THE ASIAN SQUARE DANCE – PART VIII

WRITTEN BY MICHAEL AKERIB

 

PUBLISHED IN ASIA

The economy

Economists generally agree that the cumulative economies of Chinaand India will be larger than that of the G7 by 2030. At present,China’s GCP stands at $9.2 trillion, or nearly 5 times that India.

The two countries have taken very different economic paths. Chinahas chosen to become an exporter of labor-intensive products whileIndia still relies on agriculture and services, particularly in IT.

Russia’s GDP at $2 trillion in 2013, and expected to shrink by 3 to5% in 2015, less than a quarter of China’s. Russia is a raw materialpowerhouse and a manufacturing dwarf. As such it should be a naturalsupplier of oil and gas to China – it is a closer supplier than theMiddle East. However, the pipeline that will be built across Siberiawill deliver its goods to Nakhodka, a port facing Japan. Russiaseems to fear that it will become dependent on China for its gasexports and that China will consider Russia as a vassal state andsideline it on the international scene as the disparities betweenthe two countries grow. China has also to date not given a definitereply to the role Russian gas will play in its energy policy. Priceis also an issue since China tends to compare the price of gas withthat of domestic coal.

While economists forecast that China’s GDP will overtake that of theUS, it still has some way to go as US GDP stands at $15 trillion.

By building its extremely large dollar reserves, $4 trillion, theChinese Central Bank has allowed the US to borrow at very lowinterest rtes and has created a situation in which banks havesearched for higher yields through lending massively to the housingmarket. The risk on the currency and on the value of US Treasurypaper is extremely large. It is estimated that China holds over 6%of the US debt.

China could, if it so wished, put pressure on the US economic systemby buying less US debt, or even selling it, thus precipitating afall in the dollar and an increase in interest rates. Reprisals fromthe US could come in the form of new barriers to trade for productsmade in China.

Should there be a major economic recession in the US, with aconsequent loss of jobs, the country may well turn to protectionism.The idea that the globalization process has been essentiallybeneficial to China will be a driver to reduce imports from thatcountry.

China is also worried that US government borrowing to cover itsenormous deficit will lead to high inflation and that therefore thebonds held by the Central bank will lose value.

The US has been putting considerable pressure for China to revalueits currency, the RMB, and thus reduce its competitive advantagebased on cheap labor. Some economists, however, believe that arevaluation of the currency may well lead to precisely the oppositeeffect as funds may then float out of the RMB and into othercurrencies, thus leading to a de facto devaluation.

The fall of the dollar has revaluated the RMB and thus made Chineseexports more expensive, hurting mostly privately-owned SMEs andhalting the modernization process of the economy. The US could allowits currency to depreciate further, to the point where its goodswould be significantly more competitive than they are today.

China could take advantage of a weaker dollar to acquire assetsdenominated in dollars, whether in the US or in other countries. Ithas thus become a major lender and investor in South America –particularly in Ecuador, Nicaragua and Venezuela where it hascommitted to invest $250 billion over the next 10 years. This mightwell be the reason for the US to have softened its stance towardsCuba.

China could also use its reserves to acquire major Europeancorporations in the hope that they will out-compete US companiesthus creating an economic war between the US and the EU. It couldalso use its vast financial reserves to hoard oil and uraniumforcing prices of these products to reach new highs.

China feels that the US administration under President Obama has notdelivered on its pledge of including China, and other emergingcountries, into major economic decisions. Thus, the Obamaadministration has put pressure on its allies in the Asia-Pacificarea to stay away from the Asia Infrastructure Investment Bank, oneof China’s pet projects.

As of Japan’s GDP at $5 trillion stands also at four times that ofSouth Korea.

Trade and investment

Asia is in a unique tradition with several world powers sitting on anuclear arsenal and harboring resentments and old, deep rootedhatreds and territorial disputes. Military budgets are on the riseand economic growth has slowed considerably. Competition existsbetween the countries we have been considering in this series ofarticles – it exists in the industrial world, in cyberspace and inouter space.

