China: The Future Is Bright With A Chance Of Economic Collapse


December 28, 2016: As far as security threats go, nothing surpasses the precarious state of the Chinese economy and banking system and what would happen if both collapsed. All the other headline grabbling activities (military expansion, aggressive territorial claims) are mainly to deflect attention from this, the real threat. China managed to avoid a financial meltdown in 2016, but mainly by avoiding having to deal with the bad debt problem and the continued dependence on infrastructure projects and wasteful spending by state-owned firms. The government admits that economic growth is in decline. Official estimates are for GDP to grow of nearly seven percent in 2016. Estimates by economists outside China put it more like six percent and the next few years will see a further decline. The government is making the right moves and doing it slowly so as not to trigger a major increase in unemployment or a collapse of the many banks that are crippled by uncollectable loans. Wealthy Chinese have been seeking to buy foreign currencies rather than hold large sums of cash using the Chinese yuan. If the Chinese banks do get in trouble the value of the yuan will plummet sharply.

Compounding all this is growing wariness about the accuracy of government supplied economic data. For example Producer Prices (what manufacturers sell their goods for) have been falling every month for nearly four years. This is caused by low demand and in response companies have been employing fewer people for two years so far. Part of the slowdown is deliberate. China had made it more difficult to borrow in an effort to deal with the real estate bubble and corruption (bad loans) in the banking system. But now the government is loosening credit to make it easier for companies to grow. The problem is that the economy is no longer growing like it did since the 1980s, at over 10 percent a year. On top of that there is the old problem of corruption within the government when it comes to accurate economic statistics. The unreliable government statistics were long an open secret that did not seem to matter. That has changed.

GDP growth has been slowing since 2010 and that trend will continue. This is mostly about how the decades of development are over. Most of the missing (because China did not go through the Industrial Revolution until the late 20th century) infrastructure (road, ports, dams, utilities, housing) have now been built and, because of government corruption, often overbuilt and poorly built. China is putting up impressive economic numbers but not enough of the ones that count. For example, a better (but less used) measure of economic strength is how much of the national wealth is in private hands (where it is more efficiently managed). Thus while China makes much of its GDP (at $11 trillion second only to the American $18 trillion) and capable of eventually surpassing the U.S., they are now losing ground when it comes to privately controlled wealth ($23.4 trillion versus $84.8 trillion). More Chinese, especially the wealthy middle and upper class ones, are openly protesting this deception because it ultimately puts at risk all that new wealth.

Moreover the real strength of the Chinese economy is production for domestic consumption. Starting in the 1980s, China set the economy free to finally get through Industrial Revolution (which most Western nations underwent in the 1800s) with little state interference. As happened in the West, this leads to explosive growth and problems with pollution and raw materials shortages. This makes China's neighbors nervous, because that's where lots of the raw materials come from, and some of the pollution (industrial waste) can go to.


The problems North Korea is creating for China is seen differently by the other nations North Korea threatens. Growing aggression from both China and North Korea has caused potential victims to sharply increase defense spending. Japan and South Korea have continued to hike their defense spending to record levels. For 2017 South Korean spending is going up four percent to $36 billion. In Japan it is a 2.3 percent boost which means $45 billion for 2017. This is the fifth year in a row Japanese defense spending increased. Unlike Taiwan and South Korea, which continued to be threatened by China and North Korea, Japanese defense spending declined after the Cold War ended in 1991. But in 2013 that changed and every budget since then has increased. By 2015 Japan had its highest ever defense budget ever ($42 billion). Most of the recent increases have been to buy new weapons and upgrade existing ones to improve defense again Chinese or North Korean attack. South Korean spending is putting more emphasis on missile defense.

South/Central Asia

Despite growing resistance to Chinese efforts to take control of the South China Sea, Chinese troops continue causing problems along the border of the Indian state of Arunachal Pradesh. These incidents are not supposed to happen at all because of agreements China and India negotiated in 2013 and 2014. Because of that China claims recent incursions were accidents and point out that their troops leave as soon as India contacts China (per the border agreements) and China is able to contact the border troops involved. There have been fewer of these incursions since 2014. Meanwhile India continues to move more troops into the area and build facilities to support them. India recently activated eight military airfields in the sparsely populated provinces. Each can handle large transports (like the new American C-17s India bought) and has a control tower and room for rapid expansion.

