We all listen to what we want to hear, especially in the West. Here most economies are dominated by the services sector, so we enjoy a sedentary and office-bound existence; liberal political systems have given rise to a consensus belief, bra wars notwithstanding, that any dispute be it trade, territorial or financial, can be resolved through negotiation with like-minded people. Hence when dealing with those who suffer from rank insanity, nationalistic paranoia or an imperial mentality, we are susceptible to misreading these clear signals.
The lack of reaction to the utterly barking comments from Major-General Zhu Chenghu of the People’s Liberation Army of China (PLA) is a good example. Speaking in July at a function for foreign journalists, organised in part by the Chinese government, he spelt out the circumstances under which China would unleash nuclear winter on America. His comments included that China should be prepared to lose all its cities East of Xian (i.e., most of them, about 700 million people) but could rebuild the nation with the 600 million survivors.
General Zhu is a serving officer and Deputy Director of the PLA’s National Defence University (i.e., its key policy body). His nuke ‘em speech set out the PLA’s response should America come to Taiwan’s aid, as a result of an attack by China. This followed a new law passed by the National People’s Congress in March, authorising the use of military force to prevent Taiwan gaining formal independence. It was unanimously passed to ecstatic applause.
The General has been noted for his hawkish instincts before. In stating the specific terms for the use of nuclear armaments against America, and the price China was prepared to pay, coupled with a growing ability to deliver such threats, this represents a step change from the ravings of Mao Zedong.
Major-Generals in China do not go off-piste with ‘what if’ scenarios, especially in front of foreign journalists. This was a policy speech. Neither the government nor the ruling Communist Party has distanced themselves from his opinions.
Meanwhile in the West and much of Asia, no one wants to hear.
Underestimating China, again
The West has underestimated China, its ambitions and staying power many times before. In 1949 the PLA kicked out the rapacious government of Generalissimo Chiang Kai Shek which fled to Taiwan and the smaller islands of Quemoy and Matsu closer to the mainland. It was widely assumed that the victorious ragbag peasant army might be effective in the Chinese context, but useless elsewhere.
1950 was the first shock; under the auspices of a UN mandate, America and various allies went in to support the Korean government against an attempted coup. The Russian MiG 15s of the Chinese Air Force (powered with engines pirated from Rolls Royce) were better than anything America had available. The scoreboard in the first six months was one of very heavy allied air losses. China came close to dominating the skies with its marked technological superiority. It was no UN walkover. Despite also beating up two armies on a regular basis then widely considered superior, India in the Himalayas and Soviet Russia along the Amur River, China as a military power was still not taken seriously.
The standard ‘peasant army’ view of China was reconfirmed in 1979 when it invaded a war-battered Vietnam, which had booted out American forces a mere five years previously. Despite China’s enormous superiority in men, materiel and technology (on paper at least), the hardened Vietnamese army fought the invaders to a standstill in three weeks, and then pushed them back.
This marked a key turning point in China’s military and economic policy. It had become apparent, even to the most dung-witted communist cadre, that Mao’s absurd and deadly internal campaigns, from ‘Let 100 Flowers Bloom’ to the ‘Cultural Revolution’ had totally crippled the economy.
It was thus no coincidence that soon after the Vietnam fiasco, China’s new de facto leader Deng Xiao Ping (he never ranked higher than 10th in the official hierarchy), gave his famous speech stating: ‘it doesn’t matter if a cat is black or white, as long as it catches mice’. This was a long-winded way of putting economic reform ahead of ideology. He clarified this message further in his 1982 slogan ‘to get rich is glorious’. Deng’s most senior position was that of Secretary to the Military, thus economic reform was driven by the needs of the PLA. The subsequent lift off in economic growth has been as well documented, just as the key reason for reform has been forgotten. China could only be militarily strong with a rapidly improving economy; bra exports would pay for a resurgent PLA.
Ignoring the signs
“China does not now face direct threat from any nation” says the 2005 Annual Report to Congress by the US Defense Department, discussing the military capability of the People’s Republic. With unusual modesty, it also points out that ‘direct insights into China’s strategies are few’. What have the military experts and authors have been smoking?
