Asiatic Adventurism, Part III

For a quick overview of issues, consider that China has understood the art of war since Sun Tzu, back when the rest of us didn’t have fireworks or chopsticks. The Chinese do not like losing face. Shooting wars have been known to start over tariffs. China is already using gunboat diplomacy and playing a deep game. They know that a trade war is still a war while Congress was grandstanding to the voters — and Japan cowers.

China has many counters to the latest puff ball protectionist gambit, an obvious one being a stiff little note from their Ambassador regretting that due to lost revenue from increased U.S. tariffs his country feels obliged to sell Treasuries according to the enclosed schedule until trading relations are stabilized at the current level…or even one more favorable to China. Start with $100 bn the first month, $200 bn the second month, and schedule $300 bn the next month, anticipating the U.S. would fold after the first sale, if not sooner. Robert Mugabe stymied DeBeers by selling diamonds at a discount, so why not discount T-bills if political and other economic advantages make that course feasible?

If I were Chinese Premier Wen Jiabao, I would hold ostentatious talks with the Japanese (who are scared stiff of me) about selling U.S. paper jointly in order to protect my dear friends on the islands not that far off my coast, that description being a non-subtle reminder that the sun cannot rise if Beijing decides otherwise. I would offer favorable discounts for those purchasing in yen or yuan, and push harder to replace the U.S.$ as the world’s reserve currency with a “basket” that included gold, the Euro, and BRIC currencies. I would step up demands for restrictions on where the U.S. fleet can sail — because my fleet is bigger and I have a million men in my army. I’d make a nice donation to Japan which is doing quite well rebuilding a blue water navy and has demanded that the U.S. vacate some very pricey naval yards. If I were really annoyed I would seize Taiwan and defy the U.S. to do anything about it. U.S. forces are already overextended and Formosa needs repatriating, in the Chinese view.

To put it mildly, the Community Organizer in the White House hasn’t the least notion of how games are played in the East and no hint that he is attempting to compete way out of his league. Perhaps the Joint Chiefs of Staff are still too engrossed in “Don’t ask, don’t tell” and the Rules of Engagement to suggest that there is enough turmoil in the Far East without us poking the dragon frivolously. Mr. Obama can never bear to consider that he might be fallible, but his sole position is that the Chinese are holding their currency artificially low — in his opinion. I have consulted an authority, and the gist of his comments on the probity of the U.S. claim is that China does not allow its currency to float. It is not obliged to let its currency float. The number of yuan offered in any given contract is arbitrary, at the discretion of the Chinese, so there is some plausibility to the claim that their rate isn’t “fair.” Life isn’t fair and if we don’t like their rate, don’t trade. China doesn’t believe in “social justice.”

I’m concerned more about actual territorial aggression than I am about mercantile wars. China has used a nice euphemism, “the peaceful rise,” to imply that they’re just a nation of shopkeepers and the fleet, the army, and war materiel are just window dressing every country needs to attain first world status. It is easy to overlook that China has been an imperial power throughout recorded history. Nobody has succeeded in breaking away or taking any part of China in quite some time. Mostly they just sat there being Chinese, other than the time they decided the Great Wall was necessary, held the Boxer Rebellion, wanted our help to get rid of the Japanese in WWII, and Chang Kai Shek grabbed Formosa in 1949 after being run off the mainland. China will take it back when the time is right. China has never had any objection to expansion; for all practical purposes China owns Tibet and Manchuria, is keeping a close eye on Mongolia, and would like to acquire Siberia. We may see May Day parades of tanks again; the party firmly in charge remains a military one with a tradition of such displays.

Have you ever heard of the Spratley Islands, named for a British sea captain who ran aground on them? Sometimes known as Senkaku? This is a group of 750 reefs, atolls, cays, and islands (including the Purcells) in the South China sea, only 4 square kilometers of which is above high tide in 425,000 square kilometers of ocean. Japan has had possession for a century, but the area is still claimed by China, the Philippines, Brunei, Malaysia, Vietnam, and Taiwan; it is desirable real estate with excellent fishing and reserves of oil and gas as well as for vital strategic position. A good comparison is that this area is the equivalent of the Mediterranean if you are Italy, Lebanon, or Egypt, or Rome, wanting to control shipping and be able to rush Legions where they were needed. Last month a Chinese fishing vessel — obviously not a junk — began ramming Japanese Coast Guard cutters on patrol in the area. This is an act of war, or at least an international incident, not a simple “oops.”