China, which is making major investments in Pakistan, has threatened to cut back if Pakistan does not improve security and is calling for greater international efforts to do the same in Afghanistan (where China has some major projects pending because of security concerns). This is a veiled criticism of Pakistan, which is the largest customer for Chinese weapons exports. All this has caused a growing struggle within the Pakistani government as the military (and its intel branch, ISI) refuse to consider shutting down the remaining Islamic terrorist sanctuaries. Thus it was no surprise that in late November the Taliban announced that it would not interfere with a huge copper deposit 40 kilometers southeast of Kabul at Mes Aynak. In 2008 China signed a deal with Afghanistan that gave them 30 years to develop a mine there and ship copper out. Mes Aynak is believed to be one of the top three copper deposits in the world and worth $50 billion or more if it ever got into production. But China has not moved because of the lawless situation in Afghanistan. The Afghan government believes the Taliban is trying to entice the Chinese to begin construction so the Taliban can extort regular payments to “protect” the facility from attack. That really doesn’t work in Afghanistan, where there are too many potential attackers.

Meanwhile In Libya

In Libya UAE has supplied one of the factions with at least three Chinese Wing Loong UAVs. Unable to obtain armed Predator UAVs from the United States, Gulf Arab states turned to China and purchased quite a few Chinese UAVs. Each Wing Loong can carry two BA-7 laser guided missiles (similar to the Hellfire) or two 60 kg (110 pound) GPS guided bombs (similar to the U.S. SDB). In 2012 Uzbekistan and UAE became the first export customers for this Predator clone. Development on Wing Loong began in 2005, first flight was in 2007 and Chinese troops got the first ones in 2008 for further testing. While Wing Loong is similar in shape to the larger American MQ-9 Reaper, in size it's almost identical to the 1.2 ton Predator. Wing Loong weighs 1.1 tons, has a 14 meter (46 feet) wingspan, and is 9 meters (28 feet) long. It has max altitude of 5,300 meters (16,400 feet) and an endurance of over 20 hours. Payload is 200 kg. Promotional pictures of the Wing Loong show it carrying two BA 7 missiles, which is basically a laser guided anti-tank missile with a max range of 7,000 meters. In Libya Wing Loong has been used mainly for surveillance.

December 24, 2016: The government went public about the warnings recently issued Chinese firms that do business with North Korea that the latest round of sanctions must be observed. These international sanctions are in response to the North Korean nuclear test in September and the October ballistic missiles tests. In November China agreed to enforce a new set of economic sanctions. For several years China has applied more and more pressure on North Korea, usually quietly, by cracking down on trade, especially the movement of forbidden (by current sanctions) items. China is North Korea’s largest trading partner, buying over half of legal North Korean exports. In turn North Korea imports over $3 billion worth of food, medicine and other unsanctioned items from China. Nevertheless one reason for the new Chinese willingness to crack down on the illegal North Korean trading that had long been tolerated was discovery that North Korea had bribed a lot of Chinese officials and gone into partnership with a number of Chinese companies to illegally (even by Chinese rules) obtain key components for its nuclear weapons and ballistic missiles. The Chinese tried to keep the details of its crackdown secret but, as is often the case in the age of the Internet, this proved impossible. All this was complicated by the fact that the Chinese government has made a major public commitment to fighting domestic corruption and protecting China from foreign military threats. For decades Japan and the United States were identified as the principal foreign threats. But in the last few years the government has allowed growing public anger at North Korea to be openly discussed in Chinese media. These threats; to use nukes and ballistic missiles against China for not supplying North Korea with enough fuel, food. This growing bad behavior and ingratitude from North Korea turned Chinese public opinion against North Korea, which had long been seen as an ally against the evil West and their South Korean and Japanese puppets. Until the latest North Korean nuclear and missile tests China was directing more anger at South Korean refusals to halt the expansion of their anti-missile defenses. China is still angry about that but is now more concerned with the North Korean threat. North Korea has remained defiant, continuing to test ballistic missiles that can reach all of China.

December 23, 2016: In the last month China declared its only aircraft carrier (Liaoning) combat ready (in late November) followed by its first live-fire drills in mid-December off the coast of northern China (the Bohai Sea) near the shipyard and naval base as Dailan. For the first time J-15 jets took off from the Liaoning armed with anti-ship missiles and fired those missiles at target ships. On December 23rd Liaoning and its escorts were seen moving past Japan for the Pacific while also continuing to launch and recover its jets and helicopters. Although China always described Liaoning as a training carrier it is also reminding the world that the Liaoning can fight as well.

December 22, 2016: The government announced that it is deploying a military engineering team to Sudan. The 109 Chinese soldiers will serve with the UN peacekeeping mission in Darfur. Another 116 Chinese soldiers will deploy by the end of the month (for a total of 225 troops) and all will serve for one year. China has a “rotating” contingent and this is the 13th rotation for Chinese peacekeepers.

