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Will Abe succeed in recovering Japan's lost decades and national pride?

So far seems so good for the now exuberant Japanese Prime Minister Abe. The Japanese stock market is ebullient. The economy seems to be picking up. His popularity rating at over 70% is quite unprecedented. He is well set to capture the upper house of the Diet in July. If all goes well, he is likely to proceed with revising Japan's post-war Constitution to enable Japan to rearm as a "normal" nation. Recovery of Japan's lost decades and its national pride does not seem far in the horizon.

The leader in The Economist (Abe's Master Plan, 18 May, 2013) gives a guarded assessment. For serious questions remain whether Abe’s unconventional strategies are sustainable even in the medium term -

(a) An ever-weakening yen for an economy of the size of Japan is bound to put pressure on its trading partners worldwide, risking competitive devaluations if not a full-blown currency war. China is already feeling the heat along with some of Japan's Asian neighbors, such as Thailand. While America may welcome a much weaker yen for now so as to divert attention from the dollar Click here, there may come a time when American exports would begin to suffer if the yen goes through the floor. History of the 1985 Plaza Accord comes to mind, which resulted in decades of yen appreciation.

(b) Japan has built the world's highest national gross debt reaching 240% of GDP. Debt servicing already accounts for a quarter of the budget. It begs the question how far money-printing alone could serve to revive an economy with the world's highest proportion (23.3%) of the elderly (65 years and over). In any event, the growing debt mountain is becoming a tickling time-bomb, according to a recent article in Spiegel Online (Anne Seith, January 3, 2013).

(c) Abe signals liberalization of agriculture and other key sectors such as electricity by agreeing to sign for American Trans-Pacific Partnership (TPP). Yet these sectors are full of vested interests and political behemoths which have all along been the bedrock of his Liberal Democratic Party. Whether he can muster enough newly-won political capital to ram through meaningful reforms is moot. His other proposed economic measure to increase VAT is likewise not set for easy passage, if past experience of his predecessors is any guide.

(d) Perhaps most important of all are Abe's right-wing political leanings and his nationalistic history-revisionism. His grandfather was instrumental in managing a puppet regime in Manchuria during the last days of the Qing Dynasty. Abe himself doesn't admit that Japan was an aggressor in the Second World War. He connived at, if not quietly encouraged, his senior deputies' paying homage to the Yakasuni Shrine housing Japanese war-dead along with Class A War Criminals. His government has rejected the existence of forced "Comfort Women" during the war, the bulk coming from China, South Korea and other Asian countries. These and other war atrocities still remain deep scars in the national psyches of many Asian countries, especially China and South Korea. It is difficult to see how Abe's rejectionism and Japan's eventual rearmament would help exports to these huge markets.

(e) While America may welcome if not encourage Japan's eventual rearmament so as to reduce its military burden in the Asia Pacific, it is unlikely to be willing to see an exacerbation and complication of the already-tense situation in the East and South China Sea. Owing to the U.S.-Japan Mutual Defense Treaty, any untoward action by Japan is likely to drag America into a catastrophic regional if not global war. 

In any event, a more buoyant Japanese economy would be welcomed by China, now Japan's largest trading partner. However, if Japan revises its Constitution to rearm, coupled with its rejectionist postures, this would stir up a tidal wave of anti-Japanese backlash, most of all in China and South Korea. What is more, this could lead to an unwelcome arms race, which would be bad news for peace and stability in an already geopolitically-tense Asia Pacific region.

Military and Security Developments involving the PRC 2013 - Annual Report to Congress

The U.S. Department of Defense has released its 2013 Annual Report to Congress on the state and development of China's military. The comprehensive report highlights that China has dramatically improved a wide-range of military capabilities including Anti-Access/Area Denial (A2/D2), C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), survivable long-range nuclear deterrence, nuclear submarines, guided missiles, steath fighters, complex-environment information-warfare (IW), cyber warfare, space warfare, and civil-military integration.

A further indepth assessment of China's military fortes is attempted by Professor Andrew Erickson of the Naval Defense College, highlighting China's nuclear-powered ballistic-missile submarines (SSBNs) and nuclear attack submarines, the world's only long-range anti-ship ballistic missiles (ASBMs) with a range over 1,500 km，and development of multiple aircrat carriers with distant ""access points" in the form of agreements for refueling, replenishment, crew rest, and low-level maintenance possibly in the Malacca, Lombok and Sunda Straits, together with world-class shipbuilding and nanotechnology capabilities.

