Transcript

SARAH FERGUSON: Hello and welcome to Four Corners, I'm Sarah Ferguson.

China is on our minds and our political radar like never before. The world's fastest rising superpower has become both our biggest trading partner and the strategic rival of our number one ally.

As Beijing flexes its muscles in the South China Sea, the United States has pivoted its power to face the challenge posed by China's push for supremacy.

Australia is now plotting an uncertain course between the two superpowers and is being courted by both.

Recent controversies over political donations and the blocking of Chinese land and property deals are symptoms of the growing wariness of China's use of economic and soft power to bind us closer together.

Tonight, in a special report for Four Corners, Peter Greste examines the rise of China and what that means for Australia.

REPORTER: The US Marines are training in the cool pre-dawn air at the Sprawling Robertson barracks in Darwin. These are frontline fighters, preparing for combat missions wherever the American government chooses to deploy them.

Drill Sergeant: The main thing is responsibly making those instant decision maker that's make a marine what he is - not so much his physicality but he needs to be comfortable with interpersonal violence.

REPORTER: The troops are almost through their six month rotation. They're part of an ongoing presence of Marines in the top end.

Drill Sergeant: 'everyone understand? (yeah) once you come to Holland road take a left, then all the way down Holland Road back to Light Horse drive which is the main road taking a left and the ending location is the south side of football field you'll see your squad advisors staged there on the south side to record scores times, any questions or need a closer look at the map, ok?... It's a mile and a half max effort once you finish we'll get you in the pool for a bit'.

LT COL. STEVEN SUTEY, Commanding Officer, 1st Battalion 1st Marine Regiment: Anywhere we go to conduct any operation is usually part of a larger coalition force and so this gives us an opportunity to practice and train to that before we need to be deployed anywhere.

REPORTER: Australian troops have worked with them ever since the second World War, but the Marines see this as part of a much deeper history.

LT COL. STEVEN SUTEY, Commanding Officer, 1st Battalion 1st Marine Regiment: The United States marine corps has been in the Asia Pacific region for greater than a hundred years so absolutely we're part of forces that are assigned to the Asia Pacific region, this just gives us an area to train and come exercise in.

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: We count on Aus-Australia mates being there when when ah serious issues are are at stake, so um ah and I think um it goes the other way too.

REPORTER: The US wants to double the number of troops in Darwin to two-and-a-half thousand.

PETER GRESTE (reporter): of course a force this size isn't a threat to anybody, but this is not just about the presence of a combat force up here. This is about symbolism and it says to the rest of the world - and to China in particular - that Australia and the United States are working in lock step together.

REPORTER: When he was here back in 2011, President Obama set out his Pivot to Asia strategy, and cast it with missionary purpose.

PRESIDENT BARACK OBAMA (Date: November 2011): We are saying together, proudly, "Yes, we have the strength for the burden laid upon us, and we have the power to protect and guard our own, here in the Asia Pacific and all around the world."

PROF. HUGH WHITE, Defence Analyst: that was the most potent symbol you can imagine of the beginning of a time where America was seeking Australia's support to push back against China's challenge to American primacy.

REPORTER: Military analysts say President Obama's target is clear. He wants to contain China, and that poses a profound challenge for Australia.

PROF. HUGH WHITE, Defence Analyst: this is an attempt by the United States to demonstrate to Australia, to the rest of the region and to China and to Americans that Australia is there at a on America's side as it pushes back against China's challenge to American primacy and that's...

PETER GRESTE (Reporter): Q: It locks us into a fight with China?

PROF. HUGH WHITE, Defence Analyst: That that's certainly what the United States would like... they want us to see ourselves as deeply committed to supporting the United States in whatever the United States does, to resist China's pressure and of course many Australian political leaders and many Australian voters would think that's inherently a good idea, but they have to really think through what does that mean, where does that lead, is it going to work?

REPORTER: A short drive away from Robertson Barracks, is the Darwin Port. It's a quiet morning - only a few vessels have docked.