This report is a dismal read on China’s intentions and the many statistics are worrisome. It lays out how over the last decade especially, China has been re-arming and modernising its military at an unprecedented rate. Announcing the 2005 budget, President Hu Jintao stated that ‘the military must be ready for war at any time’ and raised defence expenditure by 12.6% to $29.9 billion.
This is not an alarming number in itself; the UK, as the world’s fourth largest economy, is spending around $45 billion this year. However, the PLA’s budget is double that of 2000 and this is the eleventh year running of increases in real terms in the low teens. Moreover, just as most Chinese official data is suspect, so especially are the military budget numbers, as the US Defense Department points out.
For example, major items of equipment are simply not included, such as $3 billion spent buying advanced armaments from Russia last year (where China is now its No.1 customer), or fuel. China also gets a better bang for its buck; for every US soldier with his gizmos and a big gun, China can field five for the same price with reasonably good kit. For apart from an unprecedented rearmament programme, there is a quantum leap taking place in the technology and the quality of the PLA.
Occasionally, some Asian governments show feeble signs of alarm when their skilled secret agents obtain official Chinese maps (a visit to any primary school room in Canton would furnish the same result). These show that China believes its boundaries are far removed from where the rest of the world thinks they are. Apart from including Taiwan and its offshore islands – understandable perhaps – they also include great swathes of the Pacific Ocean and the South China Sea as belonging to the People’s Republic.
Repeated actions by the Army and Navy confirm that China thinks that these maps reflect the true boundaries. They have variously occupied or built bases on a large number of islands and atolls which the UN and the rest of the world agree belong to other countries. Those nations which, rather to their surprise, have seen Chinese forces occupying various islets and atolls within their legal territory include Japan, South Korea, Taiwan, Indonesia, Vietnam, Malaysia and the Philippines (whose Government took nearly a year to notice a large base had been built on one of its islands).
Pretend Peaceniks
One of China’s policy strands is to emphasise its peaceful intentions by pointing to action along its enormous land borders. It is beyond doubt that disputes over 4,000 miles of China’s frontier have become much less dangerous, which must be a plus.
The two joint Sino-Russian military exercises since early 2004 were declared a triumph by both nations. Historically, that border had bristled with armaments (even the railway gauges were deliberately different, so that one could not invade the other by train) and border spats were frequent. The number of Chinese troops on the Russian frontier has halved in the last four years, even as sales of top notch Russian equipment to the PLA has soared; six super-Kilo class submarines and four destroyers this year alone. (And despite the US Defense Department being categorical about a lack of any capability, China picked up its first ex-Soviet aircraft carrier which is now being refurbished).
More surprising has been the arrangement reached with India over the long disputed Himalayan border, involving territory swaps and troop reductions. Both countries have grasped the reality that fighting over the ownership of 20,000 ft high mountains is not particularly worthwhile. Thus for the first time in modern history, all China’s land frontiers are relatively secure and at peace, clearly a very desirable outcome. This therefore should allow a considerable reduction in the PLA. Given these tranquil and now open borders for the first time, such an enormous build up in military capability is even harder to explain.
To be balanced, there is a justification for specific increases in armament expenditure. 80% of China’s oil imports come through the Malacca Straits. This is a notoriously pirate-infested area (where many of the buccaneers are frequently alleged to be off-duty personnel from Indonesia’s own fine military establishment). In 2004, China was consuming energy at rate equivalent to 6.5m barrels per day, but total domestic production was a mere 3.8m, all the rest was imported by sea; so it is understandable that China wants the ability to protect these routes and its shipping.
Yet all strategists rather unusually agree that heavy investment in tanks and self propelled guns is not the most effective way to protect a nation’s merchant marine.
Still fighting the Cold War?