Asia’s history is one of constant conflicts and long-seated hatredand there are too many potential conflicts that threaten to eruptinto wars. There is also a seeming disdain of leaders towards theirown people, the most flagrant case being North Korea.

There is also a major gender imbalance in favor of men and thissituation has led to fears of a rise in militarism. There iscontradictory evidence that unmarried men tend to be more violence-prone than married man.

Almost all the countries covered have strong economicinterconnections.

India runs a major trade deficit with China which in 2013 was ofover $ 30 billion, with India complaining that Chinese goods takeadvantage of a whole series of measures put in place by the Chinesegovernment while Indian companies have problems entering the market.

Similarly, Indian companies have had problems entering the Japanesemarket, but due to quality issues.

With the opening of the Indian economy to foreign investments,Japanese corporations, catching up to a late start, are expected toinvest $35 billion over the next 5 years in public-privatepartnerships. Japan is also expected to become a partner in a major

public-private infrastructure partnership project, so large manyknowledgeable observers of Indian politics doubt it can be realized,estimated at $100 billion, to create a high technology corridor –the Delhi Metro Industrial Corridor – linking Mumbai to New Delhi.Terrorist attacks have so far frightened would-be investors,however.

China has also been an important investor in India. A sustainedeconomic cooperation between the two countries would make them lessdependent on exports to the European Union and to the US.

China has regularly complained about the long delays for India toapprove investments by Chinese firms and of a total ban ininvestments in infrastructure. Chinese workers also havedifficulties in obtaining working visas.

Bilateral trade between India and Russia is much lower at $12billion but after President Putin’s visit, ambitious targets havebeen set for 2030, essentially in infrastructure projects. Thus,Russia will supply four nuclear power plants.

India’s largest market is the US with bilateral trade between thetwo countries being of the order of $100 billion with plans to reach$500 billion. The US has thus displaced China as India’s largesttrading partner in spite of India’s complaint that US subsidies tocotton farmers undermine Indian exports and that steel exports areunjustly submitted to high tariffs. In turn, the US complains at thedifficulties companies face in attempting to enter the Indian marketand at the limitations imposed on them when investing.

China and Japan are each other’s largest trade partners, Chinahaving replaced the US in that role. Japanese tourists are the mainvisitors to China. Japan is the major foreign investor in China,taking advantage of low labor costs. However, the tense situation

between the two countries, and the increased cost of manpower, hasled Japanese companies to sharply reduce their investments.

China is also South Korea’s main trading partner with two-way tradeof $230 billion and the signing of a bilateral trade agreement thattook effect in February of this year. Koreans are also largeinvestors in China.

China and Russia, in spite of the fact that they are both export-oriented economies, are complementary in that the first is a bigconsumer of raw materials, primarily energy, while Russia is a majorexporter of oil and gas. This has led China to increasingly seeRussia as a petro-state with little technological capabilities andunable to pose any type of threat.

Hence, while in the years following the Second World War Russia sawitself dwarfed by the Western economies, the country is, today,overtaken economically by both the West and the East, the latterbeing represented by China, Japan and South Korea.

In the Chinese-Russian partnership, China appears to be the seniorpartner and it is safe to say that Russia needs China more thanChina needs Russia.

Russia sees China as a hedge of its European energy markets. Thishedge, however, can only be fully operational in the future asbuilding the right infrastructure that would allow Russia to moveits energy exports eastwards is a long-term venture, particularlysince Russia’s most productive wells are in the European part of thecountry while the bulk of China’s population is in the eastern partof their own country.

Two-way trade in 2014 was over $100 billion and while China isRussia’s second largest trading partner, trade with the EU is 4times that amount. The value of trade is very dependent on the priceof oil and gas. It is nevertheless expected to reach $200 billion by2020.

On completion of the Eastern Siberian Pacific Ocean Oil Pipeline(ESPO), Russia could supply 20% of China’s imports and 33% ofJapan’s on condition these two countries choose this dependency.

The two countries have launched the world’s largest joint gasproject – the Sila Sibiri pipeline – which will deliver gas to theRussian Far East and to China. There are other joint projects,including in the Arctic, which have received President Putin’sblessing.