MIKE HUGHES, Landbridge Managing Director: The port services the whole of the north of Australia...export of bulk minerals, export of other food products, cattle port, and a lot of product coming into northern Australia comes in fuel to run northern Australia.

REPORTER: It is Darwin's economic umbilical cord to the north. Nationally, China is our biggest trading partner, taking almost a third of Australia's exports. The Territory government has also turned to Chinese money to develop the port. Late last year, a Chinese company called Landbridge won the half a billion dollar lease to run it.

Peter Greste (reporter): but Terry Darwin isn't a massive harbour and this looks like an incredibly sophisticated system?

TERRY O'CONNOR, Darwin Port CEO: most certainly it was built around growth, the new LNG pipeline coming online is going to significantly complicate the picture here very big vessels operating in the harbor.

REPORTER: Handing the port to Landbridge was hugely controversial - the government said it just wanted a good investor. FIRB - the Foreign Investment Review Board - was aware of the sale, as was Defense. Critics said the deal compromised national security for the sake of the economy.

PROF. HUGH WHITE, Defence Analyst: I think ah many people in Washington were worried that Australia's willingness to allow a Chinese company to take that lease, showed how deeply Australia's economic future was being embedded with China's and I think more than the narrow intelligence concerns, they were worried broad more broadly about what that meant about the direction Australia is going... there is a concern in the United States about how far Australia is being drawn into the Chinese economic hemisphere.

MIKE HUGHES, Landbridge Managing Director: We at govt level, with FIRB, defence, no concerns have been raised we seem to be caught in middle of some other debate we like to focus on actual conversations we have people in authority which are very positive rather than focusing frankly on what is in the press.

REPORTER: Across the bay on the edge of the city is the Fort Hill Wharf... at one end, cruise ships board their passengers... at the other end, navy vessels berth.

PETER GRESTE (reporter): Do you understand why Australians concern security risk for a Chinese company operating facility that is also shared by the Australian navy?

MIKE HUGHES, Landbridge Managing Director: Of course I understand the need for the Australian government to think about where it invites foreign investment. I guess my point was that was done very thoroughly in our case. And every time, each of those bodies at a high level they said they have no concerns and are in fact very comfortable with our involvement.

REPORTER: That tension between economics and national security in the port is a local version of a national question.

PROF. HUGH WHITE, Defence Analyst: This is the first time in our history where our biggest trading partner is a strategic rival of our principal ally, so this introduces a whole level of complexity into our strategic situation we've never known as a country before.

PETER GRESTE (reporter): Are you concerned about the tension between our- those economic and strategic interests here?

JULIE BISHOP, Foreign Minister: No, I believe that we are able to balance those um competing interests as other countries do in many other circumstances. We are an economy that's built on foreign direct investment so we're able to manage these issues as well as a relationship and alliance with the United States.

PETER GRESTE (reporter): Except that it does keep coming under stress. It wasn't just Land Bridge it was also the AusGrid decision. It's and there's been obviously there's been controversy around the sale of the Kidman properties and so frequently we're seeing this dilemma: how much Chinese investment do we accept and at what risks to our own national security?

JULIE BISHOP, Foreign Minister: Well, I think we risk overstating it. About 30% of our foreign direct investment which is valued at about $3 trillion comes from the United States. Uh China's is about 2 ï¿½%.

REPORTER: So Darwin represents a dilemma. For more than a decade Chinese trade has made us rich. And ever since the Second World War, we've depended on the US to keep us safe. That presents us with an unprecedented challenge.

PETER GRESTE (reporter): Australia sits at the intersection of these two great powers. The problem for us is the historical forces driving each of them are far greater than anything we can possibly control so we need to find out how those forces might play out.

REPORTER: Those forces came together at last month's G-20 meeting in Hangzhou - the first ever in China. It was a historic moment for the Chinese President Xi Jinping - a chance to use the grand theatre of a global summit to assert China's new-found power... and to welcome the world's most powerful figures on his own terms.