Underlying policy is for all that trade and other ties between China and the West have improved remarkably in the last 15 years, the Communist Party of China still thinks in Cold War terms; ultimately it sees America as both a competitor and an enemy. It also cannot forgive or forget the nearby running sore of Taiwan. This non-Nation is for all intents and purposes an American military dependency, as the US provides the majority of Taiwan’s military equipment. China has never wavered from its belief in 1949 that Taiwan is a renegade province and must be subsumed either voluntarily or, if necessary, by force. Sabre-rattling has been a constant in the last 56 years; annoyingly for China, the powerful American battle-carrier fleets have made any serious military action impossible. However, this game too is changing.
Given the growing threat from China as it improves the quality and quantity of its military hardware, it is odd that the once bellicose Taiwan has become more docile. Real defence expenditure as a percentage of GDP has been falling every year for the last decade. Even the megahawk President Chen Shui Ban had to change his rhetoric in the 2004 elections and offer a further one third cut in Taiwan’s military capability.
These would seem to be the precise signals that China wants, indicating rapprochement; this is logical too, given that Taiwan is still China’s largest source of Foreign Direct Investment and largest foreign employer, so there is a clear economic benefit in avoiding military conflict. Yet inexorably, China is building up massive armed forces directly opposite Taiwan which will soon ensure it can win any armed conflict – including if necessary against an American fleet.
Taiwan Straits
Military Balance, Ground Forces only
China – Straits Area
Active Personnel 375,00Group Armies 9 Armoured Divisions Mechanised Infantry 3 DivisionHeavy Artillery 5,500 Tanks 2,500
Taiwan -Total Forces
Active Personnel 200,00Group Armies N/Armoured Divisions 25 Brigades Mechanised Infantry 3 BrigadeHeavy Artillery 4,400 Tanks 1,900
Source: US Dept. of Defense Report to Congress on China’s military capabilities, 2005
These numbers apply to the ‘Taiwan Straits Military Area’ only. The West, hearing what it wants to hear, takes comfort in the steady reduction in the size of the PLA, from a peak of 6,000,000 peasant conscripts in 1979 and, after the latest demobilisation of another 200,000 this year, to a mere 3,000,000.
What is doesn’t want to hear is that this ‘smaller’ force is considerably more effective and better armed, nor does it want to know about the rapid growth in local and international missile capability; 730 mobile missile launchers with the addition of 100 each year. A doubling of the intercontinental ballistic missile capability every four years. It has long been accepted wisdom that China’s fleet was a tired old beast but the modernisation here is a wonder. The six new Russian super Kilo submarines this year takes its advanced submarine fleet to 54. The doubling in the number of frigates and destroyers since 2000, with each new vessel packing considerably greater fire power and, to quote the US Defense Department again, “particularly notable advances in missile technology”, means America’s naval defence of Taiwan becomes ever more difficult.
On the last two ‘intimidation exercises’ by China when the Seventh Fleet was sent in, it patrolled to the East of Taiwan for the first time. Previously it had always gone into the Straits between Taiwan and China proper. The reason was simply that China’s missiles are now too accurate and powerful to risk having the fleet within 200 miles of the coast. Give it a maximum of five years and America will be forced to defend Taiwan from Hawaii – too far and thus too late.
Watching and learning
The Chinese press has shown great interest in the New Orleans disaster. Less, as we liberals might believe, out of concern for the inhabitants, but wondering how stretched the US military is, and whether Iraq, Afghanistan and other ventures have left America with surprisingly little spare capacity. It would be naïve to believe that this is not being seriously analysed and ‘war-gamed’ by mad General Zhu and others.
The Communist Party must also be encouraged by how much the US Congress played down the Defense Department report on China’s capabilities and how quickly the light winds around General Zhu’s comments passed. Even Secretary Donald Rumsfeld, who can usually be relied upon to give a macho sound bite, at a recent Conference in Singapore limply replied to questions on Taiwan and China’s military build-up that “they wouldn’t want to put the 2008 Beijing Olympics in jeopardy”.
Everyone is telling China the same – carry on rearming and your school maps will soon be reality.
