China: The Last Emperor Confronts Interesting Times

Archives

October 13, 2021: In the last few days Evergrande, a major Chinese real estate firm, sitting on over $300 billion of bonds that are as toxic as they come, finally triggered the long-feared financial crisis. After missing its second bond repayment and unlikely to default on the next one, the value of bonds in the “high yield (junk bond)” sector collapsed, with bond prices plunging 75 percent in one day. The junk bond segment of the first to fail when a national economy suffers from too much bad (unlikely to be repaid) debt. China can avoid the bankruptcy of one real estate firm, but only for so long because several other similar firms are also close to default. The Chinese bond market is the second largest in the world, after the United States. With debt, quality (the ability of debtor to repay). The quality of Chinese debt is much lower than the U.S. or the West in general and the extent of this problem was deliberately hidden by debtors, especially local governments, for decades. This makes a Chinese real estate bubble far more dangerous than previous ones encountered in major economies.

Since the 1980s China has been a communist police state with a market economy. That means the government has surrendered total control of the economy, especially consumer spending. In the last year Chinese consumers have not responded to government calls for more consumer spending to help maintain economic growth. Too many Chinese do not believe the economy has really recovered from the 2020 covid19 recession, especially since entire cities are still being locked down to eliminate new outbreaks. Each of these brief halts in business activity ripples throughout the country, triggering a lot of unexpected shortages. This was compounded by a government program to reduce air pollution by cutting domestic coal production as well as coal imports. This triggered a growing number of electricity shortages, which disrupted business activity in many parts of the country and further disrupting the Chinese and economies that depend on Chinese exports. The government tried to ignore the implications of these policies but most Chinese did not and have been hoarding their resources, preferably nothing associated with the Chinese currency (the yuan) or the debt markets.

Another bit of bad news to escape government censors was the growing number of yuan-denominated bonds that are rapidly losing their value because international credit rating agencies are lowering ratings on such bonds because the ability of the issuer to pay interest and eventually the face value of the bond is declining. Many large Chinese banks and financial institutions are going bankrupt because of all the bad debt, usually yuan-denominated, they are carrying. In many cases the government ordered that these questionable bonds be issued to hide massive corruption in the financial system. The government thought that with enough time they could fix things. Then came a real estate bubble that was much larger and dangerous than thought. At the same time the Americans began a trade war to force China to stop using illegal trade practices. Finally, there was the worldwide covid19 recession, which put more pressure on the fragile Chinese financial system. Chinese economic reports, especially the quarterly ones, are now awaited with dread rather than just anticipation. Bad news is taken for granted and the only question is how bad things get. This puts the sissy suppression campaign into context.

A growing number of Chinese government and business leaders have been predicting that China was headed for the same fate as Japan in the 1990s, when a real estate bubble triggered a violent and long-lasting reduction in economic growth. The Japanese had allowed a huge real estate bubble to develop and when economic growth stalled for a bit a lot of the real estate loans became bad debt and that created an economic crisis Japan is still dealing with.

The Japanese voters were angry and, as a democracy, elected new politicians. China is not a democracy and a banking crisis like what Japan went through in the 1990s will create a lot of angry Chinese who cannot, as the saying goes, “vote the rascals out (of office)”. In China that degree of public anger means revolution, or at least a lot more disorder. China has a huge real estate bubble along with very inefficient, compared to most Western nations, government spending policies and rapidly escalating labor shortages. There are also deficits in social spending, like taking care of the impoverished elderly. Chinese problems, in addition to being similar to those of Japan, are also considerably worse because of greater corruption, pollution and political oppression. Japan is a democracy while China is still a communist police state and that means the crises in China will not be handled peacefully as it was in Japan. Worse, for Chinese and the rest of the world, is that the Chinese financial crisis may be as poorly managed as the many state-owned firms that created the financial risks. As a police state, with the largest Internet censorship operation in the world, and laws punishing those who report news the government disagrees with, it takes longer for the details of high-level corruption to reach most Chinese. A financial system collapse would be impossible to hide, which is the main reason a major government debt management official was executed earlier this year and the government declared the debt-crisis a matter of national security.

How well the government is in handling this debt market collapse will take several weeks, or months, to develop. Because China is the second largest economy on the planet, its financial health matters. The rest of the world can survive, with varying degrees of short or long-term damage, such a collapse. For China, the collapse will mark the end of an era, if not the end of the current government. What comes after that is uncertain and dangerous. That the Chinese call “interesting times” as in the old Chinese curse; “may you live in interesting times.”

