Over the last few days, more American tariffs were imposed on Chinese imports, ending a truce in the trade war between the two nations. The Americans accuse the Chinese of delaying negotiations in an effort to weaken American resolve. That has worked in the past, but not this time and financial markets in the U.S. and China both declined. It was telling that the Chinese markets declined much more sharply. This was the point the Americans were making, that China was more vulnerable in this trade war.

Additionally the American economy is booming while the Chinese economy has hit a rough patch. Chinese GDP growth in 2018 was 6.5 percent (relatively low for China) and many economic indicators there 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 are 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 (the basis of much corruption) mean that just borrowing more money to give the economy a boost will not work. A sharper decline in Chinese economic activity would have 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 major impact on national economies worldwide. That’s why global financial markets have been in turmoil since 2018 and prospects of a turnaround are not good. The Americans demanding an end to Chinese bad behavior comes at a bad time for China.

While 2018 was a bad year for China's economy, 2019 is not 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 by the end of 2018 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 did 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. There is also supposed to be a halt in Chinese 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. The new American tariffs are a reminder to the Chinese that the 90 day truce is not working and it is time for China to decide if it wants to address American concerns or continue the trade war.

China is seen as vulnerable because its economy is overheated, unbalanced and at risk of partial collapse. Chinese leaders insisted they needed 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 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. It is also bad news for Chinese allies Russia, North Korea, Cuba, Venezuela and Iran. China calls this an American effort to thwart the Chinese rise to superpower status. The Americans consider it punishing decades of bad behavior and bad faith negotiations.

Bashing Big Brother

Since early 2018 Western nations have been 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. This includes a growing number of electronic tracking methods (mandatory cell phone apps, extensive use of high resolution security vidcams and effective facial recognition tech) that enable police to monitor most everyone in Xinjiang in real time and enormous detail. This system automatically detects and locates “disloyal” people and has them picked up for reeducation.

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 due to restrictions on journalists' (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 reeducation 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 reeducation camps of Xinjiang are now estimated to hold ten percent of the adult Moslems in the province. The reeducation 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 millions of people have been identified and punished 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 reeducation 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 on the Internet. Exactly how the bulk of China's 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.

May 6, 2019: The U.S. Navy conducted its third 2019 FONOP (freedom of navigation operation) in the South China Sea. This one took two American destroyers within the claimed territorial (closer than 22 kilometers) of some of the Spratly Islands. China issued warnings and accused the Americans of troublemaking. There were five South China Sea FONOPs in 2018. Since 2015, when Chinese South China Sea claims became a major issue, the Americans have carried out seventeen FONOPS in the South China Sea. By early 2019 China had 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. 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 continued its policy of not interfering with FONOPS but does send warships to follow the foreign ships. 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 CCP control. What China has demonstrated is a willingness to do everything short of war, especially if they can remain able to claim victim status.

Over the weekend the United States announced it is imposing 10 percent tariffs on $200 billion of Chinese exports and imposing more the longer China delays addressing American problems with Chinese misbehavior in terms of trade practices and blatant industrial and military espionage. Today Chinese financial markets declined sharply.

May 3, 2019: In Venezuela Russia and China are becoming a problem. The United States reminded Russia that foreign military intervention in the Western Hemisphere is not allowed and that the U.S. is continuing its two centuries of supporting that, with military force if necessary. This warning came after the Americans discovered that Russian special operations troops and security advisors in Venezuela had persuaded embattled dictator Maduro to stay in Venezuela rather than flee to Cuba. American officials told their Russian counterparts that the U.S. would use force to remove the Russian interference from Venezuela. Russia remains defiant.

In contrast, China is also supporting Maduro, but in economic, not military terms. That does not violate the 19th century American Monroe Doctrine. China is willing to do business with the opposition, which is considered (by over fifty nations, including most of those in the Americas) as the legitimate ruler of Venezuela. China has no military forces in Venezuela but is working to revive the local oil industry, which Maduro has wrecked through corruption and mismanagement. Using this approach China stands to profit no matter which way the current revolution in Venezuela goes

May 1, 2019: At the UN China halted a decade of blocking efforts to declare notorious Pakistani Islamic terrorist Masood Azhar an international terrorist. Azar was responsible for the 2011 Mumbai (India) terrorist attack and a more recent February suicide bombing in Kashmir that left 40 Indian police dead. India has plenty of evidence that Pakistan continues to protect Islamic terror groups that only attack other nations (mainly India and Afghanistan). While Pakistan was grateful that China used its UN veto to block justified counter-terrorism measures involving Pakistan. Yet China was also trying to persuade Pakistan to back off on sponsoring Islamic terrorist groups that were willing to attack Pakistani enemies. Pakistan refused to go along with the Chinese requests so China is sending the message in stronger terms. This move wins China some goodwill from Afghanistan, India and many other nations who have suffered from this Pakistani use of Islamic terrorists.

