In December, for the first time since February 2016, Chinese factory activity declined. That alone was enough to cause stock markets worldwide to continue their sharp declines because the factory slowdown was more evidence that the entire Chinese economy was hitting a rough patch. It was also confirmed that Chinese GDP growth in 2018 was 6.5 percent and many economic indicators continue declining while those in the United States are growing. This is a reminder that the current trade war with the United States favors the Americans for many reasons that Chinese leaders cannot ignore. China has hit economic slumps since the 1990s, usually the result of economic problems in the West. But now the cause is China because of a lot of bad decisions that are now catching up with the Chinese leadership that made all the mistakes in the first place. Years of tolerating corruption and ignoring the growth of bad loans (that were at the basis of much corruption) means that just borrowing more money to give the economy a boost will not work. A sharper decline in Chinese economic activity would have a worldwide impact because China is a major trading nation and a major customer for raw materials, semi-finished goods and some high tech items. Fewer orders from Chinese firms have a major impact on national economies worldwide. That’s why global financial markets have been in decline for months and prospects of a turnaround are not good right now.
While 2018 was a bad year for the economy, 2019 does not appear to be much of an improvement. China hopes to maintain GDP growth of at least six percent while at the same time continuing to safely reduce (“deleverage) the huge number of bad debts local governments and corrupt banks have taken on over the last decade. The economic decline in 2018 could be measured in many aspects of economic activity (production, orders for raw materials, finished goods or construction and so on) and sentiments (of people running the economy and consumers). Chinese stock markets were down over 30 percent and for the first time in three years, profits of industrial firms took a dive. At the same time, there were similar shocks to the American economy, but much more limited. In early December Chinese and American leaders agreed to a 90-day truce in their trade war. The Americans are doing it to test the sincerity of new Chinese trade measures that are supposed to make it easier for some American products to be sold in China. China is also supposed to halt the theft of American IP (Intellectual property) and commercial espionage in general. Until now the Chinese would often flagrantly cheat and then deny that they had done any such thing. This has been going on for decades and the recent American trade war is meant to deal with this long festering issue. China is seen as vulnerable because its economy is overheated, unbalanced and at risk of partial collapse. Chinese leaders need some time to consider their options and cope with some very immediate problems (a growing labor shortage and more business being shifted to other Asian nations). The Americans openly reminded the Chinese that there would be prompt retaliation if China reneged on any of these agreements and that is good news for Chinese competitors, especially neighboring nations.
Trying To Hide The Pain
China is continuing its mid-2018 policy of monitoring Chinese media for any errors or exaggerations when reporting economic data. Punishment is prompt and harsh for any editors who screw up, accidentally or on purpose. In other words, the economy is not doing well and the government wants to prevent financial panic, especially in light of the trade war with the United States and the sanctions on Iran (a major source of oil). This media manipulation can moderate the widespread unease about the economy in China but not eliminate it. The government still lacks total control over the Internet and cell phone users. Bad news still gets around and when it has to do that despite government censorship the news has more impact. While some of this bad news comes from outside China most of it is generated internally. Chinese have learned not to trust government supplied economic data. Chinese can see for themselves indicators of economic slowdown and a rapidly mutating slang is used on the Internet to get the news past the censors.
The government knows it can slow the spread of bad news, not stop it and tries to come up with new distractions to divert public attention. The mess in North Korea helps, especially since South China Sea headlines don’t distract as well as they used to. Threatening Taiwan or the U.S. Navy is always good for a few days of distraction. Some things are more difficult to hide. For example, Chinese, especially the growing number who travel abroad for business or pleasure, note that China is not well liked by its neighbors. China is seen as a bully and a threat economically and militarily. This can be seen by the eagerness of Chinese neighbors to side with the United States in its trade war with China. Many of these nations have similar disputes with China see the American efforts as beneficial for everyone but China. “Attack while the enemy is weak” is a classic strategy and one especially favored by those who study Chinese history, as most Chinese leaders do. When playing defense against this ancient Chinese wisdom advices use of deceptions and delay until the situation changes. In this conflict, the American and Chinese leaders seem to be using the same moves but from different playbooks.
The Chinese were surprised at the American trade war as they believed the West, especially the Americans, would not risk such a move. Unfortunately, the current American leader is a career businessman and expert at the use of mass media and negotiating solutions where no one else could. Most Chinese noted this change and became even more disillusioned at their own government which is still seen as corrupt and self-serving by most Chinese. The newly acquired Chinese prosperity rather fragile compared to the Western models. The Chinese government prefers to play down this but at the moment most Chinese are well aware of the fragility and terrified at where it may lead.
