and its friends and allies, fearing that China is virtually turning all of South China Sea into its internal lake to impede/deny freedom of navigation and trade through international waters. And the US is prepared to challenge China’s control and assert such freedom of navigation, raising specter of naval confrontation. During a recent speech in the UN General Assembly, President Obama maintained that, “We have an interest in upholding the basic principles of freedom of navigation [in South China Sea] and the free flow of commerce, and in resolving disputes through international law, not the law of force.” But peaceful resolution might not be easy.

During Xi’s US visit, there doesn’t seem to have been any progress in this regard. Both sides reiterated their respective position, with the US advocating a peaceful diplomatic solution, and China asserting its sovereignty. In other words, the question of sovereignty in the South China Sea, and between Japan and China in the East China Sea, remain serious issues affecting peace and stability in the region.

Lately, the question of cyber security has also come to cloud US-China relations. According to US reports, Chinese hackers have stolen security data of over 20 million federal employees and contractors, thus posing great security and commercial risks for the US. Indeed, even a unit of the Chinese army was also said to be involved, and the US has charged some of them with illegal activities. Beijing, of course, denies it and claims that it too has been a victim. Not surprisingly, the issue of cyber security featured in preparatory talks before President Xi’s visit and the issue was also discussed during his US visit. There was talk of establishing a “hotline” for cyber attacks between the two countries. And according to reports, Beijing agreed that, “Neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property including trade secrets or other confidential business information, with the intent of providing competitive advantages to companies or commercial sectors.” The problem with all such understandings, whether in regard to state secrets and/or commercial information, is how to prove and enforce cyber-related crime. And it is further compounded if the relationship is marred by mutual distrust. In other words, no amount of understanding on the issue of cyber crimes is likely to bridge the gap. But it is still worth maintaining functional relationship between the world’s two most powerful countries.

Another issue that has marred relations between the US and China is the question of human rights. Its generally accepted meaning is the freedom of expression and free assembly for citizens without fear of being locked up for exercising that freedom. It also means the citizens’ right to periodically elect their own government, which might involve rejecting the incumbent regime. By these standards, the monopoly power of the Communist Party of China (CPC), with citizens denied the right to choose their own government, is a denial of basic human rights. Those demanding to exercise that right often end up behind bars.

According to reports, such arbitrary arrests have become a feature of the Xi Jinping’s regime, which is not apologetic about the monopoly power of the CPC. The argument on Chinese side is that every country has its own history and the system that shapes it. Indeed, the US is regarded as self-serving in advocating its system, which too is said to have serious human rights problems and violations. And its advocacy of democracy and human rights is considered subversive as far as China is concerned. Which led the CPC to issue an internal memo not long ago that reportedly warned against seven “false ideological trends, positions and activities” including “Western constitutional democracy”, “universal values”, “the West’s idea of journalism”, and civil society. And there is no prize for guessing that China and the US strongly disagree on the idea and practice of democracy.

With such divergent views and interests on a whole gamut of issues, President Xi Jinping’s US visit was not expected to bring about any significant meeting of minds. But both countries seem interested in keeping up the dialogue and not let things get out of control. And as long as that is maintained, it is not too bad.

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

Contact: sushilpseth@yahoo.com.au