How bad could things get in South China Sea? Check the price of iron ore

One answer to that question can be found in strength of China’s slowing economy. And one of the best barometers of the slowdown is not the country’s “man-made” GDP figures but rather the price of iron ore, which is an essential ingredient to China’s industrial sectors. And the price of iron ore has been sinking. As explains:

Iron ore fell below $90/a ton for only the second time since the financial crisis. The price of iron ore is down 33.7 per cent year-to-date.
On a quarterly basis iron ore hasn’t averaged less than $100 since the height of the global financial crisis, but is now in danger of doing so – the quarterly average now stands at $104.60.
China is responsible for two-thirds of the 1.2 billion tonne seaborne trade and the declines in the price of the steelmaking raw material has been blamed on continued signs of a slowdown in the world’s second largest economy.

Recall that a slowdown in China risks more social disorder, raising the need for a galvanizing force from outside. So as sure as growth slows at home and the government continues on anti-corruption purge that will further dent spending, the PLA cranks things up in the Pacific.

Of course, iron ore is not a fail safe barometer of China’s economic pace. In fact, iron ore in China has also been used as collateral for off-the-books financing, as is copper. The practices from a country as large as China wreak havoc on traditional forecasting for the commodity’s price and demand outlook.

As notes:

Another complicating factor in the iron ore market is Beijing’s clampdown on unofficial financing activities happening outside state-owned banks, the so-called shadow banking system. The use of commodities – particularly copper and iron – as collateral in trade financing agreements makes up a large portion of the unofficial banking sector.

…Estimates vary wildly but the portion of iron ore and copper stockpiles at the country’s ports tied up in these deals could be as high as 60%.

Which means that the vast amounts of commodities sold to China may not go directly into industrial uses or construction but sit in docks and depots.

What this means is that the pace of China’s economy could actually be much lower than the official 7.7 per cent. Surely, behind the official numbers is uneven growth depending on the sector. And in that climate where employment may soften and hopes of sharing in China’s wealth fade for many of its workers, the need for external enemies rises. So keep an eye on the price of iron ore to see how soft things are getting at home for China to understand how hard their military (and other authorities) may be with neighbors.

The key index to look at is Tianjin Iron Ore 62% fines index.

Philippines, in dispute with China, compares itself to pre-WWII Czechoslovakia

Says Philippines president Benigno Aquino

From New York Times

“If we say yes to something we believe is wrong now, what guarantee is there that the wrong will not be further exacerbated down the line?” he said. He later added, “At what point do you say, ‘Enough is enough’? Well, the world has to say it — remember that the Sudetenland was given in an attempt to appease Hitler to prevent World War II.”


Things are getting so bad in Asia, everyone is struggling for historical parallels. Not sure why Shinzo Abe caused a stir referring to the close economic ties of Germany and Britain before WWI. That factoid has been pointed out by a lot of people in recent months.



China’s South China Sea claim focuses on foreign fishing vessels

China wants Vietnamese, Filipino and other foreign fishing boats to get permission to fish in a wide swath of the South China Sea, under rules issued by Hainan island provincial government authorities.

The development, first reported outside of China by Bill Gertz at the Washington Free Beacon, marks yet another escalation in the tensions in the South China Sea, a 1.5 million square mile area where China has contested the ownership of islets and fishing areas controlled by Vietnam and the Philippines. The South China Sea is also where a Chinese Navy ship nearly collided with the USS Cowpens which was surveilling China’s new aircraft carrier the Liaoning on December 5.

Chinese law states that any ships that violate the fishing regulations will be forced out of the zone, have their catch confiscated, and face fines of up to $82,600. In some cases, fishing boats could be confiscated and their crew prosecuted under Chinese law.

Gertz makes an important observation about how the rules may be treated by the Chinese.

Beijing will likely deflect criticism of the no-fishing zone by claiming it was initiated by a regional government and thus is not part of national policy.

And this seems to be part of the “who’s-on-first?” strategy/trend of China multi-layered authority sending conflicting signals, which are difficult to address if there is no one signal authority in control. This strategy/trend allows China to test their neighbors and rivals. In part reflecting the dense layer of criss-cross and conflicting authority within China (which speaks to China’s internal challenge), China essentially allows various departments to create their own policy in dealing with international affairs – with one caveat: that whoever acts ensures China appears strong to the world.

In the past, China has claimed nearly the whole of the South China Sea as its own territory. As a former US State Department officer John Tkacik observed, the new rules appear to carry that earlier claim to a new level.

Says Tkacik:

“Beijing is now stepping beyond its previous vagueness on the legal status of the ‘Nine Dash Line’ to promulgating a ‘provincial measure’ to see what the push-back is,” he said.

The fishing rules may also be a classic case of what’s known as “lawfare”, or the ‘use of legalized international institutions to achieve strategic ends.’

In other words, China can legally wrest control of a territory by showing that it administers them. In time, as other powers recognize China’s administration, China’s legal claim grows. This is why it’s important the US government doesn’t recognize China’s unilaterally announced Air Defense Identification Zone over the East China Sea, but it’s equally significant that US airlines do recognize it, even if for safety reasons only. (Japanese airlines don’t recognize it).

As Zachary Keck, writing in the Diplomat notes, the bright side to this use of lawfare is that China recognizes the validity of international law.