The Second-Rate Superpower
Russia likes to be seen as an ally of China but the reality (which more Russians are accepting and confronting) is that Russia is no longer a superpower and provides a military threat only because it has spent a lot of its shrinking defense budget on maintaining its nuclear weapons and ballistic missiles that deliver them. Actually, Russia still maintains a larger force of nuclear-armed missiles than China but that is largely irrelevant. Economic growth and GDP determine who has the most power. The Russian GDP ($1.3 trillion) is stagnant and the population continues to shrink because more people are leaving and not enough children are being born. Few want to move to Russia, at least not for economic opportunities. Russia projects a more powerful image than it can sustain. Russia needs a win but so far can only manage some feeble threats. Similarly, Chinese “ally” North Korea has a miniscule GDP ($30 billion) which is pathetic compared to South Korea ($1.3 trillion), Japan ($5 trillion) and China ($11 trillion, second only to nearly $20 trillion for the United States.) Another Chinese ally, Pakistan, has a GDP of $300 billion which is relevant when you consider neighbor (and sworn enemy) India has one of $2.6 trillion. That also explains why India is so concerned with Chinese aggression and seeking military relationships with the U.S., Japan, South Korea and tiny Israel (GDP $350 billion) because that nation is a military and industrial powerhouse in the region.
South China Sea
In the aftermath of the American November FONOP (freedom of navigation operation) in the South China Sea, the fifth one for 2018, China has moved more radars and EW (Electronic Warfare) equipment and guided missiles to the Paracel islands. China also declared once more that the Paracels were part of China and China would control its territorial waters (any seas within 22 kilometers of Chinese land). That last 2018 FONOP was near several of the Chinese occupied islands in the Paracels. These islands had long belonged to (and been occupied) by Vietnamese. China took the Paracels by force in the 1970s. In 2012 one of the Paracel islands (Woody Island) was declared the center of Sansha, a new Chinese municipality (city). Sansha is actually Woody Island and dozens of smaller bits of land (some of them shoals that are underwater all the time) in the Paracels and the Spratly Islands to the south. In fact, the new "city" lays claim to two million square kilometers of open sea (57 percent of the South China Sea). China did not interfere with the November FONOP although it did send a warship to follow the American cruiser. Two days later another two U.S. Navy ships (a destroyer and a replenishment ship) passed through the Taiwan Strait (the waters between Taiwan and the Chinese mainland) as a form of FONOP. This was the second Taiwan Strait FONOP since October where the passage was publicized. Until the October FONOP such trips through the Taiwan Strait (which American warships do regularly) were not publicized, something the U.S. had been doing since 2007. The renewal of publicizing these movements annoys China which responded by having their own warships following American warships passing through the Taiwan Strait and increasing Chinese naval ship patrols around Taiwan.
There are two ways China can enforce its sovereignty exert control over its territorial waters. The traditional response is to attack intruders with gunfire or missiles. Then there is the preferred Chinese method of swarming around the intruder with commercial, coast guard and even navy warships and combat aircraft. This has included causing collisions (often just “bumping”). China does not want a war with the United States, mainly because of the economic risks which could lead to more unrest inside China. Interference with seaborne trade and trading relationships, in general, would disrupt the Chinese economy and threaten the CCP (Chinese Communist Party) control. What China has demonstrated is a willingness to do everything short of war, especially if they can remain able to claim victim status.
Money Talks In Different Dialects
For much of 2018, Western nations were increasingly critical of how China was treating its Moslem minority. In the northwest (Xinjiang province) it has been no secret that the extreme security measures have been mainly directed at Uighur, Kazakh and Kyrgyz Moslems. Nearly a million of these Moslems have been sent to reeducation camps and that has become an international issue, but not with Moslem nations who are usually quick to complain about any real or imagined slight by Western nations. The silence of Moslem critics was not because China has restricted journalist (Chinese and foreign) access to Xinjiang because that has not completely kept news of what is going on there from getting out. Thus when it became known that at least 50,000 Kyrgyz Chinese Moslems were also in the re-education camps there was outrage in some Central Asian nations that had people they could identify with those in the camps. But even these Central Asian nations were not officially critical of the Chinese. The lack of criticism from Moslem nations is mainly about money and the realization that China is able and willing to maintain or withdraw investments depending on how recipient countries behave towards China. Since the 1990s China has been more of a presence in Kyrgyzstan and the other former Soviet stans of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) because these nations wanted someone to help with the economy and discourage the Russians from trying to dominate the region as they have done since the 19th century. The stans were very receptive to Chinese diplomatic and economic cooperation. But now many people in the stans are reconsidering their relationships with China in light of the anti-Moslem crackdown in Xinjiang. This is a problem for China which has a growing number of economic investments in the stans, including the massive OBOR (trans Eurasia roads, rail and pipelines) effort. To make matters worse the U.S. is threatening to impose sanctions over the Xinjiang detention camps and there is growing agitation in the UN for sanctions, or at least censure. That is unlikely to happen because China has long used bribes and threats to gain control over UN votes and the willingness of some foreign countries to openly criticize China. Moslem nations are notoriously corrupt and Chinese bribes are more effective there than they are in many Western nations.