The DoD Report nevertheless notes that China's military is primarily defensive, in particular over Taiwan and its other terrritorial claims in the East and South China Sea, as well as guarding its vital Sea Lines of Communication (SLOC). The latter, however, necessitates the expansion of China's blue water navy and its longer-range military projection, supported by the development of longer-range tranport planes.

The Report highlights the efforts of China's military to provide commong goods such as anti-priracy, UN peace-keeping operations, and confidence-builidng joint miliary exchanges and exercies, includng the United States and other non-allied nations.

The Report also refers to China's identification of the first two decades of the 21st century as a rare window of opportunity to grow "Comprehensive National Power" in attaining its status as a global power. It emphasizes the need for the United States to remain vigilant in managing US-China relations during China's trajectory to safeguard American interests as well as world peace and regional stability in the Asia Pacific.

Download Military and Security Developments involving the PRC 2013 - Annual Report to Congress

The following is its Exective Summary -

EXECUTIVE SUMMARY

“The People’s Republic of China (PRC) continues to pursue a long-term, comprehensive military modernization program designed to improve the capacity of its armed forces to fight and win short-duration, high-intensity regional military conflict. Preparing for potential conflict in the Taiwan Strait appears to remain the principal focus and primary driver of China’s military investment.

However, as China’s interests have grown and as it has gained greater influence in the international system, its military modernization has also become increasingly focused on investments in military capabilities to conduct a wider range of missions beyond its immediate territorial concerns, including counter-piracy, peacekeeping, humanitarian assistance/disaster relief, and regional military operations. Some of these missions and capabilities can address international security challenges, while others could serve more narrowly-defined PRC interests and objectives, including advancing territorial claims and building influence abroad.

To support the Chinese People’s Liberation Army’s (PLA) expanding set of roles and missions, China’s leaders in 2012 sustained investment in advanced short- and medium-range conventional ballistic missiles, land-attack and anti-ship cruise missiles, counter-space weapons, and military cyberspace capabilities that appear designed to enable anti-access/area-denial (A2/AD) missions (what PLA strategists refer to as “counter-intervention operations”). The PLA also continued to improve capabilities in nuclear deterrence and long-range conventional strike; advanced fighter aircraft; limited regional power projection, with the commissioning of China’s first aircraft carrier, the Liaoning; integrated air defences; undersea warfare; improved command and control; and more sophisticated training and exercises across China’s air, naval, and land forces.

During their January 2011 summit, U.S. President Barack Obama and then-PRC President Hu Jintao jointly affirmed that a “healthy, stable, and reliable military-to-military relationship is an essential part of [their] shared vision for a positive, cooperative, and comprehensive U.S.-China relationship.”

Within that framework, the U.S. Department of Defense seeks to build a military-to-military relationship with China that is sustained and substantive, while encouraging China to cooperate with the United States, our allies and partners, and the greater international community in the delivery of public goods.

As the United States builds a stronger foundation for a military-to-military relationship with China, it also will continue to monitor China’s evolving military strategy, doctrine, and force development and encourage China to be more transparent about its military modernization program. In concert with its allies and partners, the United States will continue adapting its forces, posture, and operational concepts to maintain a stable and secure Asia-Pacific security environment”.

India angry with China's perceived intrusion into Daulat Baig Oldie region of Ladakh

Live interview discussion panel on Times Now of India on 23 April, 2013. Another interview discussion panel was convened the following day.

According to the Financial Times, India's Foreign Minister is visiting China to cool off the tension. Click here

White Paper on China's Armed Forces

On 16 April, China's State Council released a White Paper explaining in some detail the sizes, organization, deployment and missions of the PLA Army (PLAA), the PLA Navy (PLAN), the PLA Air Force (PLAAF), the PLA Second Artillery Force (PLASAF) (the nation's strategic nuclear and missile deterence force), the People's Armed Police Force (PAPF) and the Militia.