Since 2014 commercial contracts between the two countriesintensified as Russia was looking for credit and investors in theface of the sanctions imposed by the EU and the US as well as theserious dip in the price of oil. The oil and gas contracts signedbetween the two countries are, respectively, of $270 and $400billion over a thirty-year period with Gazprom deliveries due tostart in 2019.

Chinese investments in Russia are of the order of $10 billion andnew investments have been earmarked for a large variety of projects.The largest investment is a partnership with Rosneft, valued atseveral billion dollars meant essentially for the Sakhalin-3 block.Rosneft has also secured a $35 billion loan from China in exchangefor oil supplies. This envelope is to be used to purchase severalsmaller oil producers.

China will also invest in a high-speed train between Kazan andMoscow – a $25 billion investment, and other major infrastructureprojects are being discussed.

Russia has, in turn, agreed to supply China with the know-how toproduce uranium-enrichment facilities and to supply enricheduranium.

Economic ties between China and the US are also important and theinterdependence between them appears to be growing rather thanslowing in spite of constant mutual accusations of retreating fromfree trade. The US ran in 2013 a deficit of $318 billion formerchandise trade, one third of the total trade deficit. China isthe US’ biggest supplier.

Imports by the US of cheap Chinese products – essentiallymanufactured goods, machinery, chemicals and transport products –has been of great assistance in controlling inflation and the US hasthus transferred to China increasingly large amounts of dollars.Since China is a major supplier of goods to other Asian countries,in particular in South-East Asia, that assemble products for exportto the US, the US’ importance to the Chinese economy is even greaterthan what the above figures show. The US has started a large numberof cases against China at the WTO claiming the country is practicingillegally high import tariffs on US goods while simultaneouslysubsidizing exports. By limiting or banning exports of rawmaterials, such as bauxite, and allowing prices to climb, China hasbeen accused of developing one more strategy of subsidizing itsindustry.

Chinese investments in the US are of the order of $50 billion butare dwarfed by the over $400 billion invested by US corporations inChina, even though the investment flow has slowed. Statistics inthis respect are not meaningful, as often these investments are notreported in US statistics as the flow of funds is channeled throughfavorable tax havens.

A large number of American firms have established manufacturingfacilities in China, and this allowed the US economy to grow withminimal inflation. There is a generally shared belief that China hasentered a period of uncertainty, that local competition is adoptinga more aggressive stance that in some areas there is over-capacity,that intellectual property is not respected and that the country isincreasingly adopting a protectionist stance. Nevertheless, anincreasing number of US corporations are dependent on the Chineseeconomy for their profits and sometimes on products, such astobacco, whose sales are dwindling in traditional markets.

Also, the US is attempting to sell, in China, alternative energysources such as solar or wind power technology. This is a majormarket considering that the Chinese government has announced itsintention of investing $200 billion in renewable energies by 2020.US companies, however, are loath to export their latest technologyin a country known for closing an eye to the trespassing ofintellectual property.

Chinese investments in the US could be even bigger if they were notmet by obstacles – the most glaring example being that of Huawei,the telecommunications company, which was blocked from entering theUS market.

The Chinese have also become very large buyers of real estate in theUS, amassing a portfolio of $22 billion.

The relationship between Japan and Russia is more complex since thetwo countries have never signed a final peace agreement and Japanstill lays claim on the Kurile Islands. Russia is ill at ease withJapan’s future involvement in a missile defense system and hasproposed to join the initiative which is led by the US.

Bilateral trade is of the order of $33 billion with oil and LNGtaken an important part of this volume, in particular from theSakhalin deposits. After the Fukushima incident Japan has felt theneed to diversity its sources of energy and Russia is a naturalsupplier. In Russia’s eyes, supplying Japan would counterbalance theincreasing dependence on China. Several cooperation agreements todevelop new gas and oil fields have also been signed between the twocountries.

Total Japanese investments are small, with car makers have plants inRussia, but the most likely investments will target Russia’s FarEast, particularly for infrastructures. Several joint ventures havebeen started in agriculture, energy and infrastructure.