If this were the message that Asian countries, the UN and America especially, really want to send, such an outcome could in some ways be desirable. One major and several minor flash points will have been snuffed out. But we do not believe that any of them are keen to see Taiwan taken over, or the dozens of other islands that China claims, thus giving China hegemony over vast sea areas (with all the oil potential underneath). In practice the issue is not about China’s sovereignty over Taiwan, it is about which country will in future be the dominant influence across the Western Pacific and much of Asia.
We cannot believe that America desires its replacement by China, but it is allowing China to move in by default. There appears to be a belief that because the US has considerable manpower and large bases across much of the Asia-Pacific, it will remain top gun. Given that all these bases, including even Hawaii and Alaska are within easy reach of China’s growing intercontinental capacity for the first time, and that the battle carrier group advantage is slowly being eroded, such complacency is misled.
Only Japan has realised
In his election campaign and subsequent victory last weekend, Junichiro Koizumi concentrated on one issue; reform, especially of the Post Office. To foreigners, this confirms the idiosyncratic nature of Japanese politics – calling a general election about Postman Pat. Koizumi’s focus is less odd however, once it is understood that the Post Office is the country’s dominant financial institution and has been the key source of patronage and corruption.
Within his reform message, Koizumi mentioned only one other topic; to change the Constitution. Westerners are amazed how Japan’s PMs still insist on their annual pilgrimage to the Yasukuni Shrine to commemorate Japan’s war dead. Given that the Second World War ended 60 years ago (and the behaviour of Japan’s troops), this seems both crass and unnecessarily provocative. Yet visiting the Shrine and discussing constitutional reform on the same day was no coincidence.
Japan’s Constitution is similar to many western models, save in two critical respects. First, there is no military, merely a ‘Self-Defence Agency’, whose forces cannot be used overseas except in narrow, and largely humanitarian, circumstances. Second is the low ceiling on defence expenditure (although in practice breached several years ago). Reform has two goals; to allow an increase in the percentage of GDP spent on the military – to keep pace with China – and to gain a permanent seat on the UN Security Council, to counter-balance China which has one of the five already.
As the world’s second largest economy, it is logical that Japan joins the Security Council as a permanent member. However, this requires that it allows the use of its forces overseas in a potentially belligerent manner. Koizumi’s desire to reform the Constitution is driven by his, and the ‘Liberal’ Democratic Party’s genuine fears of what they see happening, just over the horizon, in China.
It is easy to set up global-military scare stories. There are many ways in which the risks inherent in China’s fast growing military capabilities could unravel. One is that the Chinese Communist Party, which is losing thousands of adherents every year and has halved since 1990, simply implodes and its militarism ceases.
Or, the army may again turn inwards and kill its own people – the Tiananmen Square and Cultural Revolution options. Perhaps if the economic growth rate slows, which looks more likely by the month, military expenditure will be curtailed. There are many possible scenarios.
It is also conceivable that Taiwan voluntarily returns to the fold. In 1982, bookies would have given spectacularly long odds, post the Falklands War, that Britain’s ‘Iron Lady’ and PM, Margaret Thatcher, would never kow-tow to Communists and China; let alone hand over 5m people whose desire to be run by them was then zero. She held out heroically – for less than 12 months.
Trying to interpret complex political changes into making money from equities is a very imprecise science. Historically, when China was much weaker, markets were easily spooked by any hint that China was becoming militarily aggressive. Now they just ignore all evidence. In Korea, the index at an all-time high suggests that China’s intentions have never been more benign. Taiwan, not quite at an all-time high, has gone introspective, a bad policy when your enemy is building up an invasion fleet. In other Asian countries, greed rules; Governments and business are more interested in how to take advantage of China’s (profitless) boom, while America has sufficient domestic and foreign problems to have lost focus.
Nor are we, like Chicken Little, expecting the sky to fall. But we are concerned that valuations are showing maximum complacency, when Deng Xiao Ping’s true legacy is being realised. Although he was ‘everyone’s favourite reforming Commie’, his real desire was to restructure and strengthen the economy, so that the Communist Party of China could become a military Super Power.
By Bedlam Asset Management
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