Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

In an editorial in today's China Daily, Japan's recent award of East China Sea energy resource drilling rights to Teikoku Oil Co. was characterized in particularly confrontational terms. (China Daily, published in broad-sheet format, is China's only national English-language newspaper.)  Today's editorial, titled "Japan's Dangerous Move in the East China Sea", included the following remarks:

"Japan has unilaterally demarcated a controversial exclusive economic zone (EEZ) along the "median line," which sits on the Chinese side of the continental shelf, and on which China enjoys exclusive rights."

"Giving Teikoku the go-ahead to test drill is a move which makes conflict between the two nations inevitable, though what form this clash will take is hard to tell."

"Japan's unilateral action to start drilling, which flies in the face of international maritime laws, is not simply about new sources of energy.  It reveals plainly the country's intention to take our Diaoyu islets for good."

"...Japan has strayed from the path of dialogue.   If a confrontation were to result, the blame would sit firmly with Japan."

Importantly, this China Daily editorial was summarized in a prominent article in today's People's Daily titled "Japan's Move in East China Sea Makes Conflict 'Inevitable': Report".   People's Daily is the de facto journalistic mouthpiece of China's communist government.

In our view, a rapidly emerging China will, at some point, give Japan's military a "bloody nose" in order to establish a new Asian pecking order.  China took a step in this direction in late 2004 when a PLA Navy submarine violated Japanese territorial waters.  Here's an excerpt from page 53 of Laguna Research Partners' 2005.04.14 "Crisis on the China Rim..." (CCR) analysis:

"...at 05h 40m on November 10, 2004, an unidentified underwater vessel penetrated Japanese territorial waters in the southwest sector of Okinawa Prefecture  ...the vessel passed Ishigaki and Miyako Islands traveling at approximately 10 knots  ...it returned to Chinese territorial waters roughly two hours and twenty minutes after its initial incursion into Japanese waters   ...Japanese Defense Agency General Yoshinori Ono ordered Japanese Self Defense forces to pursue the rogue craft at 08h 45m, approximately 45 minutes after the craft had departed Japanese waters  ...following that incursion, a review of intelligence data has led Japanese officials to conclude that the unidentified submerged craft involved was a Chinese nuclear-powered submarine  ...soon after, China apologized for this "accidental" incursion  ...both the unauthorized incursion into Japanese waters as well as the slow Japanese military response have rattled officials in Tokyo, and have heightened demands from conservatives, most notably Foreign Minister Nobutaka Machimura, for a prompt revision of the Japanese Constitution’s pacifist Article IX   ...in view of the importance of potential energy reserves under the East China Sea, this incursion was likely a key factor in Japan’s decision to broaden its defense pact with the US to identify Taiwan as one of their 'mutual security concerns'"

We feel, however, that the timing and outcome of a military skirmish between China and Japan is difficult to forecast given China's demonstrated tendency to miscalculate in the realm of international affairs.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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