Japan and South Korea are each other’s fourth largest tradingpartners. Russia has proposed building a railway that would linkNorth and South Korea to the European markets via Russian territory– i.e. connecting to the Trans-Siberian Railway. Such an undertakingwould allow South Korea to increase trade with Europe and reduce itsdependency on the American and Asian markets.

Bilateral trade between South Korea and the US amounted to $115billion in 2014 and represented a US deficit of $25 billion. In June2007, the two countries signed a trade agreement that phases out alltariffs, on consumer and industrial products over a period of threeyears. Total investments from South Korea to the US is estimated tobe $25 billion while US investments in South Korea are of $35billion.

Bilateral trade between the US and Russia was, in 2014, of $34billion with a US deficit of $13 billion. Russians are big investorsin New York – particularly Manhattan – real estate particularlysince the sanctions and the decrease in the price of oil led to acollapse of the ruble. US investments in Russia stand at around $15billion and are rather diminishing, again in view of the sanctions.

Economic growth has not eradicated poverty in East Asia andestimates of the extremely poor are of the order of 250 millionpersons. Although continuing economic growth should lead to areduction in poverty, this should still touch 15 to 17% of thepopulation. The imbalance stems in part by the fact that there is animbalance between skilled and unskilled labor as well as regionalimbalances due to the rapid industrialization of certain areas.

Demography

East Asia is today’s the world’s fastest aging. Projections show 20%of the population over 60 by 2050, or two-thirds of the world’sseniors. Already by 2040, the number of people over 60 will behigher than the people under 15.

Just as China is the world’s most populated country, India is theworld’s largest democracy. They are the only two countries with apopulation larger than 1 billion. It is forecast that sometimebetween 2015 and 2025, India’s population will have overtakenChina’s as the former’s population is growing at twice the rate ofChina’s population. Furthermore, India’s population has a lowaverage age while China’s is aging. Therefore while India may beconsidered to have an infinite supply of cheap labor, this will notbe the case of China in the mid-term future. Thus, while India’sdependency ratio will improve, China’s will worsen.

China’s population is aging rapidly, partly because of a vastlyimproved health system. This expanding health care system willrequire substantial additional funding. So will the pension systemeven though traditionally, children support their elderly parents.

Both China and India suffer from a growing ratio of males tofemales. The devotion of the children to their parents, when these

age, will be difficult to maintain if single men, due to absence ofthe brides, migrate in search of employment of opportunities.

As the economies of both countries expand at a similar rate, theywill need trained engineers and scientists. China graduates 600 000engineers per year and India 350 000. However, China has aqualitative advantage due to a better educational system.

Japan’s economy is to a large extent driven by demographic change.Birthrates have collapsed with a total fertility rate dangerouslyapproaching 1. With a life expectancy of 88 years, it has today theworld’s oldest population, with the largest number of centenarians,but may well cede this place to China by 2050. By 2025 itspopulation over 80 years of age will be equal to that under 15.Thus, two persons of working age will have to support one retiree.On the other hand, they will be a reduction in supporting children.

Older persons invest very conservatively, and therefore the economymight lack the dynamic financial markets required to fuel growth andentrepreneurship.

To a large extent, the same analysis applies to South Korea. NorthKorea is faring slightly better with a total fertility rate ofnearly 2.

Russia has a population of 142 million for a country representing19% of immerged land. There has been a small rebound in birth rates,but it may not be sustainable. The percentage of the population over60 is low compared to China, Japan and South Korea, and is of only20%. The imbalance between women and men – 1 160 women for 1 000 men– and the fact that women in rural areas are unable to find husbandswho are not addicted to alcohol, contribute to a low level ofmarriages, and consequently low fertility. With life expectancyexpected to rise in the coming years, while fertility is expected to

remain at its present level, the old-age dependency ratio isexpected to double by 2050. This would mean that spending onallowances and pensions would rise from the present figure of 9% to12% by 2030 and 16% by 2050.