PROF WILLY LAM, Chinese University of Hong Kong: For the first time since the rise of the Communist Party, Xi Jinping sees himself as at the least the equal of ah the US President ... for Jinping there's no question that ah he can talk to the most powerful figure in the free world on level terms.

REPORTER: That gives Xi extraordinary clout. When he talks, the world has no choice but to listen.

XI JINPING, President of the People's Republic of China (Date: September 2016): We should turn the G20 group into an action team instead of a talking shop...

REPORTER: For decades China was content to focus inward in a policy known as "hide and bide", building power and waiting to assert it. But Xi Jinping has shifted gear to what he's called the "China Dream".

PROF WILLY LAM, Chinese University of Hong Kong: For Jinping he sees himself as the person who um, and translate China into ah, the next superpower of the world, the Chinese dream mantra is that by the- the year 2049 the centenary of the establishment of the Peoples Republic, China will have closed the gap with ah, the US, both economically and more importantly militarily. Without which ah the Communist Party cannot justify its um, status as the perennial ruling Party and Xi Jinping himself cannot justify his um, place in history as the Mao Zedong of the 21st century.

REPORTER: When Malcolm Turnbull met Xi Jinping at the G20 Summit, he acknowledged China's new role as an economic superpower.

MALCOLM TURNBULL, Prime Minister (Date: September 2016): The agenda you've recognizes that the keys to ensure strong economic growth and more opportunities trade open markets innovation investment, especially in infrastructure - enabling infrastructure.

REPORTER: As China's economic clout grows, so does its political influence. Over the past three years, donors linked to China have given at least two million dollars each to Labor and Malcolm Turnbull's coalition.

PETER GRESTE (reporter): We've seen a lot of attention being focused on China's um attempts or perceived attempts to influence Australian politics, um including Chinese donations to political parties. what do foreign donors expect in return?

JULIE BISHOP, Foreign Minister: Well, I think we have to also put this in perspective. A number of these companies are in fact incorporated in Australia. A number of them are run by dual citizens or Australians and I would imagine that they make donations to political parties for exactly the same reason other people make donations to political parties. Businesses donate to the party that they think provides the best business environment for them to operate.

PETER GRESTE (reporterer): The outgoing US ambassador expressed his concern about those donations.

JULIE BISHOP, Foreign Minister: That's a matter for the US ambassador. But I believe that we have a relatively open and transparent system where donations to political parties are disclosed. They are audited. But they're made to a party. They're not made to the individual and I don't think anybody would suggest that the coalition's foreign policy on China has been altered in any way over a long period of time.

REPORTER: It seems odd to do a story about China without visiting there...we made repeated attempts to get approval to enter the country and each time we were rebuffed...of course one of the biggest criticisms about china is that lack of openness and transparency, so we've had to come to the next best thing and that's Hong Kong. For Chinese, this former British enclave represents more than a century of colonial humiliation, but also the entrepreneurial spirit that has powered China's economic miracle. For all the Western high-rise gloss, the culture is still deeply rooted in a world view far from European tradition. In a street market Mao Zedong and Confucius share the shelves, with Lenin watching nearby. The Communist Party is encouraging a resurgence of all three.

PROF WILLY LAM, Chinese University of Hong Kong: Both um, Confucianist, patriarchal values and Leninism serve the same purpose and that is to focus all power um, at the hands of the Party and also to ensure ah, the Party status as what Jinping calls the perennial ruling party. So that there will be no challenge ah from other political forces in China.

REPORTER: The communist party is taking those old ideas, and developing a sense of national pride, rooted in rich Chinese cultural history.

PETER GRESTE (reporter): when Chinese look at their history of art what they see is evidence of a great civilization that dominated the world for over a thousand years for everything from science to economics to military affairs. And at a time when Western Europe was nothing more than a medieval backwater. So for them today it isn't so much about China rising but China re-establishing its historic place in the world. And that place is driven by commerce. Just look at Hong Kong Harbor. In 1980, China's exports were equivalent to six percent of America's exports. By 2014 it was one hundred and six percent.