The Other China

Taiwan recently celebrated National Day, which commemorates the 1911 revolution that overthrew the Chinese monarchy and the establishment of the ROC (Republic of China). This year there was a big parade featuring the largest military component ever. Taiwan also believes the communist government in China is facing the same calamities that led to the 1911 fall of the ancient Chinese empire. This was caused by decades of weak and ineffective rule. By 1911 the monarchy had lost control of many parts of the country, including portions occupied by Russia, Japan, Britain and other foreign states. The ROC had to deal with nearly four decades of civil war, invasion by Japan, the rise of the communist movement, World War II and defeat by the reinvigorated communist forces after World War II. By 1949 the communists declared the PRC (People’s Republic of China) the legitimate government because the remaining ROC forces had retreated to Taiwan Island where the World War II ROC alliance with the United States prevented the PRC from taking Taiwan.

The communists had other problems, mainly with Russia, which in late-1950 demanded that the PRC send sufficient forces into Korea to halt a largely American UN force that had defeated a North Korean invasion (also ordered by Russia) and was moving towards the northern border with China and Russia.

China had 5.5 million troops in 1949 when they declared the establishment of the PRC and defeat of the ROC. The communist government knew they had to demobilize and planned to cut military strength by over a million in 1950. In late 1950 Russia demanded that China intervene to stop the UN forces and force them out of North Korea and off the Korean Peninsula. That proved more difficult than expected and turned into a three-year war in Korea that cost China several hundred thousand dead and a brief expansion of the PLA to 6.3 million. While Russia provided economic and military support for this effort, the Chinese communists resented it and considered their losses in Korea to have paid the debt they owe Russia for help in defeating the ROC. Even before the Korean War was over China began reductions of PLA strength, mainly by demobilizing many irregular units (partisans, local militias) and units of questionable loyalty. By 1980 the force was down to about four million. Then came the modernization program. This led to a major personnel reduction in the 1980s that eliminated a million troops and during the 1990s the PLA had less than three million troops. By 2007 it was down to 2.3 million troops who were now armed and equipped like Western forces. At this point the PRC military threat was much greater because the PRC was now, on paper, powerful enough to take Taiwan by force, even against active American intervention.

The ROC government and voters were divided about how to deal with Chinese threats because the Chinese economic modernization had been a major economic boost for Taiwan, and there were efforts to negotiate an end to the PRC threats. That did not work and over the last decade ROC sentiments shifted towards preparations to upgrade their military forces and form closer alliances with other nations threatened by PRC ambitions. National Day had long been a minor holiday commemorated in the PRC as well as the ROC as well as Chinese worldwide. Since 2009 Taiwan has turned National Day into a major holiday, which reaffirmed the ROC as the legitimate democratic government of all China and not some wayward province claimed by the communist police state the PRC still maintained in the mainland. On the mainland there were a growing number of Chinese demanding democracy, or at least less police state control and repression from their government. Chinese refer to their current leader as “Emperor XI”, a term that the PRC censorship bureaucracy tries to ban from all forms of media.

This has long been a theoretical threat to the Chinese communists and now it is becoming more of a problem than they ever expected. PRC hardliners are urging an attack on Taiwan to extinguish the PRC threat once and for all. The senior PRC leadership realized that military force is not a good option because the PRC aggression since 2000 has led to a major anti-China coalition to form which could block China’s access to world trade even if it does occupy Taiwan. Major components of that coalition include the strongest regional military powers like India, South Korea, Japan, Australia, Vietnam, Singapore, Taiwan, Indonesia, Malaysia, and American forces in the West Pacific. The U.S. has moved more than half its navy to the West Pacific and made plans to quickly move an equal portion of the air and ground forces to the West Pacific if there is fighting.

Taiwan told the Chinese communists that Taiwan independence as the ROC was here to stay. This came despite growing Chinese threats to use force. An increasingly belligerent China has shown its displeasure by being increasingly aggressive with its verbal threats and military harassment in 2021. A lot of this has been directed at Taiwan, which had nearly thousand Chinese military approach or even briefly enter Taiwanese airspace so far in 2021. This often involves the Taiwan ADIZ (air defense identification zone) that requires foreign aircraft to identify themselves before entering. Chinese military aircraft approach or enter the ADIZ without warning and that often means Taiwan sends up fighters to double check. ADIZ intrusions have increased sharply in 2021 and many of the aircraft are ASW (anti-submarine warfare) aircraft (like the American P-3) as well as a lot of EW (Electronic Warfare) and ELINT (Electronic Intelligence) aircraft. China is also expanding military bases on the coast near Taiwan and sending new aircraft types there for training. One of those new aircraft is the latest Chinese SEAD (suppression of enemy air defenses) aircraft, the J-16D. There were first developed over half a century ago by the United States and nicknamed “Wild Weasels.” The latest American SEAD aircraft is the F-18G.