The re-education camps of Xinjiang are now estimated to hold ten percent of the adult Moslems in the province. The re-education often consists of confinement and lectures about what the government considers bad behavior (doing anything the government does not like). Inmates are given a choice; do what the government wants or undergo an escalating series of punishments. Xinjiang has been the test site for how extensive networks of vidcams and other forms of population monitoring can lead to more control over large populations. Already the government boasts that nationwide fifteen million people have been banned from flying or riding the high-speed trains because of their low SCR (Social Credit Rating). Low SCR makes it more difficult to get a good job, a bank loan or a passport. SCR scores depend on what the government sees, hears or reads via that growing network of sensors and informants.
The government expects to have the Big Brother monitoring and SCR systems operating nationwide by 2020. Already local officials are finding SCR a useful tool in many different ways. Xinjiang is apparently the laboratory in which it is discovered what works and what does not. For example, Xinjiang factory workers who refuse to accept harsh working conditions and no pay increases can be assigned a low SCR and then told they must either improve their attitude towards bad working conditions or go to a re-education camp for a while, perhaps a long while if they refuse to behave as ordered. Many Chinese have no problem with SCR and see it as an opportunity. One reason for that, which the government does not like to talk about, or even acknowledge, is that SCR has already been corrupted. Local officials and police have a lot of discretion in deciding which behavior is likely to lower an SCR. In other words, some well-placed or well-timed bribes can keep your SCR healthy. The government is aware of this but knows that despite the vulnerability to bribery the SCR is still a powerful tool for controlling the population. For example, one way of boosting your SCR, and making some legal money (although usually less than $50 a month) is to agree to work for the secret police as a local informer. In some parts of the country, like the capital, there are a lot of these paid informants. In central Beijing, where nearly four million people live and even more work or pass through, about three percent of the population are paid informants. That is in addition to the extensive network of security cameras and extensive surveillance carried out in the Internet. Exactly how the population will react to extensive and sustained use of SCR is an unknown. But at this point, we are beginning to find out, especially in Xinjiang province and some of the major cities. The cost of building and operating the SCR system is one reason why China spends more on internal security (secret police, riot police, coast guard and so on) than they do on the defense budget.
China continues to tolerate a certain amount of North Korean smuggling and financial misbehavior. But North Korea must be discreet because China is officially backing (if not actually enforcing) most of the economic sanctions on North Korea. Since a crackdown on Chinese banks a few years ago North Korea has moved most of its illegal finance operations out of China. North Korea has established a network of companies and banks that will act (for a fee) as middlemen in turning North Korean profits from foreign operations into products that can be shipped to North Korea without any real proof North Korea paid for it. Of course, it is obvious that these imports are not free foreign aid but the source of payment is difficult to trace, often more trouble than it is worth. But when the effort is made a new North Korea financial network is detected.
January 2, 2019: China began the New Year by threatening Taiwan with invasion if it did not accept Chinese rule. China offers a deal similar to what Hong Kong got when it rejoined China when the British lease expired in 1997. That did not go as planned, as far as the people of Hong Kong were concerned. But while few Chinese in British Hong Kong ever considered Hong Kong an independent country, 70 percent of the people in Taiwan do. The Chinese do not want violence, not when threats and economic warfare have worked pretty well so far. The costs of a war with Taiwan would be substantial, even if it did not trigger a wider war with the United States. The risk of a real conflict is an interruption in economic activity in China. It is a particularly bad time for that sort of thing right now. In response, Taiwan suggested that China try democracy as a solution for the growing political and economic problems the mainland Chinese are facing. That sounds attractive to many Chinese who note that it has worked in Singapore, as well as Taiwan. South Korea and Japan are also good examples because those two nations have cultures largely derived from Chinese practices. But the Chinese leadership is not interested.