Back then, China's foreign currency reserves were one-sixth the size of America's. By 2015 they were 28 times larger. And in 1980 China's economy was smaller than the Netherlands. And by 2014 it grew by an amount roughly equal to the Dutch economy.

PROF WILLY LAM, Chinese University of Hong Kong: Until the 1840's ah, Chinese had the largest GDP in the world so ah, for Xi Jinping um, it's important to tell the people that after one and half century of um, humiliation at the hands of the colonial powers, China is now on the rise again. China determined to ah, reassume its status as the middle kingdom of the world.

PROF. GRAHAM ALLISON, Harvard Kennedy School: In historical terms, not to blame China in any way, but as a rising power rises relative to a ruling power, one sees in effect a rising power syndrome in which the rising power thinks well I'm bigger and stronger, so my interests deserve more weight. I deserve more say.

REPORTER: We're flying out of Hong Kong across the South China Sea. This is the theater where Beijing seems determined to test its power. About a third of the world's trade - more than five trillion dollars worth - passes through here ever year. That's including the bulk of Australia's trade. It is one of the world's most strategic waterways.

PETER GRESTE (reporter): It's a little bit hard to see down through the clouds but just below us there's a patch of water that's claimed by no less than three countries. To understand why this is one of the most contested areas in the world have a look at this map.

Malaysia claims territory along its coast; Brunei is arguing for a wedge into the contested waters. The Philippines argues that a sweep of the sea to its west is its territory; Vietnam also has a large claim. And China uses what's known as the "Nine Dash Line" to scoop out its claim to more than 90 percent of the sea. And beneath it all, there are at least four large oil and gas fields. China says its claim is based on hundreds of years of history.

PROF WILLY LAM, Chinese University of Hong Kong: Ah and ah, for the near term they want to become the final arbiter of um, defense in the Asia Pacific Region and for that to happen they have to marginalise ah American Power so ah the assertion of military power in the past decade, ah the building of nuclear submarines and now at least two new air craft carriers, I think ah, ah, devoted to this goal of ah, at least minimising American influence in the Asia Pacific region.

PETER GRESTE (REPORTER): What do you assess is China's aim in the region? Is it to push out, to displace that US dominance?

ADMIRAL DENNIS BLAIR (RET): I think it's to ah push out anybody's dominance and replace it with ah ah ah this inflated um Chinese concept of their rightful sphere of ah of of influence.

REPORTER: The contested sea is full of coral atolls that disappear at high tide. A few years ago, China quietly began building them into islands, turning claim into possession. Only the Chinese know what is going on in the reefs they control, but the Americans have been watching closely. These pictures are from a navy surveillance flight last year.

The crew heads towards Fiery Cross Reef in the Spratly Islands - a chain claimed by both the Philippines and China.

U.S CREW MEMBER: You can see here the landing strip. This is the taxi way. They've built hundreds of meters of it in the past couple of months.

REPORTER: Other satellite photos from just a few years ago show that Fiery Cross was a pristine reef with only a tiny construction on the south east tip. But a sequence of images over a 15 month period shows how Chinese crews have covered it with sand. They built it into a mini-town, complete with a harbor, extensive buildings, a sports ground, and a runway three kilometers long. In April 2014, a tiny sandbar was the only thing above the waterline in Gaven Reef. Six months later, it was a fully fledged island, with a harbor bringing in construction materials. The latest images from last month show a well-developed facility.

RICHARD HEYDARIAN, De La Salle University: China has ah quite stealthily tried to make them look like they have civilian aspects, so that this is what they call dual purpose complex or facilities. So China could put Malls, ah some civilian ah structures there but clearly ah they are also ah convertible into a full scale ah military ah installations.

REPORTER: China analyst Richard Heydarian has been closely studying the South China Sea projects.

RICHARD HEYDARIAN, De La Salle University: the technology that they're employing here and the scale of the reclamation and construction activities what China is doing is incomparable, it's a whole different league unto itself.