October 10, 2021: Taiwan celebrated National Day, which commemorates the 1911 revolution that overthrew the Chinese monarchy and the establishment of the ROC. The celebration was different this year.

October 8, 2021: Afghanistan is seen as a new opportunity for China, but a risky one. Russia still maintains an embassy in Kabul, the Afghan capital but recently confirmed that it has been reducing the number of Russians in the embassy to the bare minimum. Pakistan, China and Russia are still maintaining their embassies there. All the Afghan ambassadors, including the one in the UN, remain loyal to the deposed IRA (Islamic Republic of Afghanistan) government. Pakistan is counting on China and Russia to use their influence to change minds, but so far there is not much good news from Russia or China about the new Taliban IEA (Islamic Emirate of Afghanistan).

Russia has a long and painful history with Afghanistan. A particularly painful period took place in the 1970s and 80s when they tried to support a communist government in Afghanistan that triggered a massive backlash from most Afghans. China sees economic potential in Afghanistan but has had a hard time doing business in Pakistan, where most of the hostile Islamic terrorists and rebel groups are kept under control. Afghanistan has no history of doing that but China sees a potential opportunity to pursue until it becomes obvious that won’t work. At that point China will declare the Taliban hostile and concentrate on keeping their influence out of China and nations with heavy Chinese investments.

Russia reacted by organizing and announcing joint military exercises between Russian forces and those of Tajikistan, Uzbekistan and Turkmenistan, new nations that were part of the Soviet Union until 1991 and now border Afghanistan. There is also Kyrgyzstan, which borders China and Tajikistan. Russia has maintained close military, economic and diplomatic ties with the “stans”, who are suffering from Afghan drug cartels using their countries as markets for the drugs as well as smuggling routes to other parts of Eurasia. Now more Islamic terrorists from Taliban Afghanistan will be added. Russia and the stans also stand ready to support the armed opposition to the Taliban, just like before.

October 6, 2021: The United States revealed that it had 3,750 nuclear weapons. That’s down from the maximum (31.255 nukes) in 1967 and 22,000 a quarter century later when the Cold War ended. The two major nuclear powers, the U.S. and Russia agreed to several nuclear reduction agreements during the 1970s and the end of the Cold War in 1991 led to major reductions in the number of nukes maintained by the U.S. and Russia. China developed nukes in the 1960s but never spent a lot of money on building a large stockpile. This is believed to have about 300 nukes.

October 5, 2021: China has become a major customer of Russia’s natural gas and that is threatening other customers like Ukraine, Belarus, Western Europe, and Turkey. Currently the largest customer is Western Europe, especially Germany. China will eventually become one of the, if not the largest customers and is already acting like it is. There is a major problem in that Russia does not have enough natural gas to supply all the export demands, Natural gas sales contracts specify a minimum amount to be delivered each year. Beyond that it is a matter of who can pay the most or has the least current disagreements with Russia. Germany has seen natural gas deliveries drop sharply in September. Russia denies this has anything to do with the unresolved dispute over ownership of the new Nordstream pipeline from Russia to Germany, which paid for most of it. The new pipeline makes Ukraine more vulnerable to reduced natural gas deliveries because most of the gas moving through Ukraine was headed for other customers in Europe.

October 4, 2021: For the second time since late July, a British carrier task force (SG21 for Strike Group 21), led by the new British carrier Queen Elizabeth, conducted another FONOP (freedom of navigation operations) in the South China Sea near artificial islands China insists is now part of China. The July FONOP included seven other ships, including an American destroyer and frigates from the Netherlands, Britain and Singapore. There were also two other Singapore Navy ships (an amphibious assault vessel and an offshore patrol vessel. The carrier is still accompanied by a British SSN (Nuclear Attack sub) but the status of that vessel is rarely discussed because it is submerged nearly all the time. Since July SG 21 had been holding joint training with allied navies in the region, including a major exercise that included four carriers. In addition to the Elizabeth there were two American nuclear carriers and one of the new Japanese helicopter carriers that will also be used to operate F-35B vertical take off and landing aircraft. The Elizabeth is carrying 30 of these right now, the largest number of F-35Bs to operate on a carrier. China protested all these aggressive actions and threatened economic retaliation. That threat is not as effective as it used to be.