December 21, 2016: An updated version of the FC-31 jet fighter successfully flew and was announced as a suitable rival for the American F-35 but at half the price. China is currently pricing the updated FC-31 at $70 million. Since 2014 China has offered its 25 ton J-31 stealth fighter to export customers as the FC-31. China has been developing two stealth warplanes. The J-31 first flew in 2012 and the 32 ton J-20 in 2011. There are eight prototypes of the J-20 and apparently at least one pre-production model. Both the J-31 and J-20 are expected to enter service by the end of the decade. Japan is also developing a stealth fighter which, if it is completed, won’t enter service until the late 2020s. Russia is developing one as well and hopes to have it in service by the end of the decade. Meanwhile the United States has had stealth warplanes since the 1980s and is the only nation with operational stealth aircraft as well as combat experience with this tech.

December 17, 2016: China joined with other donor nations in openly condemning North Korea for diverting flood aid to military uses. In the past China would have ignored the diversion or criticized North Korean leaders privately. No more. Going public like this forced North Korea to pay attention, if only because China is usually the largest donor for major catastrophes like the record floods that hit border areas. The damage was worse on the North Korean side and the aid effort less energetic and effective than in China.

December 15, 2016: China is wary of the growing number of American naval robots and today a Chinese warship in the South China Sea seized an American naval robot. Then things got interesting. The waters of the western Pacific are increasingly populated by AUVs (Autonomous Undersea Vehicle) set loose to collect technical data on the water all the way from the surface to the sea bottom. Increasingly these AUVs are being caught by fishing nets by accident or seized by warships on purpose to make a political point or, eventually, interfere with legal data collection that is nevertheless very useful in submarine operations. The AUVs are also called UUVs (unmanned underwater vehicles) and they have been getting cheaper, more capable and more proliferating. After the recent incident with China the U.S. pointed out that the kidnapped droid was using commercially available technology and was worth about $150,000. Faced with a “grand theft droid” charge China agreed to return the AUV and did so on the 20th.

December 14, 2016: The government again warned Burma to do something about the fighting along the border. This has been particularly intense over the last few months in Shan State. There fighting between rebellious tribes and the Burmese army has increasingly seen stray bullets and mortar shells land on Chinese territory. In November a Chinese citizen inside China was wounded by some of the gunfire. China told Burma to restore order to the border which has been unruly for centuries. To emphasize the point China put army units near the Burma border on high alert and publicized the order. Aside from the violence China is unhappy with how all this violent interferes with trade moving across the border in both directions.

December 13, 2016: The Philippines has agreed to buy weapons from China on terms that include Chinese loans for up to $500 million that do not have to be repaid for 25 years. This would finance major military purchases although initially the Philippines is only interested in about $14 million worth of weapons and equipment for the national police. The Philippines needs more weapons and equipment for the police and China has become a major supplier of this gear throughout the region.

Meanwhile China is openly boasting of having split the American alliance opposing Chinese claims to the South China Sea. For example the Philippines recently said it would no longer cooperate with the U.S. Navy carrying out patrols through Filipino waters claimed by China. That means American ships or aircraft involved in these patrols cannot operate from Filipino naval or air bases. At the same time Filipino president Duterte has, under pressure from his own military, backed away from efforts to expel all American troops from the Philippines and cancel many defense related agreements. The Filipino generals and admirals are aware that China is moving more weapons into disputed islands (many recently created by China) and appear intent on annexing it all, not matter what sovereignty nearby nations had long enjoyed. The situation has gotten worse as China is installing more anti-aircraft weapons on some of these islands.

China believes it has obtained the cooperation of Cambodia, Philippines and Malaysia on South China Sea matters. That means ASEAN (Association of Southeast Asian Nations) which in 2014 showed signs of openly defying China, is no longer a threat to Chinese claims. Founded in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand, ASEAN has since then expanded to include Brunei, Burma, Cambodia, Laos, and Vietnam. Most of these nations oppose China's violation of many members EEZ (Exclusive Economic Zone, waters 380 kilometers from the coast) in the South China Sea. China long had a staunch (and paid for) ally in ASEAN (Cambodia) who blocked all attempts to unify and oppose China. Now China has more allies in ASEAN and one less international critic to worry about.

December 12, 2016: Taiwanese officials admitted that Chinese military aircraft had circled Taiwan for the first time. This included passing over the vital Bashi Channel and Miyako Strait. China use H-6 bombers and Su-30 fighters, both of which have the range for such an operation.

December 10, 2016: Six Japanese jet fighters confronted Chinese military aircraft that flew close to the Japanese coast (specifically Miyako Strait). China later filed a formal complaint that the interception was “too aggressive.” Japan denied the allegation. So far this year Japanese jets have been sent up over 60 times a month to deal with Chinese warplanes flying close to Japanese airspace.

December 4, 2016: In north Burma (Shan State) an air force jet crashed near the Chinese border, apparently the result of equipment failure. For a while there were rumors that a Chinese anti-aircraft missile brought the aircraft down but China denied that and there was no evidence of such a missile attack.


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