The White Paper seems to respond to concerns with the perceived expansion of China's military expenditure (by 10.7% to $119 billion in 2013). In contrast, because of bugetary constraints, the United States has reduced hers to $640.7 billion for 2013 (a historic low level of only 40% of the entire world's military expenditure, for the first time in many decades) Click here.

The White Paper comes at a time when tensions are rising in the East and South China Seas where China's neighbours with rival territorial claims are becoming emboldened following the United States's strategic pivot to Asia.  Click here

It also comes when U.S. military planners are debating whether the concept of "Air-Sea Battle" (ASB) best serves America's strategic interests in a military confrontation against China. This is aimed at the increasing deterence against war-zone deployment of U.S. carrier assets posed by China's "Anti-Access Area Denail (A2AD)" capabilities. The latter take the form of mobile carrier-killer missiles, nuclear submarines, and long-range strike systems, supported by regional Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR) assets.

Some U.S. military planners argue that ASB is predicated upon a first-strike paralysis of China's relevant C2ISR capabilities, which represents the supposedly "last (lowest) rung" of a possible escalation ladder. In such a scenario, according to these planners, "the “burden” of any further potential escalation would thereupon fall upon Beijing, for China presently lacks any capability to execute analogous precision conventional strikes upon the U.S. homeland. It would thus have either simply to accept the loss of its A2/AD capabilities or to take the enormous escalatory step of moving to the use of nuclear weaponry — a step that would presumably result in catastrophe for China in the face of U.S. retaliation".        

The PLA White Paper makes plain the following -

(a) Determined never to seek hegemony, China advances a new security concept of mutual trust, mutual benefit, equality and coordination in maintaining peace and stability, embracing the strategies of Comprehensive Security, Common Security and Cooperative Security;

(b) The core aims of China's military is to safeguard the nation's sovereignty, security, territorial integrity, and peaceful development;

(c) China maintains a high level of military alertness and efficent combat readiness with steadily-elevated integrated reconnaissance and early warning, resistance, counterattack and protection including support and civilian defense systems, strategic deterrence and precision strikes, survival counter-attack, all-dimension response, full-territorial reach, and nuclear and conventional missile capabilities;

(d) The nation is geared to winning local wars under conditions of informatization as well as strategic and comprehensive joint operations;

(e) China safeguards the nation's maritime rights and interests including the deployment of joint military-police-civilian defense mechanisms, and coordination with law enforcement organs of marine surveillance and fisheries administrations;

(f) China needs to become a maritime power to safeguard critical Sea Lines of Communications (SLOCS), China's overseas assets essential for development; as well as the protection and emergency evacuation of Chinese nationals abroad;

(g) Amongst the five Permanent Members of the UN Security Council, China is the largest contributor of peace-keeping soldiers and police. China is committed to global peace and continues to play an important role in international peace-keeping, disaster and other humanitarian relief, as well as anti-terrroism, anti-piracy and other international joint operations and exercises in maintaining global peace and security.

The message is clear. China is committed to peaceful development and vows never to seek hegemony. However, China is fully prepared for any eventuality including a comprehensive C2ISR readiness and will not tolerate threats to her core interests of sovereignty, security, territorial integrity, and continuing development.

This calls into question the validity of the ASB argument. If a first-strike is so effective as to paralyze China's entire C2ISR network, it is doubtful whether in such a perilous situation with unknown or uncertain threats, China would hesitate in deploying long-range missiles, at least conventional ones intially. If, on the other hand, the first-strike impact is less than complete, which is likely in view of the scale and diffusion of C2ISR assets for a country of China's size, the deterence of China's A2AD capabilities is likely to remain.

China's Achilles heel remains her dependence on resource imports through sea lanes. Hence, the country's determination to safeguard SLOCS. These include not only the South China Sea but also the India Ocean and all the way to the source of the bulk of China's energy imports - the Middle East. China's vulnerability is represented by the choke points of the Strait of Hormuz (affected by any international flare-up over Iran) and the Malacca Strait (controlled by the U.S. Seventh Fleet).