REPORTER: The Chinese aren't the first to build islands here, but the speed and scale of the work is unprecedented.

RICHARD HEYDARIAN, De La Salle University: I think it's perhaps these satellite images that have really put the South China Sea issue on the global radar. I think prior to that a lot of countries were treating it as some small obscure ah territorial spats that has been there for a century and flares up w-once in a while, but once these images came out it really ah drove home the the the idea that China is maybe looking at dominating an international water, arguably the most important international water in the world. Five trillion dollars of trade, 10% of global fisheries ah resources are there, significant amount of hydrocarbon resources and three times more energy transport than the Suez Canal.

PETER GRESTE (reporter): The Chinese have never said a great deal about what they're doing, they've often said that they're not trying to militarise the region, do the images that we're seeing from the South China Sea substantiate that?

PROF. HUGH WHITE, Defence Analyst: Oh no, I think it's quite plain that they're trying to militarise the region, they would argue with some legitimacy that the United States is doing the same a-as the both sides have by their military deployments and activities tended to tended to m- to make the South China Sea disputes a theatre of strategic competition between them and you know, I don't I think it's hard for the United States to argue that China is the only side neutralizing the issues when they've had two carrier battler groups deployed in the South China Sea over the last few months er so I think, I think in fact both sides are trying to exploit the situation in the South China Sea.

REPORTER: We've come to Manila on the other side of the South China Sea. The Filipino capital swelters in monsoonal humidity. Three years ago, the Philippines took China to the Permanent Court of Arbitration in The Hague to decide who owns a host of the disputed reefs. We're going to meet the man who launched the case - the then Foreign Minister Albert Del Rosario.

PETER GRESTE (reporter): Ambassador Del Rosario, Mr Peter Greste...Ambassador, thank you so much for agreeing to talk to us.

ALBERT DEL ROSARIO, Pilipino Secretary of Foreign Affairs, 2011-2016: No, thank you for coming over here...

REPORTER: Ambassador Del Rosario insists they'd already tried and failed to negotiate a deal directly with China.

ALBERT DEL ROSARIO, Pilipino Secretary of Foreign Affairs, 2011-2016: The core issue was ah ah China had taken the position ...of indisputable sovereignty over nearly the entire South China Sea as represented by their nine-dash line which by the way is an excessive claim and is ah in clear violation of ah international law.

REPORTER: In July, came the verdict: The Philippines won almost every aspect of its case. China has no legal basis for its claims based on history.

ALBERT DEL ROSARIO, Pilipino Secretary of Foreign Affairs, 2011-2016: Well I think the assertions of of China ah were ah were ah contradictory, unlawful a-and violation, gross violation of international law...

REPORTER: Filipinos celebrated a historic victory. But China rejected the verdict outright.

LU KANG, Chinese Foreign Ministry Spokesperson: "I want to say that the tribunal was originally established on the unlawful acts and illegal complaints made by the Philippines. The existence of this tribunal has no legitimacy, thus whatever ruling it makes will be futile and without any efficacy."

ALBERT DEL ROSARIO, Pilipino Secretary of Foreign Affairs, 2011-2016: ...it's final, it's ah non-appealable and ah we, we need to ah we need to ah have the ruling apply so that ah we can have a rules' based ah ah solution to the situation.

PETER GRESTE (reporter): But you still don't have access to that zone, your fishermen still can't fish out there.

ALBERT DEL ROSARIO, Pilipino Secretary of Foreign Affairs, 2011-2016: Well, we're working on it Peter and ah we we hope that the international community ah will help us in abiding by the ruling...

CHENG LI, China Scholar, The Brookings Institution: let's face it, we do not live in an era with international law, with international court can decide everything, every country should obey, western countries sometimes from time t- time also do not u- take er ah er the this(?) ruling si- ah-ah-ah seriously.

PETER GRESTE (reporter): But when you put aside a ruling like that and you have negotiation, inevitably a country with the resources that China has both economic and ah military resources, it makes it impossible for smaller countries to negotiate from a position of strength, they have to accept what China imposes on them don't they...