The situation in the US, while not as bad, is worrying. Itspopulation of 316 million is growing at the rate of 0.7% and isexpected to reach 400 million by 2050. 22% of the population will beover 65. The life expectancy is slightly higher than 78 years butthe total fertility rate at 1.9% is below replacement. The reductionin birth rate applies also to immigrants, usually an importantcomponent in US demographics.

India’s demographics are quite different. Its population is onlyslightly below that of China, at nearly 1.3 billion, and it has theworld’s largest number of young people since two thirds of itspopulation is under 35, and the average age of the population is 27.But in India too the population is aging and is expected to reach 37by 2050. At that time 300 million people with be over 60. The totalfertility rate is 2.5. It should therefore still enjoy a demographicdividend compared to the ageing societies we have reviewed.

The Diasporas

There is a large Tibetan diaspora in India where the Dalai Lama hasestablished his headquarters and this has been an irritant to theChinese government while achieving little for the Tibetans. TheDalai Lama relinquished his political responsibilities in March 2014and has been replaced by a Harvard scholar who has never visitedTibet

The presence of a Chinese diaspora in Russia is a more complex issueas there is an important labor movement, of legal and illegalimmigrants, along the border and is becoming an important issue in

the relations between the two countries. Migrant labor isessentially employed in agriculture and construction. The totalnumber of Chinese in Russia is estimated to be 400 000 includingnearly 20 000 Chinese students in Russian universities. The vastmajority of the migrants come to make money and have no plans tosettle permanently.

The Chinese diaspora in the United States is much larger with 1.6million immigrants and just as many US citizens of Chinese origin,heavily concentrated in the states of California and New York.Several incidents have questioned the loyalty of some of theimmigrants to the host country.

There is a small but concentrated Korean diaspora in China numberingapproximately 600000.

There has been a considerable flow of highly qualified andentrepreneurial migrants from India to the US and the Indiandiaspora amounts to 2.5 million people and this number is expectedto double in the next ten years. Indians are thus the most importantgroup of Asian immigrants in the US. The 75 000 Indian students inthe US are the largest foreign group registered in colleges anduniversities. Indian immigrants have been, on the whole, anextremely educated and successful group with total assets estimatedto total $76 billion.

There are in the US over 3 million Americans of Russian descent.

Water

There is a contentious issue between China and India regarding thelatter’s water diversion plan which will shift 50 billion cubicmeters of water from the Yarlung-Tsangpo, an affluent of the

Brahmaputra originating on the Tibetan plateau, to the Yellow Riverso as to harness hydroelectric energy. This would severely restrictthe flow of water to India.

Energy

As mentioned in the first part of this article, China and India, butalso China and Japan, are competing to secure energy sources.

While the competition between China and India lies in securingenergy sources in other countries, that with Japan is not onlycentred around Russian supplies, but also on the presumedhydrocarbon deposits around two rocky uninhabited islands in theEast China Sea that the Japanese government purchased from a privateowner and which China claims as its own.

China is uncomfortable with the long shipping route oil takes fromthe Middle East to its ports. The area is populated by pirates andother revolutionary or semi-revolutionary movements that could beallowed, if not encouraged, to target Chinese vessels. Ensuring thesafety of the shipping routes is the official reason for China’sinvestments in naval power.

Central Asia

Russia fears the political influence that China may exert on theCentral Asian republics, in particular through the SCO – theShanghai Cooperation Organization – set up by China but pf whichRussia is also a member. India is, incidentally, an observer, andRussia would like to invite the country to full membership status.Intriguingly, however, while Russia sees to remain the determiningfactor in influencing policy in Central Asia, China’s position isthat these states are free to develop relations with countries not

members of the SCO and that the organization is not, and should not,become an anti-Western club.

Russia opposes China’s wish of extending the SCO agreement to covertrade in the form of a free trade agreement, as Russian corporationswould be unable to compete on price. It would also open the area toChinese investments, including in energy projects. China issuccessful in the region due to the aid it brings, diplomaticpressure and large investments. Russia’s policy has been to preventCentral Asian countries to supply European markets by bypassing theRussian pipeline system and ensuring it has a monopsony. However, inview of the decreased quantities purchased by Russia affected by thereduced demand in Europe, these countries have looked foralternative markets, and China is the obvious one.