Japan impounded the Chinese boat, and China pitched hysterical fits, demanding that Japan release the Captain and crew. Japan attempted to split the difference by releasing the crew but retaining the Captain for trial, and things turned ugly quickly. Amid some very fevered rhetoric, China retaliated in part by halting exports of rare earths to Japan — thereby endangering Toyota, Sony, and everyone else there who manufactures electronics. This is a threat of concern to the U.S., because according to The New York Times, “China mines (Author’s note: and refines many of them) 93 percent of the world’s rare earth minerals and more than 99 percent of the world’s supply of some of the most prized rare earths…” The U.S. will come to rue this since our own ample supply of such minerals has been tied up in forest preserves, no machinery zones, and other brilliant treehugger projects. China has been very busy tying up or acquiring such minerals from Africa, and it is probable Australia will come to regret swapping so much of its vast mineral wealth for mere fiat currency.

Japan’s government geeked and let the Captain go, causing a furore at home over whether placating China was a good idea. You may recall that diplomatic relations became strained between Japan and the U.S. after elections of an anti-U.S. party last year partially in recognition of the fact that “geography is history;” it is a great deal farther from California to Japan than it is across the Yellow Sea, and considerable potential for money and currying favor with the Chinese are to be had from denying the U.S. fleet refueling rights and eventual takeover of some very nice ship yards and air fields which one supposes the Chinese could “borrow” in time of need. One almost pities Japan, caught betwen the current Washington regime’s failure to back allies and emerging Chinese aggression. “We’ve just watched the Chinese attempt to manage a dispute and they showed they would ratchet up the pressure and bully their way through a problem” commented a spokesman for the CFR.

Zhong Yongsheng, a university professor in Beijing commented: “This time China’s stand was very effective. This is shock and awe for those Southeast Asian nations that have territorial disputes with China.” “Shock and awe” isn’t a casual expression; it has specific military implications. “The gaming between China and Japan will be a protracted war,” purred Yi Tianfeng, a political scholar with Fudan University…and he may well have meant it literally. Imperial ambitions are hard to set aside once roused, and the Chinese resent a small incident during the Second Sino-Japanese war. I don’t know what those involved call it, but we refer to it as “the Rape of Nanking.” Aggressive nations never really change their national character and a great many countries remember that Japanese troops behaved very badly during WWII — and the Chi Coms have not been the most genteel of adversaries, either, as our oldest members, who fought in Korea, remember well. If actual hostilities break out this time Japan will be out-manned, out-gunned, and out-bankrolled. China is making demands to restrict shipping of various sorts in the South China Sea, which could be for several reasons, including arrogance, seeing what they can get away with, or future conquest.

Japan has real problems, here. Cessation of trade would be a serious blow to Japanese manufacturers, Japan is in the 20th year of almost no economic growth, and purchases by China of a large number of Japanese Government Bonds recently forced the value of the yen up — and increasingly advantage is held to lie in having one’s currency undervalued. Japanese are protesting openly about large land purchases by the Chinese, and it is improbable that the Japanese government will respond as Brazil did some months ago by nationalizing foreign-held land. At present Brazil is unlikely to be invaded by China, if only for logistical reasons.

China has the means, the motives, and the opportunities to gulp down several hunks of prime real estate, as well as difficulties brought about by too many Yankee dollars, too much unneeded expansion, their own probable real estate bubble, and the precarious state of economies worldwide. The reestablishment of the Greater East Asia Co-Prosperity Sphere, even if they call it “Asian Solidarity,” bodes well for no one except the Chinese, but a swift, victorious war without retaliation must look attractive. If China gets what it wants it can scale back and take a breather. One of the biggest advantages of underdeveloped nations is the ability to go on hold and just herd goats and plant rice by hand. The U.S. has lost that advantage since 85% of the population now lives in cities and only 2% is engaged actively in producing food.

We don’t like to think about war. We deal in macroeconomics here, so we could settle for disentangling our finances from Chinese companies on the single ground that an outbreak of war would likely cause stocks in Chinese enterprises to plummet, with perhaps a fleeting thought that in times of conflict foreign investments tend to be nationalized. Boots on the ground are a compelling case for ownership. Without succombing to total paranoia we could ask ourselves how we and the world in general would react if China retook Formosa and stationed a sufficient number of naval vessels to hold the Senkaku Islands, in easy striking distance of Japan and other bordering nations.

What would there be to do, bleat indignantly, “Give those back?!”

I don’t know how to ask, “Who’s going to make us?!” in Chinese, but Wen Jiabao does. Russia? Why? Russia doesn’t want to see its ancient enemy grow stronger, but why would the Bear be willing to take on the Dragon over the South China Sea? The U.S. is broke, fully extended militarily, lacks the will to fight another war, and I think is most unlikely to honor ancient pledges to South Korea, Taiwan, and Japan. We might be able to scrape up a defense of the Philippines, because if we don’t the way is cleared to Hawaii and the West coast.

If what we are seeing is the rise of Asiatic adventurism, we’re still dealing with the same geography with the same bloody history. Wake, Midway, the Solomons, Iwo Jima, the Coral Sea…

Sober regards,
Linda Brady Traynham
Whiskey & Gunpowder

October 12, 2010

The Daily Reckoning