October 1, 2021: China will sell just about anything to anyone who can pay. There are some limits to that policy which India was reminded of as the military requested money to buy armed UAVs, which the U.S. is willing to provide. India is not the only major military power that was slow to procure armed UAVs. Russia had a hard time catching up with UAV design and manufacturing and only got its first armed UAV into production in 2020.

There is a major manufacturer and exporter of armed UAVs, but it is Indian archenemy China. For several decades a growing number of Chinese commercial firms have been developing military UAVs and dual-use commercial UAVs. Unlike most Western nations, China will sell military UAVs to anyone who can pay and is not bothered about the use of bribes and other illegal (in the West) payments. If you can pay you can have it. For that reason, China has a lot of “unnamed customers” for its armed UAVs and does not release as many details of weapons export customers as other nations. Even Russia sees any export sale as good publicity. China has multiple and competing companies developing and building weapons and some aircraft types, like UAVs of all sizes. Chinese UAV manufacturers have more customers than they can handle and if some prefer to be anonymous, the Chinese comply. These anonymous customers are eventually revealed when their Chinese UAVs are spotted in a combat zone.

September 29, 2021: E conomic specialists observed that Russia has become the largest debtor of China. Foreign countries owe Chinese banks and other investors about $385 billion. Russia represents about 35 percent of that. Most of the Chinese lenders are state-owned or majority state-owned firms. While Russia is better able to handle that amount of debt than other nations owing China money, Russian economists point out that this debt is a sign of how large a portion of the Russian economy China controls. This is especially true in the Russian Far East, which largely consists of territory taken from China in the mid-19th century by a Czarist government using military threats. China has never renounced their claims on these lost territories and massive Chinese investments in these disputed territories is turning this part of Russia into a Chinese colony.

September 28, 2021: Chinese demands were believed to be a major reason North Korea ruler Kim Jong Un promoted his younger (34-year-old) sister Kim Yo Jong, to the State Affairs Commission, a group that includes her older brother and is often consulted by Kim Jong Un for advice on how to proceed with key decisions. This promotion is seen as confirmation that Kim Yo Jong is seen as the best successor to her brother. Kim Jong Un apparently has three children aged between 4 and 11. Because of that his able and trusted younger sister has been seen as a potential heir. Kim Yo Jong stepped up when her brother underwent heart surgery in early 2020 and was out of action for several months. Kim Yo Jong was decisive and suitably vicious in the Kim tradition. During that period, she received several promotions and was portrayed as a senior official who was making a lot of decisions. Now she has more promotions and a better relationship with China.

In 2020 Kim Yo Jong received several promotions and is portrayed as a senior official who is making a lot of decisions. There is much to do and more of those problems are showing up in the capital, which is no longer isolated from all the miseries common in the rest of the country. Kim Jong Un is still the supreme leader even if he was incapacitated for several months during 2020. The only thing holding North Korea together is the dictatorial power of the Kim dynasty and as long as Kim Jong Un lives his sister can only borrow some of that power some of the time. Doing otherwise could be fatal for the younger sister. She has apparently assured everyone that she would be a loyal and able heir to a dynasty that is fading fast.

North Korea also announced it was willing to revive the hotline between the two Koreas, which the north cut in early 2020. Three months ago South Korea revealed that it had been approached by North Korea officials about reviving the hotline. Various hotlines between the two Koreas have been around for fifty years but the north often shuts them down, or revives them as a negotiating tactic. Now North Korea wants to negotiate again and is bringing forth all it has to offer, which is less and less each year.

September 27, 2021: China sees North Korea as more of a liability than an assent when it comes to dealing with increasingly powerful coalition assembling to block Chinese expansion.

China considers the combined military capabilities of Japan and South Korea alone as a significant threat to Chinese domination of East Asia. The combined defense spending of South Korea and Japan is more than ten times what North Korea spends but only about a third of Chinese defense spending. What threatens Chinese military domination the most is the quality and quantity of the South Korean and Japanese air and naval power. Both nations are buying F-35 fighters and building their own submarines and aircraft carriers. Combine this with the military forces of other nations confronting Chinese aggression and expansion, a coalition that now includes India, Australia, Vietnam, Singapore, Indonesia, Malaysia, Taiwan and American forces in the West Pacific, and you get a better idea of the Chinese predicament.

South Korea has a larger army than Japan because South Korea has to face the possibility of a land invasion by North Korea. South Korea also has a large and modern air force, including F-35s. Currently South Korea is buying at least 40 F-35s while also developing a modern jet fighter, the KF-21 for itself (about 120) and export. Many of the F-35s are needed for the DDH type (helicopter carrier) ships that can operate F-35Bs.