Russia would like to see a coordination of pricing policy on energyexports between the member countries that are energy exporters.

Another Chinese advantage is that it is perceived by Central Asiangovernments as a trading partner and a door to Europe and the MiddleEast, and not as a competitor as Russia is for gas supplies toEurope. Russia’s role as a supplier of finished goods disappearedwith the downfall of communism.

China sees the pipelines for hydrocarbons from Central Asia as ahedge against possible disruptions of shipping lanes from the MiddleEast. However, just as it is beefing up its Navy to protect thoselanes, and to rely less on US maritime power, it will have to beefup its security along the pipelines to protect them from possibleattacks.

Russia sees China as a good partner in its policy of containing theUS in Central Asia and elsewhere. In fact one can say that Russia

sees China as a partner only when its relations with the West areless than perfect – which is the situation at present.

China has been able, so far, to restrain any influence the US couldhave on Central Asia thus enabling China to secure energy resourcesfor itself and to prevent the infiltration of democratic ideas.

The US has key interests in the region: to support its militaryadventure in Afghanistan, to have access to energy – without relyingon the Russian logistical infrastructure – and to wield politicalinfluence in the entire Central Asian area. The US also sees anopportunity to lessen Russia’s position as a gas supplier – shouldthe Central Asian republics find alternative routes for their gasshipments, Gazprom will no longer be in a position to export asdomestic demand is rising from an already important base.

Weapons

China’s strategy has been, and will continue to be in theforeseeable future, to encircle India both through its own forcesand through those of its allies who neighbour India, Pakistan in inparticular. China, nevertheless, contrary to the US, is not part ofany defence organization and thus does not have the burden of havingto defend the territories of other nations.

China’s military budget for 2015 has been increased by 10%, reaching$145 billion, a rather steep figure in regard to the slowing of thecountry’s economy. China has installed missile systems pointing toIndia’s major cities while China’s industrial heartland is very farremoved from their common border.

China’s nuclear strategy is to use their missiles only for a secondstrike and not to use them for a first strike on any state. It may,however, rapidly change this policy if it so decided.

India is also worried with the building of a port, by China, on thecoast of Myanmar, that would give China direct access to the Bay ofBengal. It is also worried by the increasing presence of Chinesesubmarines in the Indian Ocean. The submarines use Colombo as arefuelling port, leading India to fear that China was buildingalliances with countries surrounding India – the so-called ‘stringof pearls.’ China has called this project the 21st Century MaritimeSilk Road, a project financed by China to the tune of $40 billion.

Indian military hardware purchases, the world’s largest with abudget of $250 billion over 10 years, are an important source ofcash for the ailing Russian military manufacturers.

The two countries will be jointly developing a fighter plane of thefifth generation. India has also served Russia as a basis to enterthe South East Asian markets for military hardware by servicing andtraining users of Russian equipment sold to those countries.

Russia has been very supportive of India in its conflict withPakistan over Kashmir, among other things committing not to supplyweapons to Pakistan, an embargo it lifted in 2014.

The US has also been a major provider of mostly defensive weapons tothe Indian army and this may lead to a licensing agreement for Indiato manufacture American weapons.

India and Japan have reached an agreement regarding militarycooperation. Japan is about to review its constitution to enable itto expand its military which is already considered as one of the

world’s best and China would have problems measuring themselves toJapanese firing power in case of a conflict. It is also backed up bythe US military that have bases in Japan.

The main discussions between the two countries centred on the supplyof nuclear technology and fuel to India by the US. This is animportant step considering the fear of nuclear proliferationpervasive in the world today and particularly considering the factthat India will be adding to an already existing nuclear capabilitywhile it has never signed the Nuclear Non Proliferation Treaty(NPT). This allows the US to put pressure on New Delhi to reduce itsenergy purchases from Tehran. Further, India’s rivalry with Pakistanmight lead the latter to accelerate its own weapons programs shouldIndia proceed with its own purchases.