December 27, 2018: Chinese media confirmed earlier Western reports that China had successfully tested a new JL-3 SLBM (sub launched ballistic missile) that apparently worked and demonstrated it had a range of 9,000 kilometers (5,600 miles). That is nearly 30 percent farther than the earlier, and less reliable JL-2. The JL-3 may be the first Chinese SLBM reliable enough to use regularly in Chinese SSBNs (ballistic missile carrying nuclear subs) and allow them to operate at sea regularly and reliably. That has not been possible until now, mainly because earlier Chinese SLBM designs were not reliable. About the same time, the JL-3 took place commercial satellite photos available in the West confirmed that two new Chinese 094 class SSBNs were recently (late October) launched and are now docked for months of additional work before they are completed and ready for sea trials. Currently, only four 094s are available for duty and those are still crippled by older SLBMs that do not work. In addition, there are still problems with the basic 094 design, which is considered too noisy to stay hidden from American efforts to locate and follow. Two more 094s are under construction with a number of improvements. The second four are being called the 094A class and the existing 094s are apparently being upgraded. For the moment, though, China still does not have an operational SSBN force and after decades of trying, won’t have one until the 2020s. For China, this is how it works. That was also why China, for a long time, played down its efforts to build and operate nuclear-powered subs.
Back in 2013, China featured its nuclear subs in the Chinese media for the first time. The theme for this media promotion was that in 42 years of operation no Chinese nuclear sub has ever suffered a nuclear reactor accident. This was an indirect dig at the Russians, who are the only nation with nuclear subs to have suffered nuclear accidents. Moreover, since the 1950s several hundred billion dollars has been spent on developing and building nuclear-powered submarines. Some 300 have been built so far, most of them Russian. Nuclear subs have been used in combat only once (in 1982, when a British SSN sank an Argentinean cruiser.) When the Cold War ended, Russia began scrapping its large nuclear sub fleet, which included dozens of older boats that were more trouble than they were worth to maintain. Now China has joined this club and retired it’s first “nuke.” With the demise of the Russian sub fleet, the U.S. Navy submarine force, which peaked at 100 boats at the end of the Cold War, shrank to about 60 today. China currently has about a dozen nuclear subs in operation (8 SSNs and four SSBNs) and their track record in the last half century has been dismal. The Chinese SSNs are noisy (easy for Western sensors to detect) and unreliable. Chinese SSNs rarely go to sea, which is one reason they have had no nuclear accidents. Chinese SSBNs are basically enlarged SSNs and have never been on a combat patrol, just brief training missions. China has kept at it and over the last few years, Chinese Internet hacking efforts were often discovered directed at American SSBN and SLBM technology.
Today Ma Jian, a former senior official in the secret police, was convicted of corruption and sentenced to life in prison. This was considered a big deal because a Chinese senior secret police commander is rarely treated like this. Most of those prosecuted for corruption are lower-ranking officials. Then again it has been noted that nearly all of the senior officials prosecuted were considered hostile to Chinese leader-for-life Xi Jingping.
December 26, 2018: In Thailand, there was another sign that the pro-China attitudes are weakening as a Thai court acquitted a Chinese couple of visa violations and allowed them to stay in Thailand. China had requested that the couple be sent back to China to be punished for their pro-reform activities. In the past, the military government had promptly carried out Chinese requests for the return of dissidents but most Thais, even in the military, were never very enthusiastic about becoming too dependent on Chinese goodwill.
December 20, 2018: The United States indicted two Chinese hackers working for the Chinese government to carry out an ongoing campaign to get into American military and defense industry networks and steal data. The two inducted men were key operatives in a hacking group known as APT10 that has been active since 2006. The indictments mean the U.S. has enough evidence against the two men to get them arrested if they ever enter a part of the world where an American arrest warrant will be honored. With these indictments, the Americans are formally accusing China of Internet-based espionage against the United States.
December 19, 2018: The United States enacted a law that identifies and bans Chinese officials from entering the United States if those officials are the ones who prevent Americans from entering Tibet. This is a largely a symbolic act (“diplomatic reciprocity”) that has been around for a while but China didn’t always apply it to Tibet because China said it didn’t.
December 18, 2018: Japan has ordered another 99 American F-35 stealth fighters and as many as 40 of these are the F-35B vertical takeoff model which Japan wants to test operating from its two helicopter carriers. Japan has committed itself to spend record amounts on defense over the next five years and doing it all to defend itself from North Korean or Chinese attack or threats.
In southern China, the Chinese air force resumed its combat patrols of bombers and fighters that basically circumnavigate Taiwan, mainly to show off. China has not done this sort of thing since mid-2018. As part of the circumnavigation operation, two Chinese warships moved to the within range of Taiwanese radars.
