Will China Crash – Part 2

I am from New Zealand, and we look at the world from about as neutral a perspective as I think is possible. Which is not to say neutral, but maybe somewhat less biased than other nations. It is when you start analysing what is going on in the world that you can quickly lose objectivity and start taking on a more judgmental approach. And certainly when you engage in debate with people from other nations, it becomes very difficult to maintain objectivity.  Nevertheless, I will state from the outset that I am trying to be as objective as possible here.

Will China crash? I know I said in part 1 that No, China wont crash, but I am starting to wonder now what the future for China is – is it overstepping the mark? Are internal tensions going to tear it up? Are the systems China operates on (Guanxi etc) compatible with the rest of the world, and how much of the news that makes it out of China (GDP Reports, basically ANY governmental report) realistic, and if not, how much can you expect that they are out by.

First up – is China overstepping the mark. There is one clear case of where the rest of the world is confronted by this question – the South China Sea, and the Island building going on there. To those who dont know some of the intricacies, here is a map of the south China sea and the claims of China (in Red), and the international 200 Nautical mile Exclusive Economic Zone that is the normal marker for territorial claims:


Basically China has claimed the entire area for itself. Why?

China’s reason: It was traditionally our waters, we have fished there since ancient times.

More likely reason: Fossil Fuel reserves, Fishing, and sea lane control.

China’s reason for the claim has been challenged, by its own records: http://www.ancient-origins.net/news-general/ancient-maps-spark-debate-between-china-and-philippines-020179

The Chinese map referenced which dates from 1169 shows that the southernmost limit to China was Hainan Island. Yet China is saying that the claim of the entire South China Sea dates from ancient times.

Whatever it is, the claim is dubious at best, and goes in direct contravention of the U.N. Convention of the law of the sea (which China has ratified) that stipulates a 200 Nautical Mile exclusive economic zone (EEZ) from the shoreline of each country. So even without the claims to rocks and features, China is blatantly in breach of this (its closest claim to the Philippine mainland is 80 Nautical miles, and is not covered by any EEZ derived from its island claims)

So – to return to the question – has China overstepped. The answer, in the perception of many other countries is clearly yes, and in a very troubling way. Troubling because it is building military bases in the South China Sea to extend what it claims to be its indisputable sovereignty in the area – and there is no easy solution – the other claimants have ever friendlier bonds with the USA (even Vietnam…), because they fear China, and the stage is slowly being set for an eventual confrontation. Not lost on these nations is Chinese incrementalism. A little bit here, a little bit there, an Island here, an ADIZ there, nothing that in itself could trigger a major response, but gradually China is getting what it wants, step by small step.

The question then becomes – what is the motivating factor behind China’s expansion, and why does China think it will prevail?

In the case of the South China Sea, I think you see the locus of Chinese thought, Chinese perceived might, and Chinese projection and protection of its mainland. Ancient fishing ground is a convenient, if not somewhat disingenuous, excuse to claim an area that can be exploited for the tremendous gain of China.

It will (and has) provoked a reaction. The USA nor her allies are going to get into a military engagement here – the long term reaction will be an economic humbling of China, and one that it cannot avoid. This will be covered off in a future post. As will the other questions above. But China has made quite a strategic blunder here – while it may gain and hold ground, it should have instead made friends. China has no real friends, except for North Korea, Laos and Cambodia. This is where it is critically weak. China has a somewhat clearly articulated policy of no alliances. My post on Great State Autism goes into this further – suffice it to say here however that this is counterproductive on any conceivable level. It is a massive country and increasingly willing to throw its weight around, maybe it thinks it doesn’t need friends, but instead of a battlefield outcome, the battle will be one of perceptions, and in this, the USA is winning comfortably against a country that is starting to show worrying signs of belligerence.