April 27, 2019: China has offered the Philippines $12.2 billion worth of investments and trade agreements. The two nations signed 19 trade deals that, if carried out, are supposed to create 21,000 new jobs in the Philippines. There is a catch to all this; China expects some unwritten diplomatic concessions as well. China has already made deals like this with the Philippines but when the Filipinos refused to back off in the South China Sea those earlier investments and such never showed up. The Philippines is being given another chance to be bought and prove that they will stay bought. Opinion polls show that most Filipinos do not trust the Chinese and are unwilling to give up Filipino territory in the South China Sea. President Duterte has been in China, along with some of the key diplomatic and economic officials, to make final arrangements on these deals. Duterte has also told the Chinese that he knows how this works and that the Chinese should not get their hopes up.

April 26, 2019: President Duterte recently returned from China where he met with the Chinese leader and both agreed to work out their disputes in the South China Sea through negotiation. This may not amount to much. The Chinese take the long view and see negotiations and even concessions as tolerable digressions as they relentlessly advance towards their goal. Duterte is aware of this and has already dropped his “China wants to be a friend” approach and warned China that a military response from the Philippines was now possible. Duterte admits that this would be suicidal for the Filipino forces involved but it would trigger the mutual defense treaty with the United States. Short of that China was warned that their ships surrounding Pagasa Island are there illegally. Duterte has always admitted that the Philippines itself has not got the military resources to oppose Chinese aggression with any degree of success. Filipino legislators are complaining that their government seems unable to do anything about the Chinese threat. Filipino and American diplomatic officials are still trying to decide what constitutes an “attack” that would trigger the mutual defense treaty. The government does admit that the United States is the only “military” ally the Philippines has. The Chinese do not want to fight the Americans. That’s not what Chinese propaganda says but within the Chinese government, there is agreement that war with the United States would be disastrous, at least until China is the top military superpower in the world. China does not expect that to happen until the 2030s. So for the moment China talks tough and tries to buy its way out of any embarrassing confrontations with the United States. The current effort with the Philippines is all about how much China has to pay to get the Filipinos to fold.

China is well aware of that American link and as is their custom the Chinese are avoiding any direct confrontations that risk leading to violence. This is a potentially dangerous game but so far the Chinese have been successful at it. Until the Americans agree that the Chinese aggression has triggered the mutual defense treaty the Philippines has no option other than trying to be friendly with China while documenting the growing acts of Chinese aggression in the South China Sea. The current American government has demonstrated a degree of resolve and aggressiveness that China is not used to. Fortunately, the Americans hold presidential elections every four years and China is looking forward to possibly getting a more compliant American leader in 2020. If not then there is always 2024.

The Filipino government has also decided to declare the disputed (with China) Pagasa Islands and the nearby Eastern Kalayaan islands (actually a group of islets and reefs the Philippines claimed in the late 1940s) as MPA (marine protected areas). According to maritime law (and recently affirmed by an international tribunal) these areas, which are within 200 kilometers of the Philippines (Palawan Island), are well within the Philippines’s EEZ (Exclusive Economic Zone, waters 380 kilometers from the coast). Although the EEZ is recognized by international law (and a treaty that China signed and uses to defend waters off its own coast) China says that does not apply here because all the islets in the South China Sea belong to China and there is no room for negotiation on that point. As an MPA the Philippines can declare China in violation of still more international agreements. An MPA is the sort of thing that does not stop China but it does annoy them a great deal and increases international opposition to Chinese efforts to take control of the entire South China Sea.

China created the current crisis over who controls Pagasa Island and nearby sandbars. The Chinese have put a record number of ships around the island, most of them Chinese fishing boats pretending to be fishing but in reality members of the Chinese naval militia which is being used in unprecedented numbers here. China insists it has not ordered its naval militia fishing boats to physically block Filipino commercial or military ship from getting to Pagasa. But it has become more difficult for Filipino fishing boats to operate in areas they had long worked. China has been threatening to cut off access to Pagasa since 2014 but has never followed through, possibly because the Philippines has often stationed a warship off Pagasa. China claims ownership, despite Pagasa being closer to the Philippines than China and long occupied by Filipinos. Also called Thitu Island, Pagasa is the second-largest (37.2 hectares/93 acres) of the Spratly Islands and is inhabited by 200 Filipinos civilians and a few military personnel. Filipinos have lived on the island since 1956 and there has been a Filipino military presence there since 1970.

Many Chinese fishing ships are part of an unofficial but organized and paid naval militia. The Chinese maintain this force with subsidies (for building new fishing boats) and assurances that the navy will assist Chinese fishermen in gaining access to foreign fishing areas and exclusive use of fishing grounds in international waters. The fishing boats are the most numerous and aggressive component of this militia. Overall the militia appears to consist of several hundred fishing and coastal cargo vessels. There are a hundred or so larger civilian ships, mostly ocean going fishing trawlers, as well. The naval militia openly functions as a government supported organization and has headquarters in southern China. Any foreign criticism of the Chinese naval militia elicits only denials from the Chinese government. The best thing about the naval militia is that it is not officially part of the military but will most definitely follow orders.