For India this is an important development as its supplies ofuranium are drying out. The treaty also allows it to remain anuclear player without signing the NPT, although the country hasentered negotiations with the International Atomic Energy Agency tonegotiate an agreement that would have clauses specific to itssituation.

The US has insisted on certain clauses in the treaty such as Indiaaccepting not to undertake further nuclear testing, not reprocessingthe spent fuel and accepting that the President of the United Statescertifies, annually, that the country is respecting these clauses.

For the US this is a major step in containing China and relationsbetween China and India took a turn for the worse, with Chinasupplying nuclear power plants to Pakistan, after this agreement wassigned.

Another main motivation of the US has been to prevent India makingup for its energy shortcomings by purchasing Iranian gas that would

be routed through an Indian-Pakistani pipeline. Financial motivesare not left too hard behind, considering the deal would generateclose to $100 billion in sales for US corporations to which must beadded large sales of defence equipment which presently Indiapurchases from France and Russia.

India is also the country with which the US has conducted thelargest number of military exercises in recent years.

Following President Obama’s visit to India in 2015, a JointStrategic Vision for the region was agreed upon. Its objective is tosupport sustainable development and address poverty. However, themain objective is to ensure India’s Navy plays a dominant role inthe Indian Ocean.

Japan is now allowing its military to have an activity outside thecountry’s territory.

China’s increased militarization worries Japan, particularly theinstallation of missile launching ramps, China’s declaration of anexclusive maritime and air space, and the highly vocal Chinese mediaconstantly threatening of war with Japan.

China, in turn, fears a reunified Korea with nuclear weapons.

Russia continues to be China’s main weapons supplier as it wants themoney from these exports which are of the order of $2 billion peryear. Since 2006, the two countries have conducted joint manoeuvres,and intensified their military cooperation.

China, however, no longer represents an overwhelming share ofRussia’s weapons exports – a mere 20% today from a high of 70% ten

years ago, while the value of total exports has risen considerably,thus decreasing even more the importance of Chinese purchases.Further, with the new cold war, Russia itself is becoming its ownmajor customer.

Russia is eager to maintain this monopoly on Chinese weaponspurchases, and the EU and US embargo assist them in achieving thisobjective. However, inevitably, China will want to be involved inweapons development and testing rather than simply acquiringtechnology entirely developed in Russia. It has already indicated itdoes not want to buy finished weapons or assembly kits but want tobuild the planes in China.

On a longer term basis, it is obvious that China will develop itsown military platforms and it is already successfully copyingseveral weapons systems thus severely reducing its imports fromRussia. This worries Russia as on a conventional army basis, Chinawould have the upper hand in case of conflict, and Russia would haveto rely on tactical nuclear weapons where it has the upper hand.While the INF treaty constrains Russia’s capability of deployingintermediate range nuclear missiles, Russia would probably opt outof the treaty should it feel threatened by China.

North Korea is actively developing its nuclear program and at leastone estimate is that it may possess 100 nuclear heads by 2020.

On the other side of the demilitarized zone, there are US forces onthe ground. The US keeps 40 000 troops in South Korea.

Border issues

China and India have fought several border wars and in November 2006China declared one of the Indian provinces, Arunachal Pradesh, to be

part of China, calling it South Tibet. India also claims China isoccupying illegally an Indian province in the Himalaya.

In fact, China and India are in a constant military confrontationalong their mountainous border.

China is also in a confrontation with several countries regardingtheir maritime borders, and particularly Japan.

The Diaoyu / Senkaku (Chinese and Japanese names, respectively)islands have been a bone of contention for 120 years but China haslately become assertive on their claims particularly as it isbelieved that the waters surrounding them are rich in hydrocarbonsand fishing grounds.

China’s attitude is also fed by the fact that it is using Japan as auseful scapegoat that helps it maintain strong nationalist feelingsof its population, an important cement in a country in which socialpressures between different groups, such as rural and urban, areincreasing and threatening the country’s stability. China alsobelieves that Japan is on a long-term decline and will not be ableto adequately respond to China’ bullying presence.

