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China Defence and Security Report Q1 2008Published by: Business Monitor International Published: Dec. 11, 2007 - 67 Pages Table of Contents
AbstractIn terms of traditional security issues, it is probably fair to say that the risks confronting China diminisheda little through Q407. Taiwan’s October 10 National Day celebrations featured the first full scale military parade for 10 years. However, Taiwan’s President Chen Shui-bian - who in any case will probably be succeeded in 2008 by a President whose stance is less combative towards China - made a number of conciliatory gestures. For instance, he emphasised that the Hsiung Feng II-E cruise missile, which featured at the military parade, would only be used as a second-strike weapon, and would not be fired without the permission of the US government. For his part, Chinese leader Hu Jintao advocated a formal peace agreement with Taiwan at the XVII Congress of the Chinese Communist Party in mid-October. Elsewhere, the Chinese government issued a statement confirming that the six interested parties had approved the agreements reached with North Korea at the end of September. North Korea has undertaken to provide a complete declaration of its nuclear programmes. It will also disable the nuclear reactor, reprocessing plant and fuel fabrication plant at Yongbyon by the end of the year. Separately, press reports indicated that China had suspended rail transport links with North Korea, with the result that distribution of food by the World Food Programme had been disrupted. However, it appears that this may have been a temporary measure provoked by the North Koreans’ tendency to break up Chinese rolling stock entering the country and then to sell it back to China as scrap metal. Nevertheless, several developments highlighted the concern of the Chinese government in relation to nontraditional threats. In mid-September, Minister of Public Security Zhou Yongkang announced at a conference on security at the 2008 Beijing Olympic Games that terrorism is the largest threat to the Games’ success. Meanwhile, Chinese and Russian special forces collaborated in the Friendship 2007 joint counter-terrorism exercise: this was an adjunct to the major exercises undertaken near Chelyabinsk in the Urals under the auspices of the Shanghai Co-operation Organisation (SCO). The SCO impacts on China’s security and defence industries in several other ways. At one level, it is a manifestation of the military and geo-political co-operation between China and Russia. This is at a time when US influence in parts of Central Asia - a region of interest for both China and Russia - may be waning. Certainly, the massive increase in production of opium in Afghanistan, which borders several SCO member countries, is a sign that NATO forces are having only partial success in containing the Taliban militants. A recent development has been the formation of an ‘energy club’ within the SCO. The club is often described as being a non-governmental body that is tasked with improving energy industry relations between the SCO member countries (i.e. China, Russia, Kazakhstan, Kyrgyzstan, Uzbekistan and Tajikistan). Exactly how the club will operate remains to be seen. Unlike the Organisation of Petroleum Exporting Countries (OPEC), the SCO member states do not necessarily have consistent objectives. Kazakhstan and Russia, for instance, are major exporters of energy (and, in Russia’s case, energy-related technology); meanwhile, China is a massive consumer of energy whose environmental problems are such that it has a very strong incentive to find alternatives to coal. In early November 2007, China and Russia signed an agreement to develop the second phase of the Tianwan nuclear power project in Jiangsu province. The close relationship between Russia and China, reflected in their collaboration through the SCO, highlights two key long-term trends that will dominate security and defence issues for China. One is that access to natural resources - energy obviously, but also fish and water - will be an important consideration in China’s conduct of foreign relations with nearby countries. The second is that Russia will almost certainly remain the key supplier of ships, aircraft and other technology-intensive equipment unless and until the US and the EU lift their embargoes on arms sales to China. (The embargoes reflect different considerations. The EU’s embargo was imposed in the wake of the Tiananmen Square massacre of 1989 and is opposed by France, which sees China as a potential major customer for its defence/ aerospace industries. The US embargo reflects geo-strategic rivalry - particularly as the US is the guarantor of Taiwan’s de facto independence - and the tendency for Chinese arms suppliers to do business with countries that the US government regards as ‘rogue states’.) As we have explained in recent quarters, business is booming for China’s indigenous arms companies. This is partly because of the actual (and likely to continue) double-digit growth in the economy. It is also partly because of the ongoing transformation and modernisation of the armed forces - with major procurement programmes for each of the three major branches. Moreover, China has shown that it is competitive as an exporter of advanced equipment. In H207, AVIC I announced a number of new orders for its ARJ21-900 airliners: in addition, several Chinese organisations signed technological co-operation agreements with foreign governments. Nevertheless, huge challenges remain to be overcome. As we explain in this report, many of the Chinese arms companies are operating facilities that are over-manned, inefficient and - for historic reasons - in sub-optimal locations that are a long way from major manufacturing centres such as the Pearl River Delta region. It is very difficult to conceive how economic problems could constrain the ability of China’s arms manufacturers to make and sell increasing quantities of (increasingly high quality) equipment. However, during Q407 it has become much easier to see how economic problems could give rise to serious internal security problems. China’s phenomenal growth has come at a heavy cost. One part of the cost is the pollution, which has forced millions of people to move. Then there are the much larger numbers of people who, through the various official restrictions on internal migration of labour, many feel that the boom has passed them by. The cost and unevenness of one of the largest economic booms of history is exacerbating social tensions. Another part of the cost of the rapid growth is more fundamental: an absolute shortage of natural resources including some foods. Through Q407 the People’s Bank of China took a number of steps to curb inflation. To a certain extent, the inflationary pressures were the result of booming credit. However, food prices had also been growing at double digit rates. Interestingly, it is not just the rural poor - the 75% or so of the population living (mainly) in inland provinces who have missed out on the benefits of the boom - who may well become restless during 2008. In November 2007, the Chinese government publicly recognised the main risk that is associated with widespread speculation by retail investors in overheated stock markets: fortunes are lost and expectations dashed when bubbles burst. For much of the year, China’s stock market indices have soared as investors have moved money out of low-yielding bank accounts into shares. From October 2007, the speculation took on a (semi-) international dimension when the authorities announced a further liberalisation of the Qualified Domestic Institutional Investor (QDII) regime. The new rules made it possible for asset management companies (and some other institutions) to launch retail international equity funds that invest specific amounts of foreign exchange awarded under the QDII regime. Several of the new fund launches were spectacular, and raised US$4bn from investors in a single day. However, much of the money was effectively invested in Chinese companies through the so-called H shares, which are listed on the Hong Kong Exchange (which is regarded as a foreign stock market for QDII purposes). The result, unsurprisingly, was a rise in the price of the H shares (and a breaking of many records at the Hong Kong Exchange), since they were seen as being underpriced relative to the A shares issued by the same companies, but listed on the Shenzhen and Shanghai exchanges. In November 2007, the authorities indicated that they may change the rules governing QDII funds in order to limit the extent to which they invest in Hong Kong-listed stocks. At the time of writing, it remains to be seen what will ultimately bring the extraordinary boom in Chinese and Chinese-linked stocks to an end. However, a collapse in prices would hurt a large number of people in China’s aspirational urban middle classes. It could well be that rioting investors in the main cities are the major internal security issue in 2008. Get Full Details About This Report >> |
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