China Tensions

by Kit Dawnay

The institutionalisation of ties between Beijing and Washington has stabilised relations between the two powers.  Indeed, recent disputes, involving human rights activist Chen Guangcheng and the South China Sea, have demonstrated their strength. Challenges remain, however.

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The corollary to this success, though, is that a change of government could unsettle relations.  From October 2012 to March 2013, a new administration will take office in Beijing, presenting two particular challenges.  The first is establishing who in the entwined party and state apparatus has greatest clout; hence, Dai Binguo, state councillor, carries more weight than does foreign minister Yang Jiechi.  The second challenge is the staggered transition, with changes formalised at the Eighteenth Party Congress in October, but with the State Council continuing work until the March 2013 establishment of a new government.  

These changes come amidst rising tensions.  Friction derives in part from the US Pacific rebalancing.  The trading relationship between the US and China and US fiscal constraints may preclude any containment strategy, but perceptions can affect relations.  More narrowly, tensions are also rising in relation to two territorial disputes. 

The first of these is a dispute between China and Japan over the Diaoyu/Senkaku Islands.  Japan’s Noda government expressed support for the purchase of three disputed islets on 6 July.  Three Chinese fisheries enforcement vessels then entered contested waters on 11 July, and Chinese activists travelled to the islands in August.  The Japanese ambassador to Beijing, Uichiro Niwa, criticised the plan, but Noda seems intent on shoring up popularity ahead of elections.  So ties with Japan may sour. 

The second is the dispute in the South China Sea, which continues to escalate. The Philippines and Vietnam are taking a more assertive line towards Chinese encroachments, by establishing new administrative boundaries and a garrison in the sea.  Divisions within the Association of South East Asian Nations (ASEAN) are sharpening.  The organisation failed to agree a final communique in Phnom Penh in late July; current president, Cambodia, refused to mention the dispute.  The US and China also engaged in August in an unusually public disagreement over the sea. 

The leadership transition in Beijing may contribute to tensions.  After all, appetite for moderation in Beijing appears weak, perhaps deriving from a growing People’s Liberation Army role in policy making, perhaps from the US rebalancing, or perhaps from Beijing’s desires to play up nationalist issues as it changes leadership.  A rise in tensions in the months ahead thus seems likely.

It is not clear, though, how tensions will affect Asia.  The most direct consequences may derive from Beijing’s willingness to rely on economic coercion.  China imposed tougher inspections on imports of Philippine fruit, such as bananas, ostensibly for mealy bug infestation, but perhaps in response to the Scarborough Shoal incident (although concerns predate the stand-off).  Similarly, China limited rare earths exports to Japan after a 2010 dispute.  Beijing also used its economic sway over Cambodia to influence the ASEAN communique. 

Tensions, then, could lead to trade diversion.  The Philippines’ President Aquino has called on banana growers to find new markets.  Japan also introduced policies on the recycling of rare earths.  Furthermore, the 2005 anti-Japanese riots in China encouraged Japanese investment in Vietnam rather than China.   The opportunity costs are hard to calculate, but may be significant. 

A further consequence may be that the ASEAN split retards the birth of a regional community.  The 2015 date for its establishment already appeared optimistic, given members’ differences, the weakness of the next presidencies – Cambodia, Brunei and then Laos or Burma – and protectionist sentiment in Indonesia.  With the US and China stoking division, though, consensus may prove harder to secure. 

Yet it is too easy to play up risks.  After all, the region’s strange combination of cooperative economics and nationalist jealousy has not yet slowed growth.  Relations between China and Japan, for instance, worsened between 2001 and 2006, thanks to visits to the Yasukuni Shrine by Japan’s then-prime minister, Yunichiro Koizumi.  That period, though, also saw China become Japan’s most important trading partner (in 2004).  Furthermore, ASEAN has previously proven adept at resolving differences. 

Current signs of tensions affecting business are also scant.  The Lloyds insurance market in London, specifically through its Joint War Committee, has shown few concerns about tensions.  A brief glance at the committee’s lists shows locations in South East Asia designated as concerns, but does not mention the broader South China Sea.  

The risk of new administrations misunderstanding one another is real, though.  Much depends on the relationships between Xi Jinping’s new government and its counterparties.  Investors should thus be wary of assuming that commerce will continue unaffected.  At some stage, frictions may reach a tipping point.

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About the Author: Kit Dawnay is an independent political and foreign affairs analyst based in Hong Kong. He can be contacted at kit_dawnay@yahoo.com.

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