China’s 9 Dash Lines and the demise of the $ (Part I)
I had wanted to do a follow up on my November 2016 blog on the Rube Goldberg US$ printing machine, but following Distant Observer’s article on “Scarborough Shoal, it’s not about fishes or oil, it’s about power”, I decided to tie 2 issues together. Due to its length, I’ll publish in 2 parts.
The Chinese objective for their 9 Dash Lines covering the seas in SE Asia has commonly been attributed to:
- The food supply — a growing China is coping with depleting food resources. They want to monopolize the fishing grounds.
- The energy resources — China’s insatiable appetite for energy drives them to block the gas deposits under the West Philippines for themselves.
- Chinese hegemony — good old fashioned physical dominance of the region.
- Secure the oil and commercial supply lifeline to Japan, Taiwan and Sorkor.
- Defensive strategy to push back US offensive capabilities.
(1) and (2) can be easily discounted for the simple reason that there are easier and cheaper options open to them.
(3) Hegemony is unlikely their objective. Historically, China has had friendly relations with SE Asian countries. The 9 Dash Lines effectively puts them in conflict with Asean countries (except the Philippines and Cambodia). The militarization of the islands is also drawing Australia and New Zealand into the conflict, while the rest of the world are concerned with the freedom of navigation in the area. For dominance over the Asean countries, China could have been much more effective by taking the humanitarian and mutual respect route. Why would they want to exert brute power at a time when their military technology is 20 years behind the West?
(4) Control of oil and commercial supply lines seem plausible at first. In times of conflict, they can choke Japan and the American forces in Sorkor. However, control over the supply lines lie not in the 9 Dash Lines. It is at the narrow Straits of Malacca. A blockade at this point can easily counter the Chinese move. Malaysia may be a problem, but Singapore and Indonesia will be willing parties to such a blockade.
It is probable that they see a weakness at the Straits of Malacca which is why they have developed ports in Gwadar (Pakistan), Bangladesh and Myammar to transfer shipments onto the rails in which they invested heavily to go direct to Beijing. That would be China’s wartime supply line. I don’t know about Myammar, but ports in Bangladesh and Pakistan are notorious for pilferages. The Chinese can build the hardware, they can’t control the software. It would require a tremendous amount of re-arrangement of the regular liners and container distribution channels on a worldwide scale. Certain products cannot be shipped via trains, including petroleum. Would transshipments at Pakistan, Bangladesh, Myammar and then via rail be more cost effective than continue with a direct passage through the SCS? I very much doubt that. So in peace times, it will likely be a white elephant, other than for products sourced directly from those 3 countries.
The Straits of Malacca is key to counter the Chinese dominance. Should freedom of navigation be denied by the Chinese, the world has to reply with a blockade at the Straits. I have never seen anyone bringing this up for discussion.
(5) Defensive strategy
Chinese aggressive move on the 9 Dash Lines and militarization of the reclaimed islands in the WPS is not a projection of it’s new found powers. The Chinese air force is largely untested, it has a new untested aircraft carrier, it’s navy is weak, its submarine technology is years behind the US, and they have no experience of undersea warfare. Its missles and delivery systems have improved tremendously, but remain years behind the west. It is not yet a rotweiller. In military warfare, one avoids taking an offensive move from weakness. In the infantry we learned that if the numbers are 1-3 against us, don’t engage. But if it’s a defensive act, better to do it even at 1-100 odds. I believe what the Chinese are doing is a defense strategy which I’ll explain below. First let me digress a little.
What were the Chinese thinking?
One needs to understand the Chinese mentality or cultural nuances. In tactics or strategies, whether it’s statecraft, military, or commercial challenges, embedded in the Chinese mind are ancient arts that survive to this day. No, NHerrera, they don’t play GO for that. They have great reverence to Sun Tsu’s Art of War (around 450 BC) and the great war games played out during the period of the Warring States, particularly between 220 to 280 AD, immortalized in the novel Romance of The Three Kingdoms. To get a sense of perspective, more people died during the Warring States than WW2. Chinese leadership to this day, including the late Deng Xiao Peng, Pres Xi, party leadership and military brass, talk and quote from these 2 books over coffee, in state planning, and in meetings.
“Romance” is really very interesting. After decades of brutal warlordism, 3 states remained and they couldn’t have been more diverse in political ideology. The state of Wu was pacifist and basically sought to protect their fertile lowlands. Shu professed humanitarianism and intelligence, it used wit to survive, it had a great lord Liu Bei, a great general Kuan Yu (who is deified as the God of War – you can see him with his long saber in triad homes or business offices) and a great tactician in PM Zuke Liang. Cao seeks power and subjugation of others. It was a period of great strategies, counter-strategies, or loyalties and treason, of weakness pitted against strength. Understanding China today, we need to analyze their moves whether it is a Wu, Shu or Cao initiative.