…if Chinese leaders are seeking to bolster their sovereignty claims under current international law, they evidently don’t intend to radically upend the current international order, or at least are uncertain about their ability to do so even over the long-term.

But lawfare may be too nuanced description for what’s happening. This may just be coercion, occurring across military, political, rhetorical, diplomatic and legal channels. And if it serves China’s interests, I don’t imagine China reaching a certain point of lawfare and deciding, “Oh, yes, that’s just about right. We’ll stop here.” A rising power usually tests the upper limits of its power as its emerges.

Keeping the USS Cowpens away from the Liaoning: Four reasons the US may be misreading China’s military


The recent incident in the South China Sea, in which a China PLA Navy ship manouevered to block a US Navy ship, the USS Cowpens, from trailing the newly fitted out Liaoning aircraft carrier brings to light many of the issues surrounding China’s militarization. The incident also serves as a small scale model of the larger mysteries of China’s military capabilities, an issue China arguably cultivates for strategic reasons. Chinese philosopher Sun Tzu’s famously said that in war a goal should be to “subdue the enemy without fighting. ”

Below is a list of four issues regarding the US’s reading of China’s military rise.

1) The DF-21D aircraft carrier-killer missile vs aircraft carrier riddle

Either China is investing aircraft carriers, or it is investing in carrier-killer missiles – but it’s hard to imagine a scenario in which it is investing in both. It’s possible that China wants carriers for its seas but expects its carrier-killers to keep foreign navies far from those seas.  It’s also possible that China’s defense planning is confused and riven by internal fiefdoms, where the carrier guys get to build carriers and the missile guys get to build missiles – but there is no unifying armaments strategy. This lack of coordination in weapons making actually happened in Germany during WWII. Why wouldn’t it be possible in China during peacetime? If that’s the case, it’s a revealing sign of the mismanagement and corruption within China’s military establishment. The final possibility is that either the missiles aren’t as “killer” as feared or the intention to build carriers are not real. Look at this leaked gem from RT: A report the Chinese will build a super-carrier of 80,000 or 111,000 tones by 2020.  Again: why would China do this, if it’s strategy for the sea relies on carrier-killers that the US would surely match? Until this confected riddle is resolved, no one should assume too much about China’s future hard power capabilities.

2) China overstating military spending

China, though its networks of defense bloggers and media outlets, is overstating its military build up in the desire (whether conscious or otherwise) to help drive up US spending, sapping the US economy in much the same way as the Soviet Union. Canadian journalist J. Michael Cole makes a similar point in a piece looking at the possibility that there is a combined effort to achieve this goal by far flung Chinese and Russian deployments. Sun Tzu would be smiling.

3) China likely knows the Soviet Union overspent

Another reason that lends weight to this view is the awareness China’s leadership has of the end of the Soviet Union. Media reports suggest China’s leadership is obsessed with the conditions leading up to the fall of the Soviet Union – and surely they wouldn’t miss one of the contributing factors – the onerous spending on military while domestic needs went unaddressed.

“It’s hard to overstate how obsessed they are with the Soviet Union,” said David Shambaugh, a George Washington University expert who spent years meeting Chinese officials and reading internal party documents for a book on the subject. “They wake up in the morning and go to sleep at night thinking about it. It hangs over every major decision.” The obsession is fueled by the fear that, with a few wrong steps, China’s Communist Party would face a similar fate.

It’s hard to believe that at the highest levels China’s leadership isn’t aware of this risk of overspending on the military -both for China and the US. That may also explain how they price the cost of two aircraft carriers at $US9 billion. (Compare $13.5 billion for latest US carrier). I don’t see a price on China’s supposed supercarrier based on a Soviet design.

Further, the dramatic industrialization of China has taken the Chinese Communist Party leadership into uncharted territory. So it’s natural that of all the risks China’s leaders would consider, one of them would be overspending on military while domestic discord mounts. Meanwhile, in the aftermath of the Iraq and Afghanistan wars US overspending on the military is no secret.

4) Confusion cultivated

Finally, if there is any confusion about these matters of China’s military intentions, it’s because China may well want the confusion. Discussing recent Chinese pressure on Western media, US academic Perry Link, nails it:

If there is a silver lining in the predicament of the New York Times and Bloomberg, it is that the West may finally be getting a direct sense of the political culture at the top in China. It is a shrewd and inveterately competitive culture, drawn far less from Karl Marx than from China’s classic novel “Romance of the Three Kingdoms,” in which outsmarting the opponent by whatever means is the most admired of achievements. When U.S. policymakers use terms like “strategic partner” and “responsible stakeholder” for the people at the top in Beijing, they are out of their depth. (my emphasis)

For the US look on the USS Cowpens incident as an anomaly, or somehow outside the pattern of normal naval, is likely to be wishful Western-thinking steeped in the notion of treaties, conventions, norms. Nations – like people – make time for what’s important to them. If China didn’t want the USS Cowpens incident to occur they would have either reined in their freelancing ships captains or issued orders to prevent this sort of thing from happening. But a government and military that is opaque gives China leeway in how it wants to portray these incidents. The solution may not be for the US to “get tough” with China but rather to adopt some of its strategies. This makes the prospect of dummy armies deployed by the US in the Indo-Pacific a much more intriguing option – it would certainly be more cost effective than real armies.

To come: Top reasons for a smaller US military