China's dominant role in the Shanghai Cooperation Organization (SCO) ensures the security of energy pipelines to China's western borders from and through friendly Central Asian states. Additionally, China is building a Eurasian transportation network encompassing Pakistan (through the port of Gwadar, now trasferred to Chinese management), Central Asia, the Persian Gulf and the Indian Ocean. (Beijing Builds its Eurasian Transportation Network, The Jamestown Foundation, Richard Weitz, 12 April, 2013 here)

In the final analysis, China has now grown to be an 800-pound panda. She can no longer "hide under a bushel and bide her time" as Deng Xiaoping famously cautioned. Her actions and intentions are nevertheless largely defensive, reacting to perceived threats to her core interests of territorial integrity and energy security. even if her rivals and detractors do not see it that way.

The risk is that by constantly baiting and provoking this vast and increasingly more powerful country, things can escalate rapidly to a point of no return. Armageddon is in nobody's interest.

Rather than fixating on military power and zero-sum games, it would be far better to get China involved, in keeping with the turning of the tide, to build a new and sustainanle regional and global order in the interest of peace, stability and prosperity for all.

Japan's East Asian Strategic Review 2013

The latest Review, underaken by Japan's National Institute for Defence Studies, was released on 29 March. The report shows how, in a new era of declining capability to project power globally, the United States and other powers in a new multi-polar world are responding to regional risks and the rise of a more assertive China.

In particular, the report suggest that “Recognition that China’s maritime activities on the high seas will expand in a northerly direction in the near future is a factor motivating Russia to seek cooperation with Japan and the United States.”

It also paves the way for Japan to revamp the role of a "Dynamic Defence Force" to work more closely with the United States in maintaining regional security. This is poised to project Japanese geopolitical influence more robustly in the Asia Pacific region and beyond in the coming years.

Download Japan's East Asia Strategic Review 2013 - Executive Summary

These dynamics are happening at a time when China under President Xi's leadership vows to rejuvenate the nation not only socio-economically but as a great nation with global influence, in calls for a China Dream reminiscent of China's glorious past.

At the same time, compared with her adversaries, China is historically in a better financial and economic position to contiue to modernize and build up her military defenses, particulaly naval capabilities. These are essential in safeguarding the nations's economic and other strategic interests in the Asia Pacific, including vital sea lanes for international trade and resource importation, territorial claims, security of the Taiwan strait, and access to martime resources.

Tensions over the Diaoyu/Senkaku islands have already driven a wedge between China and Japan. In addition to a China-eccentric Pivot to Asia strategy, the U.S.Treaty of Mutual Cooperation and Security with Japan means that America has to be on the side of Japan in case of a military confrontation against China.

Risks are mounting of a first spark igniting a prairie fire in an uncontrollable conflgration that would engulf all three parties and the rest of the world. Naturally, no one is disposed to this eventuality.

Nothing short of leader-to-leader talks to install crisis-management mechanisms, implementing tension-reducing and trust-building measures and a willingness to pursue areas for cooperation instead of confrontation could help pull all parties from the brink. 

The EAGLEs and NEST will dominate world growth 2012-22

"The EAGLEs and NEST (countries) together are expected to contribute 68% to world growth between 2012-2022, led by China and India, both with a higher share than the U.S. The G7 economies will add a mere 16%", according to the following research by BBVA -

EAGLEs Outlook 2013 Report

The Role of Emerging People

For background on The Soaring EAGLEs, please click here.

China and the World by 2030

Heralding his forthcoming book ("China 2030, Springler, June 2012") in a presentation on 9 May 2012 to the Oxford China and World Economy Forum, Hu Angang of the Institute for Contemporary Chinese Studies, Tsinghua University, oulines how China's economy would regain its one-third share of the global economy by 2030, similar to the position it held in 1820.

With a GDP per capita over half but a total size more than double of the United States (in PPP terms), coupled with advances in science and technology, human capital, innovation and a greener and more equitable economy, China would be experiencing a kind of Renaissance reminiscent of the country's glorious past.

Download Hu Angang - China and the World by 2030 

Milestones in China's missile defence and hard-power projection

Almost at the same time, two military breakthroughs marked an important milestone in the developmnent of China's military strength in missile defence and hard-power projection.

The first is the successful test flight of a long-range heavy transport plane, the Y-20, which "boasts “Chinese characteristics in supercritical airfoils, integrated avionics, cabin equipment, composite materials and their processing.”   It "can “carry the vast majority of combat and support vehicles of the Chinese People’s Liberation Army (PLA),” including the PLA’s heaviest tank, the 58-ton Type-99A2,"according to China Real Time Report of 28 January, 2013 here . 