North Korea considers all these F-35 purchases a hostile act and direct threat to them. That about sums it up. In the event of a war, the U.S. plans to bring in over 200 more air force and navy F-35s for use against North Korea or China, depending on who is the aggressor.

South Korea and Japan are also building Aegis destroyers and more AIP powered submarines. Both Japan and South Korea are beginning to use lithium-ion batteries on subs, which are superior to current submarine batteries. Japan pioneered the use of lithium-ion batteries for submarines.

During the last decade, as North Korean and Chinese military threats became more obvious, Japan and South Korea have been increasing defense spending each year. North Korea openly complains about how unfair and unfriendly these increases are, but they are a direct result of the increasing threat from North Korea. Both Japan and South Korea each have annual defense spending that is more than a third larger than the annual GDP of North Korea. That is one reason North Korea spends about a third of GDP on defense compared to 1.2 percent for Japan and nearly three percent for South Korea.

September 25, 2021: North Korea offered to resume peace negotiations with South Korea, that would include officially ending the 1960-53 Korean War. North Korea said negotiations could start as soon as South Korea abandoned all the economic sanctions on North Korea. This approach has been tried many times in the past and always failed. North Korea gave no indication about how it would be different this time.

September 20, 2021: China has quietly introduced the use of mandatory permits for any legal exports to North Korea. The legal items are usually food, or medical supplies. Given the precarious financial situation in North Korea, the Chinese merchants demand as much as half the money in advance and the rest on delivery. Export laws mandate that Chinese exporters report what they sell to North Korea but many exporters have been slow in that reporting and the government made their point about mandatory reporting and permits when they blocked a shipment of 20,000 tons of rice from being transferred to the North Korea ship sent to carry the rice back to North Korea. China believed some exporters were allowing illegal items to be unofficially included in legal cargoes.

September 18, 2021: Chinese media claim recent American actions make it clear that China is now dominant in East Asia and that its power is spreading worldwide. China is openly dismissive of the ability of foreign governments, especially the Americans, to defy Chinese demands. China is flaunting its power in places like Afghanistan where everyone is discovering that China has the final say over who does what there now that the Americans have withdrawn. That is a dubious achievement as far as everyone else in the region is concerned. China is disrupting an ancient rivalry between Persians and Indians over who gets what inside Afghanistan. The economic basis of that rivalry was control over portions of the Silk Road trade routes between China and points west. The Silk Road was replaced by more efficient European ships, and their firepower, six centuries ago. In the 21st century China is reviving the Silk Road as an overland and maritime network through nations friendly towards trade with and investments from China. Iran and India see this as a threat while Pakistan sees it as an economic lifeline as well as an obligation to do what China wants. In Afghanistan China is willing to do business with whoever can provide a safe environment for Chinese investments and trade. There are doubts that anyone can do that and China is waiting to see what Iran and Pakistan can do about it. India and Russia are also cautious about doing business in Afghanistan; both currently consider the Taliban IEA (Islamic Emirate of Afghanistan) a threat. Because of Pakistani control of the IEA, India is now banned from Afghanistan but still has valuable trade relationships with Iran that Iran does not want to lose. China and India are currently archenemies of each other. Finally, there are the Afghan-based drug cartels that supply most of the heroin to the entire planet. While universally hated throughout the region, cartel money is a major source of income for the Taliban and the Pakistan military, which is currently running the government in Pakistan.

Although everyone regards China as a potential wealthy benefactor, the Chinese themselves are less confident. For a decade China has faced the growing prospect of a major financial disaster because of growing bad debts, a property bubble and corruption. As problems go, this one puts the Chinese interest in Afghanistan into perspective.

 

Article Archive

China: Current 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 


X

ad
0
20

Help Keep Us Soaring

We need your help! Our subscription base has slowly been dwindling. We need your help in reversing that trend. We would like to add 20 new subscribers this month.

Each month we count on your subscriptions or contributions. You can support us in the following ways:

  1. Make sure you spread the word about us. Two ways to do that are to like us on Facebook and follow us on Twitter.
  2. Subscribe to our daily newsletter. We’ll send the news to your email box, and you don’t have to come to the site unless you want to read columns or see photos.
  3. You can contribute to the health of StrategyPage. A contribution is not a donation that you can deduct at tax time, but a form of crowdfunding. We store none of your information when you contribute..
Subscribe   Contribute   Close