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Global Affairs

The Impact of China on Asia

 7 min read / 

Although the Chinese stock market troubles and subsequent government intervention grabbed media attention, the more worrying fact of China’s growth slowing, manufacturing lagging, profits waning and debt spiraling are the medium-term implications.

Historically, authoritarian regimes have turned to aggression in international relations to help stabilise the domestic situation and, therefore, the potential for Chinese aggression in the medium-term is a key concern. Furthermore, this would be in line with Xi Jinping’s more ‘assertive diplomacy’ (most recently evidenced by incidents in the South China Sea, for example). Whilst history does not necessarily repeat itself, it wouldn’t hurt to look at China’s relations with certain other countries in Asia, consider the geopolitical situation and conjecture strategies for reinvestment according to the ‘safest’ countries.

Australia

Australia is guaranteed protection against any Chinese maritime incursions due to its strategic alliance NATO; furthermore, the Chinese Navy does not currently have the capabilities to maintain operations so far south of South China Sea. More importantly, however, Australia remains a key nation where from China imports commodities so fuel its construction boom. Although Australia will be hurt from a slowing Chinese economy, the country can rest assured that it will not be a prime target for potential Chinese aggression due to the vitality of its commodities.

Hong Kong

Hong Kong, though it officially belongs to China, exhibits animosity towards mainland China and Han Chinese through its local population; though it is protected by the Chinese military, the local residents cheer for the US Navy and Royal Navy when they dock. Furthermore, China’s controversial proposal to ‘select’ candidates for election has been met with hostile opposition in Hong Kong. This is particularly worrying since this is the only truly democratic and largely economically liberalised part of China.

A heavier hand on Hong Kong could come in the form of, not only slowly depriving them of democracy, but potentially via increased capital controls if China experiences or even fears an outflow of FDI due to its relatively slower growth, lagging manufacturing sector, debt bubble concerns and stock market woes. Intervention, therefore, in the Hong Kong financial markets is a particularly acute risk for invested asset managers.

Mongolia

Although Mongolia is currently experiencing an unprecedented boom fuelled by its rich natural resources, it is militarily non-aligned and much of the country remains in a nomadic or a semi-nomadic state. Mongolians also have, historically, shared hostile relations with Han Chinese and the animosity continues to filter through via the locals’ aggression toward the many Chinese labourers employed in its construction industry (which is currently benefitting from the boom).

This hostility towards Chinese migrants and Mongolia’s relatively weak military capabilities makes it a justifiable target for China. Additionally, the procurement from its rich resource base (coal, iron, copper, tin, gold and so on) that would result from an invasion would complement the current Chinese economic model.

India

India and China have had uneasy relations; since the ceasefire following the Indo-Sino War, China continues to claim Aksai Chin, parts of North East India and Kashmir for itself. Furthermore, the Indian military is in desperate need of modernisation and their investment lags in comparison to Chinese military expenditure.

Maoist rebels scattered across the North East, East and across Central India (such as Orissa, Chattisgarh, parts of Maharashtra, Uttar Pradesh and even extending as far down south as Andhra Pradesh) are strategically placed around impoverished rural and semi-rural areas where there is also a concentration of key natural resources. These rebels have often been thought of as a proxy for the Chinese State (possibly partially funded by it as well) and their guerrilla operations could opportunistically intensify in the event of escalating tensions.

On the other hand, India is a nuclear power and, though the Indian military is comparatively weaker, it remains a nuclear power and this might be an unaffordable risk for China even if it wanted to become more heavy-handed. However, India, unlike some other countries in Asia, remains militarily non-aligned and there is no guarantee that the US would assist in the case of Chinese aggression.

Japan

Japan’s military has been restricted by Treaty since WWII but Abe has emphasised national security as a priority and is looking to circumvent parts of the Treaty by expanding paramilitary forces and so on. Abe has also presided over an increasingly warm bilateral relationship with India as the two key Asian economies share mutual concerns over an increasingly assertive China.

Japan, however, also shares an alliance with the US that guarantees its protection; US Naval bases in Japan ensure a greater level of security for the Japanese. Additionally, Japanese markets have not been as volatile as South Korea’s in the face of North Korean aggression.

Finally, Japan’s economic relationship with China could be decisive in ensuring a slowing China does not set its military on Japan (despite disputes over islands in the South China Sea); Japan’s economic relationship is more valuable to China than both India and South Korea. A slowing China may, rather, see value in furthering trade with Japan rather than stabilising the domestic situation via foreign aggression.

Singapore

Singapore does not have disputes with China and, furthermore, it is near a key oil waterway that, if there were tensions there, could potentially increase oil prices. An increase in oil prices would certainly not be in China’s best interests. Singapore is also a major importer of Chinese goods (over 10% of its imports come from China). Singapore’s status as a regional hub for wealth-management will be preserved even if China pursues a more aggressive foreign policy.

South Korea

The North Korean State has long been considered a proxy for China to keep South Korea and Japan on-edge. Furthermore, a slowing Chinese economy could easily translate to lesser resource-transfers to the economically struggling North Korea.

Now, although South Korea’s safety is supposedly guaranteed by the US, North Korean aggression has historically been associated with volatility in South Korean equity markets in particular and financial markets more generally since it acts as an unpredictable ‘loose cannon’ and, in the case of increased Chinese aggression, North Korea may gain confidence and impetus to be more bold where its ally may not have previously approved of its actions.

Taiwan

China has claimed that Taiwan should be part of the People’s Republic and this is enough to cause concerns amongst some analysts; there is even talk of the US and China using Taiwan as a ‘bargaining chip’ in their relations.

However, China already shares a close economic relationship with Taiwan and, in the economic realm, they have already largely integrated Taiwan into their sphere of influence. Additionally, the Taiwanese do not have disputes with China in the same way that Japan does. Finally, Taiwan is also protected by the US. Taiwan is, ultimately, not a major concern when speaking of consequences stemming from potential Chinese aggression.

Conclusion

Ultimately, China stands to lose a lot more than it can gain from increased aggression in the region. The international community would likely impose economic sanctions as many countries recently have on Russia. However, it would pay dividends to hedge the risk associated with a more assertive China in the medium-term.

From the preceding, brief analysis, it is possible to extrapolate a ranking of which countries (or areas) would be most and least sensitive to the potential for Chinese aggression. Clearly, Hong Kong is most at risk of increased regulation and even capital controls since it is already under China’s jurisdiction but Mongolia is also fairly vulnerable. India, Taiwan, South Korea, Japan and Australia are well placed geopolitically and Singapore will preserve its status as the regional wealth-management hub.

Rank (from least to most sensitive) Country (or Countries)
1 Singapore
2 Australia Japan
3 India Taiwan South Korea
4 Mongolia
5 Hong Kong

 

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Global Affairs

Breakfast Briefing: Space Race, Google in China and Zuckerberg

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Japanese Space Startup Raises $90m

Ispace Inc raised $90m from Japan’s largest corporates in a bid to reach orbit by 2019. 

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Google to Open Artificial Intelligence Centre in China

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Google AI China

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Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

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