April 25, 2019: Western nations are now considering reviving economic sanctions for Burma because of the unresolved Rohingya refugee problem. China is hoping for the worst because that would mean Burma would be more dependent on China for trade and investment. It would make Burma a Chinese dependency (sort of like North Korea) and the Burmese don’t care for that but the army leadership is comfortable with it.

The Chinese need some help because Chinese operating commercial (rather than Chinese government) enterprises in northern Burma (Kachin and Shan states) are a major source of complaints in Burma. There seems to be no end of illegal schemes the Chinese come up with that profit at the expense of Burmese in the north. Two of the recent rackets is enticing or kidnapping Burmese women to China and selling them to Chinese men to be wives. There a growing shortage of Chinese women has created a market for young foreign women. China's "one child" policy of the last few decades and the ability to determine the sex of the child before birth led to more (20 percent more) boys than girls being born in China. There's a growing shortage of potential brides, and desperate Chinese men are willing to buy a kidnapped tribal girl from northern Burma (or anywhere else). Other scams include illegal mining and agricultural operations. For the northern tribes, China has rarely been a good neighbor and Burma is the current best example of the worst behavior by a larger neighbor.

That bad behavior manifests itself in Kachin State when thousands of locals are regularly demonstrating against the Chinese Myitsone dam, a $3.6 billion project that began in 2009 but has been stalled by local resistance since 2011. In the last year China has threatened Myanmar with economic retaliation and withdrawal of protection in the UN (over criticism of the mistreatment of Rohingya Moslems) unless the dam project resumes. Opposition to the dam has become a national issue with most Burmese angry at Chinese attempts to bully Burma into accepting the dam project. Because Burma needs China more than the other way around Burmese leaders are still working on ways to get the Chinese projects moving again. Meanwhile, the official Chinese policy is an ominous “We just want to be friends.”

April 22, 2019: The new Pakistani prime minister has taken a different view of CPEC (China-Pakistan Economic Corridor), observing that the terms of the deal are not all that favorable for Pakistan. The previous prime minister is being prosecuted for corruption and some of that apparently involved the terms of the CPEC deal. CPEC is more than an economic investment, it also guarantees that Pakistan has an ally against Iran and even Western powers that might have some violent disagreement with Pakistan. China has played down the “ally” angle. While China is picking up most of the $55 billion cost, details of the agreement are not very favorable for Pakistan. That was always an issue during negotiations and was one reason it wasn’t until early 2017 that China and Pakistan finally signed the agreement that granted China a 40 year lease on new facilities China is building in the southwestern port of Gwadar. The lease grants China most (over 80 percent) of the revenue brought in by port and free trade zone operations. China usually imports its own workers from China to do most of the work on projects like this. By 2022 China expects to have about half a million Chinese in Pakistan, some of them with their families. All this means China will “own” this new port into the 2050s and will have imported a new minority (Chinese) into Pakistan that will, as usually happens in these situations, become a major element in the local economy.

The easiest way to provide protection for these Chinese is to have most of them live in a heavily guarded and restricted access area. Gwadar is a key part of CPEC and it has the misfortune of being in a province (Baluchistan) that does not want to be part of Pakistan. China and the Pakistanis try to ignore this by not reporting on non-Islamic terror attacks on CPEC construction projects. The government has long been accused of suppressing news of tribal separatists in Baluchistan attacking government targets and especially those related to CPEC. The separatists claim they regularly carry out attacks on CPEC construction projects, but most of their attacks are still directed at Pakistani security forces and government facilities.

Pakistan has told China that it wants to review the CPEC deal and how the terms were arrived at. The Chinese are not pleased, but this sort of thing has happened in many other countries that were initially enthusiastic about CPEC until they studied the fine print of the agreement.

April 15, 2019: Russian media revealed that Pakistan is negotiating to make some major (about $9 billion worth) defense purchases from Russia. Currently, China is the largest supplier of military equipment to Pakistan but the Russians are offering better prices for competitive gear including some items where China is not the best source (like military helicopters). Russia has been increasingly willing to make such deals with Pakistan, despite still being a major supplier of weapons to India. That market is slipping away as India increasingly turns to Western suppliers. Pakistan cannot afford the Western stuff and is often facing trouble making purchases because of accusations that Pakistan supports Islamic terrorists. Russia is less concerned about such matters and is willing to be very flexible in order to make a sale.

April 10, 2019: Since 2017 Indian Kashmir has suffered a growth in Islamic terrorist activity and more attention from Indian security forces. One recently noticed trend is the more frequent presence of Chinese weapons and munitions (ammo, grenades and such). Pakistan backed Islamic terrorists in Kashmir have long used Pakistani made weapons and ammo but the increasing use of Chinese gear is something new. The reason is believed to be a Pakistani attempt to hide their involvement by sending the Pakistani trained Islamic terrorists into Indian Kashmir armed with Chinese weapons. These are similar to Pakistani ones and widely available from legal and illegal weapons dealers.