"The Y-20’s capabilities are reportedly close to those of Russia’s Il-476, with one important exception: The Y-20’s Russian D-30KP2 engines lack the thrust and efficiency of the Il-476’s PS-90A76 turbofans. In a sign that even China’s aviation Achilles’ heel – engines – is now receiving major resources, China is developing a high-thrust turbofan called the WS-20 to fill this role as part of a major aeroengine resource and technology push. While progress will likely take time, reports suggest China could invest up to 300 billion yuan ($49 billion) in jet engine development by 2035. Acquisition of foreign technology and breakthroughs in recruiting foreign experts could help accelerate China’s jet engine development," the China Real Time Report explains.

The second is a successful testing of a "land-based, mid-course missile interception", which coincides with a similar and more advanced testing by the United States. Until now, this highly-sophiscated techology is being developed only by the United States and Japan. It is slated to be capable of intercepting hostile missiles mid-air before multi-warheads are launched from the projectile. Click here for a report in the Global Times of 28 January, 2013.

Together with the development of the nation's first blue-water aircraft-carrier fleet, China is now clearly showing the need to strengthen her missile defense system as well as capabilites in power projection, at a time when China has become too big and too globalized for Deng Xiaoping's old dictum "Bind your time and hide your light under the bushel" to be workable.

The World by 2030

The world is heading towards 2030 with much greater uncertainty as epochal trends and paradigm shifts are playing out. That's according to the latest report by the Washington D.C -based National Intelligence Council - "Global Trends 2030: Alternative Worlds" dated December 2012.

The report admits that global economic power is definitively shifting to the East and the South, reversing the historic rise of the West since 1750.

By 2030, the developing world will account for over 50% of the world's economy with China displacing the United States as the largest economy.

Power will become more diffused in a multipolar world, including individuals and other non-state actors, characterised by unprecedented urbanization, rise of the middle-class, new, disruptive, or lethal technologies, resource constraints, more aging populations, and risks of more crises and conflicts.

America will lose its global dominant position but is likely to remain primus inter pares amongst all nations. By all accounts, a great re-balancing of the world will be taking shape, perhaps not dissimilar to the European "long peace" set in motion by the Congress of Vienna in 1815, which was also a mutli-polar period of rapid social, economic, technological and political change. However, many a black swan could change the game along the way.

According to the report, how America will navigate this changed world is likely to shape its fate, including that of the United States itsef, for better or for worse. 

The full NIC report follows.

Download National Intelligence Council - Global Trends - Alternative World - November 2012

Extracts of the most salient tabular summaries are here.

Download Extracts - National Intelligence Council - Global Trends - Alternative World - November 2012

The NIC report may be put into better perpective with reference to the so-called soaring EAGLEs (Emerging and Growth-Leading Economies) here

Or when read in conjunction with the latest World Bank Report "China 2030: Building a Modern, Harmonious, and Creative High-Income Society", which was undertaken jointly with the Development Research Centre of the State Council. Click here

The following China-centred dynamics are also relevant  -

(a)  According to Goldman Sachs, by 2050 the top ten economies in the world will be, in descending order, China ($70 trillion), US (about $38 trillion), India (about the same as the US), Brazil (barely over $10 trillion), Mexico (just under $10 trillion), Russia, Indonesia, Japan, United Kingdom, and, lastly, Germany (about $5 trillion). Only four of the G7 would thus remain on this list. Except the US, the other three G7 countries, Japan, UK, and Germany, would fall to the bottom. The combined economic weight of the six so-called Emerging and Growth-leading Economies (EAGLEs), what may be called the E6, would be over two and half times more than the remaining G4. Amongst the EAGLEs are the so-called BRICS (Brazil, Russia, India, China and South Africa), of which China's economy is bigger than the rest of the BRICS combined.

