China's military posturing raises supply chain risks

"When might is right," the adage goes, "money takes flight." In the Far East one could add that foreign trade, too, could also take flight and the world is moving closer to just such a scenario as China begins to make preposterous territorial claims to much of the South China Sea, reportedly rich in oil reserves. But are the posturing spats over the South China Sea worrying enough for foreign investors in that region to consider re-arranging their global supply chains to avoid another 'pants down' exposure like that caused by the Japanese tsunami in 2011 and its consequent mayhem for JIT-oriented global supply chains? Alas, this time around the auguries support the yes camp. I say this time around because China has been through a boy-who-cried-wolf scenario for 30 years when American predictions that China one day would try to dominate its region by force have proven wrong. What is different this time, however, is China's new, highly nationalistic leadership epitomised by President Xi Jinping, egged on by the hawks in the Communist Party who have pressured the top leaders to take more forceful policies.

In an incredible show of chutzpah, President Xi Jinping declared that "in Chinese blood there is no DNA for aggression or hegemony." Hmmm. One wonders if Xi is weak on Chinese history, from the Divine Wind upset of the Mongol fleets, largely comprising ethnic Chinese, against Japan to the bayonets to Lhasa in living memory. Yet Xi probably approved the recent decision to move an oil rig into waters claimed by both China and Vietnam, and shows no signs of backing down. This has led to enmity against Chinese people living in Vietnam, thousands of whom have been forced to return to China. A Vietnamese fishing vessel has also been rammed and sunk by a Chinese vessel.

China also probably senses that Asian nations who could be territorial rivals in the South China Sea cannot over the long run afford to fight back. In pursuit of that strategy it has already defanged the Association of Southeast Asian Nations (Asean), which operates by consensus and unanimity, through buying the votes of one or two members like Cambodia. China also feels that the military capability of its neighbours is not up to their own and, sensing this, countries like Indonesia, Malaysia, the Philippines, Singapore and Vietnam have begun an arms race.

China should think again about its military posturing. It depends heavily on imports of raw materials and its exports to western countries to maintain its growing prosperity. Already, however, there are forces at work undermining its export achievements, not least of which is the move towards re-shoring of outsourced manufacturing back from China to Europe and other countries nearer to their main markets. This has been brought on by strongly rising wage rates in China, where hitherto low wages were the main case for outsourcing to China. But there are a host of other reasons which underpin the case for re-shoring. These include the long production runs demanded by Chinese suppliers, poor quality issues, intellectual property theft, ethical concerns over sweat shops, higher freight charges, long delivery times, and other costs concerning communications when problems arise. If there is any doubt about this one should consider, for example, one of the least likely industries where this is taking place --textiles. According to the head of retail at Britain's management consultants, KPMG, the UK is poised for a revolution in textiles. "The trilogy of brilliant British textile manufacturing, stable wage rates, and shorter lead times needed at retail level have made the UK a compelling proposition once again," he says. So to all these reasons for re-shoring cited above one must now surely add the growing political risk which, of course, would not only affect China but also its neighbours which have relied heavily on cheap labour rates to attract foreign investment.

If, as newspaper reports claim, President Xi came into office vowing to restore the greatness China enjoyed for centuries, then Xi should reflect that true greatness does not spring from the barrel of a gun. Instead, it comes from raising all of the people's well-being through the peaceful pursuit of trade. In any serious shooting war with its neighbours those aspirations would be seriously compromised. The Chinese leadership should also reflect that the country has serious internal weaknesses and threats. Its banking sector is in an unholy mess, which could bring on an internal credit crunch to rival the western eruption in 2008. Denied their aspirations, the people themselves could become China's biggest internal political headache for the Party. And then, as always, there is the natural threat from floods and earthquakes, which is reason enough for the Chinese Government to spend sparingly rather than wantonly on building up its armed forces. The nation's hard-won resources should be husbanded to meet the inevitable threats from Nature's fury. It is no less than the long-suffering Chinese people deserve.
                                                                              END