China’s claim that the entire South China Sea belongs to it hasopened the door for the US to pose as the protector of the SouthEast Asian countries.

The South China Sea is an important point of convergence between theinterests of the two countries as well as the countries of SoutheastAsia. The rise of Chinese naval power – which could become largerthan that of the US in the next 5 years – could threaten the US’dominance in the area.

The South China Sea sees the flow of half of the world’s trade andthe conflictual situation could disturb the globalization processwhich explains why China is becoming interested in continentalroutes and goods are shipped by train through a new train link whichis the worlds longest and reaches all the way to Madrid.

The interest in the area, however, does not stop there. Chinabelieves that it contains massive quantities of oil – approximatelythe same as those in the Arab Gulf.

China’s development and purchase of high-powered microwave weapons,1500 missiles, submarines and amphibious ships seem targeted atresisting, or keeping at bay, the US Navy in case of a conflict withTaiwan. As a response, the US moved 20 vessels from the Atlantic tothe Pacific fleet in 2007 and more such moves are forecasted. TheSouth China Sea is considered by the US as a natural border Chinashould not cross. It is a strategic passage point between the IndianOcean and Japan and Korea.

China also has a border issue with Russia. The two countries share a4300 km border and an important historical confrontational past.

Inside those two borders the major issues about the autonomy ofcertain regions and peoples – Taiwan, Tibet and Xinjiang for Chinaand a considerably large number of areas in Russia and the adjoiningcountries in Central Asia that were once part of the Soviet Union.If China has a clear position on this issue – i.e. a total aversionto any such move including with the use of force and populationmovements – Russia has a more opportunistic stance. It has fought aninternal war to prevent the Chechen aspirations to an independentstate but intervened military outside its borders in Georgia and isthe only country to recognize Abkhazia and South Ossetia asindependent states.

Russia fears that its under-populated and vast expanse of territoryrich in natural resources, Siberia and the Far East, yields in theface of China’s demography while Russia is in a state of demographiccollapse. These two areas have large deposits of hydrocarbons,diamonds, gold and other metals as well as large tracts of foreststhat provide raw materials to the Chinese paper industry.

Some of the lands forming the region of the Russian Pacific wereChinese until the eighteenth century, and while China has not madeany recent claims for their return, Russians fear they may do so.

Russia and China are intent in developing their relations butsimultaneously competing for domination of Central Asia andattracting Japanese and South Korean capital to develop the Far Eastso as not to be exclusively bound to China.

Simultaneously, Russia will redevelop China’s and North Korea’smoribund industry in the adjoining North Eastern parts of thecountry so as to economically integrate these areas.

Russia also has a contentious issue with Japan that has preventedthe signing of a peace agreement between the two countries since theend of the Second World War. It concerns what the Russians call theSouthern Kuril Islands, and the Japanese the Northern Territories.

Russia carried out military drills on the islands and announced itwould spend over $1 billion between 2016 and 2025 to develop theseislands. Japan would like to invest in these islands, particularlyin energy projects.

While for many years neither country appeared to think, in spite ofspeeches to the contrary, that dealing with the other was apriority, Primer Minister Abe’s visit to Moscow in August 2013 seems

to have started a different process. One thing Japan needs to avoidat all costs is a coalition between China and Russia.

A dialogue process was started between the defence and foreignministers of the two countries to discuss measures to combat piracyand terrorism.

Russia’s strengthening of its military presence in the Arctic shouldalso be considered as part of its Asian play, the Arctic being apossible base for ventures in Europe, the American continent andAsia.

Japan also has a territorial issue with South Korea centred aroundthe Takeshima or Tokdo islands, as called respectively by theJapanese and Koreans, that each country claims to be a part of theirterritory.

These are very small volcanic islands. They are, however, ofinterest economically as their waters are good fishing grounds andthe surrounding waters are believed to contain gas, although nonehas so far been found. Further, if an international arbiter wouldrule in favour of Korea, Japan’s case for the Kurile Islands and theSenkaku Islands would be severely affected as the country’s claimsin all three cases stems from the San Francisco Peace Treaty thatremained vague on this issue.