So nothing happens in isolation – while the USA isn’t dumb enough to start a fight in the area, both economically and strategically, China is being undermined both externally and by itself in ways that it cannot overcome. Some of them are demographic, some of them are based around cost-of-labour and China’s sprint to become a middle or high income country, but their dependence on foreign multinationals whom are already looking to lower cost alternatives to China (Google “PC-16 Straftor” for a clear explanation of this) has the ability to hollow China out. China is an export driven country – it is heavily dependent on exports to maintain stability. Currently China exports around 24% of their GDP per year. (The US around 13% and Germany around 45% – and Germany is in crisis – they are major creditors and when the debtor countries start winding back  on the credit – where does Germany export to? – that is another story – Google “German export problem Ambrose Evans Pritchard” – This more than anything else is the European Achilles heel). Back to China. If China withdraws credit to the US – “Calling in her debts” – China will be the one who loses – there will be immense pain, but the US already has diversified manufacturing and is quickly reducing its dependence on China as the sole source of products. If China makes conditions bad enough there that foreign companies pull back manufacturing (Microsoft, Intel and others have recently relocated to Vietnam) – China loses. The legitimacy of the CCP is predicated on delivering a slowly improving standard of living, to offset the increasingly authoritarian method of governing the country. They have made huge steps, but now they face huge challenges which they have not had to deal with before.

The South China Sea as I see it is a trap for China, and they’ve created it and walked straight into it. There is no doubt that China’s actions there have frightened and annoyed all the surrounding countries. China’s plan to change the reality on the ground by its own say so, regardless of the wishes of her neighbours seems to follow (some of this hasn’t happened yet, so there is a bit of conjecture here) 3 steps:

A) Appeasement. “We don’t want the trouble, and the pain is not over the threshold that really requires a response”

B) Naked Opposition. 10 years ago,  things may have stopped at appeasement for some time. After which the facts on the ground would have been established and it would be essentially too late to do much about it. With the rise of nationalism and a rightward swing in many countries (most recently in the Philippines with the election of Duterte) – you dont have to be a big player to cause trouble – China loves to bully its neighbours as is clearly visible in the case of SCS – but the neighbours are increasingly less and less afraid to fight back.

C) War. No one wants this, because there is no telling how it would end. The chances of it going nuclear are very real. A national conflict involving China and a US ally that could either conceivably draw the US in, or cause humiliation and a withdrawal from the US in the area – the US currently is clear that That calculus alone means

So why is it a trap for China? If you look at cost/benefit, the costs to China are enormous. The US has many bases abroad, but very few of them face opposition. They are a fact of life for many countries. SCS reclamation, development and defense on the other hand faces universal opposition. China may well think this is just a cost of doing business, but nearly every surrounding country has a vested interest in amplifying that to make the cost to China as great as possible. I think many people are incredulous that China could be so tone deaf to the consequences of their actions, and even more so about their current methods of achieving their desired outcome. I can only imagine that this makes the 6pm news in Beijing the best hour of the day for many Chinese, we’re socking it to ’em everyone, you better keep cheering for the home team. Elsewhere however, people are pointing to agreements and treaties that they have signed, and blatantly ignoring. The US sometimes does exactly the same thing, except they drag others along with them and convince them to add time and resources (think Iraq and the coalition of the willing) – China doesn’t even bother with this sop. It just charges in and thinks it can do as it likes.

In some small part, and I think this has not really been picked up at all in the media, I think Donald Trump’s rise is in some small part attributable to the rise of nationalism in China. President Xi Jinping is one incredibly scary guy. Very widely considered to be the most authoritarian leader since Mao, has taken over direct leadership of the military  (Financial Times article), Xi must walk a tightrope of conflicting demands, rising social tension, falling growth, a population that is aging faster than any other country (and even the relaxation of the one child policy is neither showing any effect, Economist article from 2011, nothing much has changed even though the law was changed in exactly the way the article describes), the fracturing of the country along the relatively affluent coastal cities who are the trade hubs with the west, and the impoverished west – none of these are problems that are going away quickly, and the CCP response to all of these has been to increase the repression and block the media. I’m fairly ambivalent on all of this – it remains to be seen what the outcome will be – I only mention it to point out that the good run China has had to date is well and truly over. What’s next is anyone’s guess.

As Sun Tzu said in the Art of War “When weak, appear strong, when strong, appear weak”

China is appearing a little too strong currently. Look beneath the surface and the reality over there is not good. Do I take back what I said in the original post about China wont be crashing any time soon – I’ll rephrase it – I don’t think anyone can tell what is going to happen over there now. China is not the west, refuses to be dealt with on western terms, and how thing plays out from here are anyone’s guess.