CHENG LI, China Scholar, The Brookings Institution: But er the point is the Chinese do not think that way, they think these countries backed by, by strongest country in the world with er ah-ah i- the the strongest military that is of course the United States.

REPORTER: Historically the Philippines greatest ally has been the United States. It reopened Subic Bay to American warships earlier this year. But the new Philippines president has made a series of provocative statements, including declaring an end to further joint military exercises with the US. They indicate the regional balance of power is shifting.

PROF. HUGH WHITE, Defence Analyst: When a country like the Philippines faces pressure from China and the Philippines seeks American support and the and the United States says n-no, we don't wanna go to war with China over this one - and that's what's been happening - that makes America look weak and therefore makes China look strong. It's a zero-sum game.

PETER GRESTE (reporter): this struggle over the South China Sea is about a good deal more than the politicians, the diplomats and military strategists, it's also having a devastating impact on one of the world's most important and productive fisheries, and we're going to see the effect of that about half a drive's north of Manila.

REPORTER: Masinloc is the town closest to Scarborough Shoal - the contested area nearest to the Philippines. The fishermen here have been sailing there for generations and they know it well.

Fishermen: There are corals around, and the center is deep...When the storms coming, if you shelter inside you safe if you coming in here because this is like a lagoon.

PETER GRESTE: And its good for fish?

Fishermen: Yes sir.

PETER GRESTE: What do you catch here?

Fishermen: Big fish like this. All kinds of coral reef fish.

REPORTER: Nards Cuaresma is the head of the local fisherman's association. They used to go spear fishing in Scarborough, picking off only the biggest fish. But that's no longer possible. The Chinese authorities have stopped the Filipinos from going there.

NARDS CUARESMA: It seems that they're doing some drilling inside the shoal...I feel that they may be drilling for oil. That is why they are preventing us from going in. We might see other things that they may be doing.

REPORTER: Now that the Chinese have closed Scarborough we are heading to one of the local fishing grounds, with nothing more than a rusty compass and well-honed instinct to guide us. Those fisheries are overcrowded now and competition is fierce.

PETER GRESTE (reporter): There's a concept in conservation called the tragedy of the commons, and the tragedy is that whenever you have a resource shared amongst competitors, even though everybody knows that to overexploit to kill it off, because nobody trusts their rivals to do the right thing and rather than being played for a mug they still take as much as they possibly can and the result is you end up killing the resource and that's what's happening here.

PETER GRESTE (reporter): are you worried about the future of fishing in Masinloc?

NARDS CUARESMA : Yes that's a big fear for us... the fishing industry has changed and because of the ban now the fishing areas are denser... so we fear that eventually the fishing industry will collapse.

REPORTER: After several hours of work, at last something takes the bait - a skipjack that had been attacked by a shark on the way up. It was the only thing they caught. Eventually the crew gives up, and heads back to shore, empty handed. The plight of these fishermen adds pressure on the Philippine government to push back in its dispute with the Chinese. The fishermen don't want to trigger an international incident. But they also want their livelihoods back.

PETER GRESTE (reporter): can you see anything you can do to change this situation?

NARDS CUARESMA: It seems that personally I cannot really do anything about it but everybody should follow the tribunal's decision so I feel our country does not have any power to force china to leave but our country can talk to all its allies to help us enforce that decision.

REPORTER: Local activists are taking to the sea and confronting the Chinese guarding Scarborough Shoal... In a Manila cafï¿½, Joy Ban-Eg shows me what happened when she and some friends tried to reach it earlier this year. She represents a group called Kalayaan Atin Ito, dedicated to defending the shoals from what she sees as an invasion.

JOY BAN-EG, KALAYAAN ATIN ITO: So see the point here is we cannot rely on anyone at the end of the day. At the end of the day it will be the Philippines who will stand alone. If it will be our blood that we have to shed over this thing then that would be the case.

PETER GRESTE (reporter): Are you prepared to shed blood over this?

