Bypassing the choke points of world trade

How China is responding to the US military offensive

Readers of this publication will be aware that the Asia-Pacific region is now the engine of the global economy and that within the next decade China is expected to overtake the US as the world’s largest economy by some distance. 

Less familiar, perhaps, will be the US strategy to halt or delay that process and China’s strategy for counterbalancing American power. The TransPacific Partnership (TPP) – like its transatlantic cousin the TTIP – is currently being negotiated with selected countries of the Pacific Rim and is intended to put the United States at the centre of a new TransPacific free trade bloc which excludes China. The United States recognises that the shift of the economic centre of gravity to Asia cannot be stopped, but by integrating markets across the Atlantic and the Pacific, ‘the US and the EU, through their combined magnetic power, would secure their ability to set market standards through the rest of the world’ and delay the decline of north Atlantic economic power.

On the military front, the US is shifting the bulk of its naval and air force assets to the Asia-Pacific region. New military bases will be established in Darwin (north Australia), Singapore, the Philippines, Japan, Guam and South Korea beefing up existing forces. The United States already has 40,000 military personnel in Japan, 28,500 in South Korea, 9,000 on the Pacific island of Guam and thousands more on over a hundred warships assigned to US Pacific Command. And it has recently been working hard to strengthen its military relationships with existing and new allies. Japan, South Korea, Taiwan and Australia have purchased US missile defence systems which, along with other military acquisitions, undermine the existing strategic balance and promote a culture of militarism. This is most notable in Japan where the right wing nationalist government of Shinzo Abe has adopted confrontational policies with China over disputed islands in the East China Sea, substantially increasing military expenditure and re-interpreting the pacifist clause in Japan’s constitution to allow its armed forces to engage in wars beyond its own territory. 

Who threatens whom?

To be sure, China has been more assertive in pursuing its territorial claims over island groups in the East and South China Seas in the past few years, but the accusation by US defence secretary Chuck Hagel of a ‘threatening’ Chinese military build-up is turning reality on its head. China lacks a blue water navy and has no ability to fight outside its own backyard. It has one aircraft carrier – a reconditioned former Soviet vessel, half the size of any US carrier and not yet in service. Its defence spending is one seventh that of the United States and it has no foreign bases. By comparison, the United States has 11 carrier groups which patrol every ocean, over 1000 overseas military bases scattered on every continent and almost 100,000 service personnel based in the region. US defence spending alone accounts for 40% of global military expenditure. And by 2020 sixty per cent of US naval and air force assets will be deployed in the Asia-Pacific as part of the ‘pivot’ to Asia. Just who is threatening whom?

Even more alarming is the new US strategic doctrine of AirSea Battle (ASB). This was conceived to confront China’s growing ability to defend its coastal waters with new anti-ship missiles. ASB would start with direct ‘blinding’ attacks on China’s reconnaissance and command and control centres before taking out air defence systems and striking at long range anti-ship missile launchers and anti-satellite systems. This is a doctrine that would quickly escalate to all-out war. 

A key component of the ASB concept is to blockade the choke points of world trade. The peculiar geography of South East Asia channelises merchant fleets through the Malacca Strait and the Strait of Taiwan. US domination of the high seas and its access to new strategic bases in Singapore and northern Australia would allow its powerful navy and air force to intercept merchant ships at these narrow points, choking off seaborne trade to China in vital oil and gas supplies and manufactured goods travelling in the opposite direction. 

China’s dynamic economy is particularly dependent on imported oil and gas – more than half its crude oil is imported and it has now overtaken the United States as the world’s largest net oil importer.  

China’s response

How is China reacting to this threat to its strategic materials? Firstly it has begun to diversify its energy supplies away from reliance on coal and oil in favour of natural gas, hydroelectricric sources, nuclear energy and other renewables. Secondly it has diversified its sources of crude oil, now importing greater volumes of oil from a wider range of countries including Saudi Arabia, Angola, Oman, Russia, Iraq, Iran and Central Asia (insert China’s crude oil imports by source, 2011). Third, it is building strategic stockpiles of oil and gas to enable it to withstand disruptions of supplies from any cause . And fourth, it is building the infrastructure for alternative land-based routes for these strategic energy supplies.  