December 13, 2018: China engineers and technicians in Venezuela to its assist PDVSA (the state-owned oil company) operations may eventually give China control of the main revenue producer in Venezuela. So far the Chinese controlled PDVSA operations account for about ten percent of Venezuelan production (which continues to shrink this year). But the Chinese have doubled production this year in the areas they control and are hoping to expand that. The Venezuelan government may not be able to allow that because PDVSA has become a refuge for government supporters who are more interested in stealing oil than improving production. The Chinese have no police powers in Venezuela but have a lot of financial clout which they believe will prevail in the long term. China feels that a more effective government will eventually emerge and allow businesses to operate efficiently (and profitably) once more. China is positioning itself as a friend of Venezuela, not the deranged socialists currently in charge. China is still working on many development projects in Venezuela and has plenty of experience doing so in lawless regions (especially Africa and northern Burma) it currently operates in. The situation in Venezuela is familiar to the Chinese and they expect to come out of this with strong economic ties to the post-chaos Venezuela.
December 11, 2018: A Canadian court granted bail to Meng Wanzhou, who was arrested on the 1st at the request of the United States. Meng Wanzhou is 46 years old, the daughter of a senior Chinese CCP official and a senior executive of the Chinese electronics firm Huawei. Meng was arrested while she was at a Canadian airport transferring from an arriving flight to a connecting one. The Americans have been investigating Huawei for illegally exporting smartphones to Iran and engaging in bank fraud to enable Iran to facilitate foreign trade despite American sanctions against it. The arrested Huawei CFO (Chief Financial Officer) will be extradited to the U.S. for prosecution if Meng is unable to get a Canadian court to rule against the extradition request. Canadian leaders insist that the law will be strictly observed and justice is done. This comes at a time where more and more instances of Chinese bad behavior in or against Canada are being publicized. As if on cue China arrested two Canadian citizens yesterday but that did not become known until today and the 12th. These arrests also took place after Canadian diplomats in China confirmed that the Canadian government was not going to give in to Chinese pressure. At that point, there was more pressure on China to resolve this matter in a manner that was not too embarrassing. China did not believe the Americans would pursue the Huawei smuggling charge this seriously. China may retaliate by arresting senior American executives who are in China but that has not happened and may not because major American firms have warned American citizens in China or planning to visit China of the threat. It would not be the first time China has arrested American, or Canadian, citizens on flimsy charges, but these victims were usually Han Chinese who were American or Canadian citizens (naturalized or by birth). China considers Han Chinese, no matter where they were born or currently live to still be subject to Chinese law despite their current citizenship. Most other nations do not agree with this although some do because they employ similar logic. At the same time it is easy for foreigners to run afoul of Chinese laws and get arrested and before Meng was arrested there were about 200 Canadians arrested or free on bail in China. That number has remained fairly stable over the last few years but the two arrests made on the 10th were directed at men who had long worked in China, knew the rules, and had a history of staying out of trouble. Canadians see these two arrests as retaliation.
Huawei has close ties with the Chinese military and government intel agencies and many Western nations are refusing to use any Huawei equipment in their networks because of the potential for hidden features in Huawei gear that facilitates Chinese espionage or military operations in general.
In southern Afghanistan (Kandahar province), the Pakistani (Baluchi separatist) man responsible for the attack on the Chinese consulate in Pakistan last month was killed in an explosion. Kandahar province is on the border with the Pakistan province of Baluchistan where most of the Chinese economic activity in Pakistan is taking place.
December 10, 2018: South Korea announced another record increase (8.3 percent) in its defense budget. In 2019 South Korea will spend $43 billion on its military. That’s nearly as much as Japan (with a much larger economy) spends. The 2018 budget had the largest increase (6.9 percent) in the defense budget since 2009. Although North Korea openly complains about how unfair and unfriendly these increases are they are a direct result of the increasing threat from North Korea. The annual South Korean defense budget is more than a third larger than the annual GDP of North Korea (which spends about a third of GDP on defense compared to less than three percent in South Korea).
December 8, 2018: In the southwest (Sichuan province), a Tibetan man burned himself to death to protest the Chinese occupation of Tibet. This makes 155 such protest deaths since 2009 after China had suppressed widespread unrest in Tibet. There have only been three of these fiery deaths in 2018. All of this stems from a major Tibetan uprising in 2008 which was quickly and brutally put down. Areas, where Tibetan resistance is most active, have since been flooded with additional police and the Chinese troops stand ready to crush any more insurrections. The decades old Chinese plan for cultural assimilation of the Tibetans proceeds. This is how the Chinese empire has expanded for thousands of years, and all around the periphery of China, there are unassimilated groups, most of them too small to bother with. The Tibetans are numerous enough to target for cultural assimilation.