(b) According to Huang Renwei, Vice President of Shanghai Academy of Social Sciences, compared with a rising China, the relative strategic power of the United States is declining due to-

(i) its mounting debt exceeding sustainable limits, threatening the status of the US Dollar as the world's dominant currency;

(ii) its increasingly constrained financial capacity is likely to reduce its military capacity, its R & D expenditure and hence its ultimate technological lead;

(iii) the American-dominated global alliance may come apart in a decade or two if the United States becomes less and less able to provide most of the public goods holding such alliance together; and

(iv) geopolitics are giving way to geo-economics where China is building a China-centric regional economic infrastructure (read regional production and supply chain) reinforced by such economic alliance as ASEAN-China Free Trade Area, the largest in the world by population.This is happening while the West, including Japan, struggles to re-start their weakened economies by one form of quantitative easing or another (read money-printing).

See Huang's remarks (in Chinese) on Xinhuanet on 20 December 2012 here

(c) Rapidly being ""internationalized", the RMB, though remaining non-convertible on the capital account, is already ipso facto "eclipsing" the U.S. Dollar as the world's "reference currency". Click here

(d) according to “World Intellectual Property Indicators 2012” released by the Switzerland-based WIPO (World Intellectual Property Organization) on 11 December 2012, China tops the world in 2011 patent applications. China also leads head and shoulders in trademark applications as well as industrial design. As a developing country, China is therefore well on track to overcome the Middle Income Trap. Click here

(e) As the world is increasingly becoming eco-conscious, China is starting to lead in a number of renewable energies, including solar, wind and hydro. In particular, China is pushing for the rapid development of electric cars, through heavy state subsidy towards private ownership and intensive research and development, including green battery technologies. This promises to revolutionize the world's entire auto industry.

(f) Shale gas is set to change the shape of the world of energy. Click here for "The Golden Age of Gas" In addition, the widespread use of abundant shale gas in America and China will weaken the strategic clout of the Middle East and other oil-producing countries, with all that implies. As the world's leading energy consumer for a long time to come, China is well poised to benefit from America's expected shale gas bonaza and her own vast shale gas reserve, the world's largest, provided problems of water scarcity, groundwater pollution and lack of advanced fracking technologies can be overcome.

In sum, provided China continues to maintain an even keel in the run-up to 2030 (though that is by no means a foregone conclusion), the country, together with or in addition to America, is set to influence, if not shape, global dynamics much more than the National Intelligence Council report seems to imply.

London to lose top spot to Hong Kong as world financial centre?

In a study released on 12 November 2012, the London-based Centre for Economic and Business Research (CEBR) forecasts that "By 2015, the number of financial service jobs in Hong Kong - which was less than half the London number in 2005 - will have overtaken the number in London and Hong Kong will be the main international financial centre in the world". Click here

Although London will always retain its many unique strengths, the surging size of the Chinese economy and the rapid internationalization of the RMB, for which Hong Kong is being honed as a global platform, are likely to add credence to the prediction of the report.

The following studies are also relevant -

(a) "Eclipse: Living in the Shadow of China’s Economic Dominance", Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics, Washington D.C. This suggests that the Chinese yuan (RMB) has already eclipsed the US dollar as the world's "reference currency" and on track to becoming at least one of the world's leading reserve currencies by the mid-2030s. Click here

(b) The latest OECD report here “Looking to 2060: Long-Term Global Growth Prospects” dated November 2012 suggests that “China will overtake the eurozone in 2012 and the US within the next four years to become the largest economy in the world.  By 2060 …… the combined GDP of China (27.8%) and India (18.2%) will be larger than that of the OECD – and the total output of China, India and the rest of the developing world (57.7%) will be greater than that of developed OECD and non-OECD countries (42.3%)”.

By 2016-2020, China should be on track to becoming the largest economy at the centre of a global production and trading system (including the ASEAN-China free-trade area, the globe's largest by population). The country will also be home to the world's largest cohort of middle-class consumers, many of whom are outwardly mobile both physically and financially.

Provided Hong Kong doesn't lose her plot and maintains an even keel on a broad front, riding on China's economic and financial transformation in the coming decades, Hong Kong should be well-positioned to capture the world's financial top spot ahead of London, New York or Singapore, not just in financial service jobs but in the fullest sense of the word.

Hong Kong should be able to continue to count on her many blessings, including a world-class commerical infrastructure, financial depth and expertise, a free port status, a low tax regime,  internationally-recognised rule of law, and uniquely, a special relationship with mainland China under the ""One Country, Two Systems" formula.