One part of the Chinese response has been to build a strategic reserve of oil and gas. This would allow it to survive a short term blockade of its ports or the choke points of world trade such as the Malacca Strait or the Straits of Hormuz. The 10th Five Year Plan (2000-2005) called for a strategic reserve to shield the nation from potential supply disruptions. China has been rapidly building new storage facilities to increase its reserve capacity from 160 million barrels to over 500 million barrels by 2020 or around 100 days of imports. It tends to buy heavily while oil is cheap – described in industry-speak as ‘buying the dips’. This has wider benefits in helping to smooth out the market and puts a floor under the global price of oil. It also provides some protection to China from spikes in the oil price and disruptions in oil supply from any cause. But by the end of this decade China’s strategic reserve, although much greater than other developing countries like India, will still be less than half that of the United States. China is building similar strategic reserves of copper, rare earths and agricultural commodities. 

Just as important, China is seeking to circumvent the long and vulnerable shipping route for energy imports around South East Asia. New routes and transport corridors are being developed through Pakistan from the port of Gwadar, from gas bearing fields off the coast of Myanmar, from Central Asia and from Siberia through new oil and gas pipelines. This has happened alongside improvements to the domestic oil pipeline network in China connecting the more developed east coast regions with the north west, central and south west regions.

Pakistan-China economic corridor

Gwadar is a deep water port in the Western Pakistani province of Balochistan. It is close to the Straits of Hormuz and the vast oil reserves of the Persian Gulf and has the potential to become the gateway to Central Asia and China. The plan is to connect it with Kashgar in China’s Xingjian province creating a new economic corridor that will bring commercial benefits to both nations. In November 2014 it was announced that China will provide $45.6 billion to fund energy and infrastructure projects in Pakistan over the next six years. The projects include an oil pipeline and a new oil refinery as well as road, rail and fibre-optic networks. The government of Pakistan plans to build industrial parks and enterprise zones along the route of the corridor – an investment that it hopes will kick-start its ailing economy. The benefits for China include faster and shorter routes for imports and exports which can particularly help the development of its poorer western provinces such as Xingjian. 

The problems with such a project, however, are considerable. The 3,000 km route runs through the cities of Karachi and Islamabad. But much of the terrain is remote and mountainous traversing the sparsely populated Balochistan province at one end and the Karakoram mountains and the Pamir plateau at the other.  It will involve building 200 km of tunnels and upgrading the Karakoram Highway. And it could become a target for insurgents in Balochistan province and along other parts of the route. Tight security will be required to protect the construction crews. 

Other routes may offer more immediate promise. One of these is the oil and gas pipelines from Kyaukphyu in Myanmar to Kunming in China.  The gas pipeline which connects with the Shwe offshore field in the Bay of Bengal was completed in 2014 and will supply 12 billion cubic metres (bcm) of natural gas a year – a quarter of China’s current usage. Its sister oil pipeline, although behind schedule, was completed in late 2014. It has a capacity of 22 millions tons a year, two million of which will be used by Myanmar. The oil will come via tankers from oil fields in the Middle East and Africa.   

Also in 2014 Russia finalised a long-stalled 30 year deal to supply 38 bcm of East Siberian gas to China. This new gas pipeline – the Power of Siberia – will connect new gas fields in eastern Siberia with north east China via Vladivostok. It will complement an existing oil pipeline – the East Siberia Pacific Ocean (ESPO) pipeline – which opened in 2009 transporting 15 million tons of oil a year (around 300,000 barrels per day) between eastern Siberia and the north eastern Chinese city of Daqing. In June 2013 the countries agreed to double that amount and almost double the capacity of the ESPO pipeline. The pipeline also supplies oil to the Pacific coast terminal of Kozmino (east of Vladivostok) giving Russia the opportunity to send more crude oil to China via a short sea route. Russia is also sending western Siberian oil to China through the expanded pipeline from Kazakhstan.

