Is “C3” The China Cold Conflict Becoming Serious? Top Ten Concerns
London, UK - 31st January 2010, 00:55 GMT
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China appears to be escalating its growing confrontation with the US over Washington's announcement of a $6.4bn defence deal with Taiwan. Under a 1979 Act of the US Congress, Washington is legally obliged to help Taiwan defend itself. The Chinese defence ministry has said that the recent deal will definitely and seriously disturb relations between the two countries.
C3 = “China Cold Conflict”
So far, in retaliation for this specific American decision, China has:
1. Imposed sanctions on US companies involved in the deal with Taiwan;
2. Suspended military exchanges because of the allegedly harmful effects of the deal on US-China relations; and
3. Stated, "It will be unavoidable that co-operation between China and US over important international and regional issues will also be affected."
This new row is not a one-time event, but rather a manifestation of an increasingly fraught relationship between Beijing and Washington, marked by a growing tone of irritation and even confrontation in public comments by Chinese leaders and officials. Moreover, this heightened irritation appears to be spreading among China’s relations with a number of other governments, with particular focus on India and some important European nations. Diplomats in a number of countries are commenting that statements and routine meetings with Chinese officials are characterised by increasing belligerence, suggesting an historic shift in China’s stance in dealing with other nations. There are a number of plausible explanations for this emerging belligerence, but what is most worrisome is that it represents a calculated necessity to escalate a cold conflict with key nations around the world to shift blame away from rising domestic economic woes on an unprecedented scale.
The principal weakness of the Chinese economy is its over reliance on exports to propel domestic economic growth. During the Great Recession, world demand for Chinese exports collapsed, leaving China with industrial over capacity. According to some calculations, as a result of The Great Unwind and The Great Reset, China must cut industrial capacity in double digit percentages to align its economy with the slower pace of world economic activity. Instead, the Chinese leadership has not only chosen to retain industrial capacity at 2007 levels but has continued adding to the established production capacity and industrial infrastructure in the last few years.
Domestic capital spending is now estimated to account for more than half of the annual rate of GDP growth. The more industrial capacity China adds and the more it builds, all of that helps to boost GDP figures. However, many of those buildings and warehouses as well as industrial plants are lying completely unoccupied or moth balled at present. Evidence suggests that within some urban centres as much as 70% of the new buildings and industrial units are completely empty. Even if world demand were to regain upward momentum, China already has production capacity far in excess of any conceivable growth in world demand for the next several years.
Unlike the economies of the US and India, China has weak domestic demand. Recent statements by Chinese officials at the World Economic Forum in Davos acknowledge the need to shift attention to the need for increased domestic consumption, but it is not possible to change the structure of the economy overnight to divert the entirety of excess industrial output to domestic consumption. Also, many of the products manufactured in China cannot be absorbed by the domestic economy, nor can they be exported to other Asian rising powers like India, given the lifestyle and living standard gap with the West.
Whilst China continues to claim fantastic double digit GDP growth this has been achieved via an unprecedented stimulus package of nearly half the GDP of China in 2009, much larger than any of the G20 countries. Clearly, this cannot continue without severe fallout. As a result, the impact on asset price inflation and core domestic inflation has been far from benign in the second half of 2009 with double digit percentage advances in specific economic sectors and regions of China. As China begins applying brakes in 2010 to address its runaway train phenomena, it risks causing sharply rising unemployment while depressing its domestic property and financial markets, trapping millions of citizens and thousands of industrial groups in negative equity.
Within the context of an unbalanced national economy -- unwinding swiftly in 2010 and beyond – it may seem politically attractive to divert the attention of Chinese citizens to growing pressures on China from other nations, laying blame for the domestic mess on foreign powers and entities that are alleged to seek to interfere in domestic matters. Recently, the US has demanded that China undertake a serious and transparent investigation into all cyberattacks on American commercial and government targets. The Chinese reception to such ideas has been extremely cold and even confrontational. As a result, the US has made its views on free internet access more voluble and frequent, causing further irritation in Beijing.
It is now becoming clear that C3 -- The China Cold Conflict -- with the US and other powers is becoming manifest beyond the increasingly interactive segments of economic and diplomatic relations, suggesting rising tensions and potential for intractability sooner rather than later. Among the top ten concerns are:
1. China-Taiwan strategic balance;
2. Cyber attacks not only on Google but on at least 30 other US companies, as well as ongoing attacks on the US government and military establishment;
3. Parallel cyber attacks on the Indian Prime Minister's offices and other parts of the Indian security establishment, and apparent statements of concern on the part of the German and French governments in regard to cyber vulnerability;
4. Internet censorship, suppression of freedom and activism, and human rights violations;
5. Severe standoff at Copenhagen in regard to climate chaos negotiations;
6. Tit-for-tat trade sanctions and public confrontation over demands made by the US President and other foreign leaders that China alter its currency policy;
7. Differences in approach to dealing with Iran via UN mechanisms;
8. North Korea's nuclear proliferation;
9. Military presence in Pakistan; and
10. Ongoing border disputes with India which are taking an increasingly provocative character.
Given the complexity and concatenation of these top ten evolving concerns across multiple dimensions, there is growing risk that C3 -- The China Cold Conflict -- may escalate further with unanticipated consequences for financial markets, world trade, global businesses, policies of governments and their national security agenda.
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