JOY BAN-EG, KALAYAAN ATIN ITO: Oh yes definitely. The first sail that we made last ah December we were ready for any eventuality. We were ready for any confrontation.

PETER GRESTE (reporter): But you could easily trigger a confrontation that could well spill out into something much bigger and there's no way that the Philippines with all of its with its very meagre resources could possibly confront the Chinese?

JOY BAN-EG, KALAYAAN ATIN ITO: Yeah. we don't want war. Nobody wants war. But at the end of the day if we don't resolve then it really end with war. So we want a peaceful resolution of this. So the only way is to call for unity among nations to enforce this.

REPORTER: On the other side of the Pacific, in Washington DC, American analysts are trying to work out what the Chinese are doing and how to respond. Before he Retired, Admiral Dennis Blair led the US Pacific Command and then became National Intelligence Director.

PETER GRESTE: what's what's your assessment then of what's going on?

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: My assessment is they they built um a logistic ah base there as an air station ah ah port, ah a lot of storage storage facility, it could be turned into a military outpost ah pretty quickly.

PETER GRESTE (reporter): Does it worry you about what that represents?

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: It does, but ah also it is only of limited military use since it's so isolated. In serious, serious war fighting ah neutralizing it it's probably 10 or 15 minutes' worth of worth of work.

PETER GRESTE (reporter): Are you concerned about the potential for conflict?

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: Well at a minimum those set up sort of a contentious ah um head butting ah thing in the region. Ah both the United States and China I'm I'm convinced want to, do not want to go to war but nonetheless they want to um demonstrate ah support for their ah for they what they think are their rights and responsibilities in the region.

REPORTER: Meanwhile China is investing heavily in its navy. It will be decades before it can match American military power. In the mean time its flexing its muscles with exercises in the South China Sea, and releasing official video to show it.

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: China really has a landsman land based attitude that that should be their territory ah in which there should be no military force of any other kind, it should only be occupied by China. Ah the United States has the view that these are international waterways which for the United States for years have been ah what we have used to ah reach our allies, to support our interests sometimes by war if necessary and if the Chinese had their way and ah the entire South China Sea ah were their own territory which they could ah ah keep the United States and other armed forces from from operating, it would be absolutely intolerable for the United States and we're not going to allow it to happen.

PETER GRESTE (reporter): And those two positions are very difficult to reconcile?

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: Very difficult to reconcile yes, yes.

REPORTER: These pictures from two weeks ago show joint exercises with Chinese and Russian forces, raising the temperature in the tropical sea even further.

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: When I'm in ah discussions with Chinese ah I'm incredibly righteous from the American point of view and my Chinese [laughs] are very righteous from their their point of view. I think there's a notable inability for the two of us to understand what's going on on the other side and to find um find compromises that we can both live with. Ah we seem to have to deal by a series of ah of concessions or wins ah in the in the ah relations and that's the kind of relationship that can sort of escalate up over time.

PETER GRESTE (reporter): And lead to conflict?

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: And lead to and lead to conflict, yes, yeah and misunderstanding and then fear and conflict.

REPORTER: To test China's resolve, the American Navy has been running its surveillance flights. On this flight last year, over the radio came a warning...

"This is Chinese navy, this is Chinese navy, this is Chinese ... please go away quickly... "

"I am a United States military aircraft conducting lawful military activities acting outside national airspace. I am operating with due regard as required under international law."

"Foreign Military Aircraft. This is Chinese Navy. You are approaching our military our zone. Please leave in order to avoid misjudgment."

REPORTER: On the water, the United States has also been running operations in the South China Sea to assert their rights under international law. Admiral Blair believes there should be joint exercises with Australia.

ADMIRAL DENNIS BLAIR, Former Commander in Chief U.S. Pacific Command: I think Australian and American ships should exercise together in the South China Sea, ah sh-showing that when they when they ah need to they will they will send s-they will send their armed forces ah in international airspace and water, so yeah I think they ought to ah join ah exercises with the American um vessels in that part of the world.