My personal belief is that China is now in a Shu state mentality and its moves in the 9 Dash Linse is a defensive strategy. If it’s defensive, the question is why? China fears the impending catastrophe that the US national debt will unleash on the world. Various intitiatives by the Chinese point to this fear factor. They were one of the first to ask the US to reign in their debt problem years ago. They have moved to build up gold reserves and decrease their US$ holdings. (Yes I appreciate to an extent they are using $ to prop up the RMB). They have taken lots of initiatives to move away from $ in their trade. The RMB is now included in the basket of currencies for the IMF’s Special Drawing Rights.
Let’s compare the experiences of Japan and China in their miracle years. In post-war Japan, the Yen was about 360 to the $. By 1970/80, Japan has already become the 2nd largest economy in the world after the US. The Yen appreciated by 276% to 130 levels in the 80s. Their economy sucked in vast sums of US$ and all this cash need to go somewhere. Japanese corporations and individuals splashed on American assets. A Japanese insurance magnate paid US$40 mm, a staggering sum in those days, for Picasso’s Sunflower. Sony Corporation practically bought Michael Jackson and they invested heavily into the entertainment industry. All that money that went back into US assets suckered the Japanese as the Yen soared.
Meanwhile, the Japanese government, through MITI (Ministry of Internation Trade and Industry), recycled the money through the Bank of Japan, lending to local banks who further lent to designated kereitsus. That caused an industrial boom and the companies extended vertically and horizontally, locking foreign companies out. That was a time of paradox in Japan Inc. The conglomerates were not interested in short term profitability. They were watching their net interest income. State interference often throws up unintended consequences.
Coming from a command economy, China struggled with the intricacies of a free market economy, particularly with exchange rate management. When China opened up after Deng Xiao Peng, they pegged the yuan to the $. From 1997 to 2005, it was pegged at 8.37 to the $. It was an undervalued rate giving China unfair trade advantages. Under pressure from US, the Yuan was floated in 2006 at a rate of 8.31, but it was still centrally controlled. It is a managed float, not a free float.Today, it is about 7.0.
In 2011, China overtook Japan to become the 2nd largest economy, and as of Dec 2014, became the largest economy in the world. Similar to Japan, China’s economic boom sucked in vast amount of dollars which needed to go somewhere. The new wealth found its way back to the US as filthy noveau riche Chinese snapped up chunks of US real estate. Those who bought in before 2006 benefited tremendously from the suppressed Yuan.
By today’s valuation, the Chinese are definitely still better off than the Japanese. Unlike Japan, China benefited from globalization and allowed foreign companies in to drive its initial growth. This would be the Shu mentality. Again unlike Japan, the Bank of China allowed the liquidity to flow into the asset market, creating huge bubbles that are now about to burst. Flushed with trade money in the country, the govt diverted the resources into a huge offshore economy, the One Belt One Road program. This is the Wu mentality.
What has this Japan/China economic digression got to do with the 9 Dash Lines? The Cao mentality sees the Americans gaming the $. The huge US debt will bring America financially to it’s knees, thus wiping off China’s tremendous gains. The sub-prime crash of 2008 is nothing compared to the one that’s coming. There is a potential for military conflicts as countries fight to survive. China’s move in the SCS is a defensive strategy in light of this reading.
The Area Access / Area Deny Strategy:
Beneath the South China Seas, American nuclear-powered submarines prowl the waters in stealth. They have the capability of launching strikes on Chinese coastal cities easily. Chinese turbine-powered submarines are no match and China has no combat experience in submarine warfare. American bases in Okinawa, Singapore and Vietnam pose a real and present threat
The Chinese response to this is to build a massive undersea sonar grid the length of its Southern coastline. The missiles on the islands are for the defense of the sonar grid. Once the A2/AA grid is operational, American submarines will be pushed further out and this will render the coastal cities out of their missile reach.
This then is the puzzle to China’s 9 Dash Line move. It is of such national importance that they are willing to face international vilification for their transgression. My guess is the Chinese will still allow freedom of navigation during peace times. This has no impact on all their undersea structures so there is no reason to alienate the world. A sense of normalcy should then prevail. China will then settle down and build relations with Philippines; the more Duterte’s position weakens, the more effort will they put in.
I conclude with an inference to make this article relevant to Philippines. I have seen so many comments in the internet by Singaporeans that China’s One Belt One Road strategy is to punish Singapore for its strong support for the US. The Philippines, on the other hand, is so over the moon that the assertiveness of the president has made world powers line up to buy favors. The Japanese pledge of a $8b aid recently has been touted as a great example without understanding this was part of the $130b assistance the Japanese promised President Aquino when he made an excellent pitch to the Japanese parliament in Jun 2015. To input such a faux importance on oneself is really laughable. The truth is that Singapore and the Philippines are just flies on the wall in China’s war games.
As I mentioned above, China and Japan invested heavily in infrastructure after their economic boom using the vast reserves built up over the years. Singapore, Sorkor and Taiwan did practically the same thing. The Philippines is now initiating the so called ‘golden infrastructure age’ relying heavily on borrowed funds. Where will this lead?