Central Asia pipelines

But within a few years it will be Central Asia which will supply the bulk of China’s natural gas imports. In particular, Turkmenistan has agreed to supply its eastern neighbour with 65 bcm of gas a year by 2020. Two new gas pipelines (making 4 in total) passing through all five Central Asian states to the western Chinese city of Alashankou came onstream in 2014. This means that within the next decade Central Asia will supply around 40% of China’s natural gas and China will be easily Central Asia’s largest trade partner. 

Before these new oil routes were developed it was estimated that 80% of China’s oil imports (around 6.6 m bbl/d in 2014) passed through the choke point of the Malacca Strait. The ESPO pipeline alone is capable of expanding to 1.6 million barrels per day by 2018. If we add to that the expansion of the Central Asia oil pipeline to 400,000 barrels per day by 2014 and the potential for routing Saudi and Angolan oil to a pipeline through Myanmar it is possible to see Chinese oil traffic through the Malacca Strait shrink to 50% or less of net imports by the end of the decade. 

The same is true for gas imports. The new gas pipelines from Russia, Turkmenistan and Myanmar will hugely reduce the proportion of China’s rapidly growing gas imports travelling as liquified natural gas (LNG) by the long and vulnerable sea route. 

China’s strategy to bypass US naval power is part of its longterm policy of ‘peaceful development’. The role of its armed forces is focussed on territorial defence. In particular, it seeks to avoid any direct challenge to the world’s single military superpower.

By building a strategic reserve of oil and gas and developing alternative land based routes for its vital energy imports, China’s response has been to simply by-pass the threat from US naval power. During a time of heightened international tension a US naval blockade of China’s energy supplies, whatever the pretext, could still cause economic damage to China’s economy in the short term but it would no longer be critical or bring the economy to an immediate standstill. And a prolonged blockade or a wider assault on alternative land based routes could only be interpreted as a deliberate act of all-out war, massively raising the stakes. All this indicates that the current Chinese leadership recognises the growing threat posed by the ‘pivot’ to Asia but instead of attempting to confront US military power, China has continued to pursue a strategy of ‘peaceful development‘ and territorial defence.

China’s strategic response

This, of course, is just one component of China’s longer term strategy. As we have seen, the broader US economic strategy for the region centres on the Trans Pacific Partnership. China, on the other hand, is working with members of the Association of South East Asian Nations (ASEAN) to create an ASEAN free trade area and an ASEAN economic community by 2015 with a single market an an integrated production base and with looser rules on intellectual property rights and state subsidies. 

A report presented by Hu Jintao at the 18th Communist Party Congress in November 2012 described four pillars of China’s multilateral policy – the United Nations, the G20, the Shanghai Cooperation Organisation (SCO), and BRICS. The last two of these are particularly important. The Shanghai Cooperation Organisation is a regional political, economic and military grouping which brings together China, Russia and four countries of Central Asia and will soon admit four new members – India, Pakistan, Iran and Mongolia. Although security is the main concern of the organisation there is increasing economic integration and energy is at the heart of the new regional grouping. SCO members will soon account for 20% of the world’s oil and over 50% of its natural gas reserves. The SCO is clearly emerging as a major counterbalance to the role of NATO in Eurasia. 

On a global scale BRICS (Brazil, Russia, India, China and and South Africa) is emerging as an alternative to the G7 western powers and is challenging the Washington-dominated Bretton Woods system and the role of the dollar as the global reserve currency. In 2014 BRICS set up the New Development Bank with an initial capitalisation of $100bn mainly to finance infrastructure projects in the developing world. In 2015 China launched a new Asian Infrastructure Investment Bank (AIIB) which quickly attracted around 50 supporting countries including the UK despite the opposition of the Obama administration. 

Thus China is responding to US militarisation of the Asia-Pacific region by diversifying the sources and routes of its energy imports and putting itself at the centre of alternative economic, political and security networks – mainly around ASEAN, the SCO and BRICS. All of this is designed to facilitate China’s ‘peaceful development’ policy. 

Alan Mackinnon