JULIE BISHOP, Foreign Minister: the United States has never asked us to take part in um exercises that would eh go within disputed territorial waters um and we will continue to do what we've always done and that is eh traverse the South China Sea, exercising our rights of um passage um over water, through the skies. Australia has been carrying out uh operations in the South China Sea for many years and will continue to do so.

REPORTER: The US established its dominance over the Pacific in World War Two. The war memorial in Washington DC recalls the key battles that helped create America's network of alliances with states like Japan, South Korea, and the Philippines. But China's challenge to US supremacy risks upending the 70-year-old balance of power.

PROF. GRAHAM ALLISON, Harvard Kennedy School: I would say in general when a rising power threatens to displace a ruling power you're in a period, you're in a in a condition of severe structural stress in which lots of things can go wrong, not because somebody wants a war, not because somebody intends a war, but because one thing leads to the other... who should rule the South China Sea? Xi Jinping thinks China should... And the Americans say no for 70 years we've been there as the predominant power. We think that the rule base system is a good system... Now can you imagine that leading to a conflict that that that then escalates to a war, that neither would've chosen, unfortunately I can.

REPORTER: But China watchers think the risks of confrontation are overstated.

CHENG LI, China Scholar, The Brookings Institution: we may ask what's the ideological difference between in today's world, within China and United States, of course, there's a culture differences, there's differences in the political system, but there's no fundamental kind of objective on the Chinese part or on the US part to try to defeat other, or see the other as a pure enemy, no, the fact is we see that we have a lot of common interests which really prevail, interest in the global economy, if the Chinese economy's not doing well . . . US suffer, same things, US economy is not doing well, China will suffer.

REPORTER: Not far from the World War Two Memorial, veterans and their families pay their respects in the summer heat, to the victims of another conflict. This is a monument to the Korean War. It was the last time China and the United States fought one another. Back then, in 1950, America led a United Nations force to support South Korea after the Chinese-backed north invaded. China then came to the aid of its allies.

PETER GRESTE, reporter: the lesson from the Korean war is that while neither the Americans nor the Chinese necessarily wanted to conflict, both were driven into a war in a third country by historical forces that were beyond the control of either of them. If it was true back then, it's also possible today.

JULIE BISHOP, Foreign Minister: Well, I don't believe that either China or the United States, or any other nation in our part of the world uh wishes to see conflict and so we all call for de-escalation of tensions for people to respond peacefully to negotiate their differences. The United States is the indispensable security power in the Indian Ocean-Asia Pacific and has been for decades now and the economic advancement that all countries have benefited from, including China, is as a result in part of the presence of the United States as a security guarantor.

PETER GRESTE, reporter: But there is something fundamentally incompatible with that isn't there, because if China continues, China's economy continues to grow and it continues to spend a proportion of its of its GDP on defence as- as every country does, then it will become also the strongest military power in the region. It will displace the United States, and where does that leave us?

JULIE BISHOP, Foreign Minister: Well, I don't believe that it will displace the U-United States anytime soon.

REPORTER: History tells us that any shift in the balance of power between big countries brings instability, uncertainty and the risk of conflict.

PROF. HUGH WHITE, Defence Analyst: I think at the moment the trend is very plainly towards escalating strategic rivalry, ah because I think both sides do have fundamentally incompatible views of their respective roles in the Asian order, China wants to lead the Asian order, ah and take America's place and America wants to preserve its place and keep America and China in a subordinate position. Those views are not irreconcilable, they could sit down and do a deal, I think it'll be perfectly possible and very desirable thing for them to do, but they haven't started doing that yet, so what I think we're looking forward to unless something very big changes is a pattern of escalating strategic rivalry which makes Australia's choices tougher and tougher.

SARAH FERGUSON: Uncertainties in our region created by the unpredictable new president of the Philippines would increase dramatically in the event of Donald Trump being elected President in America. The republican candidate has already threatened to withdraw from US military commitments in Asia. 5 weeks to go til Election Day.

Next week - how the personal became political - the fight over same sex marriage in Australia.

See you then.