China is determined to establish its superpower status in the world. The frontline in this at the moment is Beijing advancing and defending its claims over the South China Sea, asserted since 1947 by its “nine-dash” demarcation line. Vietnam and the Philippines are in direct dispute over China’s claims, and Beijing has ignored the latest international arbitration against it. China’s expansion of its maritime power in the area brings it into confrontation with Washington and Tokyo as well. There are business opportunities as China opens up trade routes and exploits the region’s natural resources, but there are also risks of heightened tension and even conflict that could affect the global economy.
Covering 3.5 million square kilometres, the South China Sea stretches from the southern coast of China across to Vietnam and the Philippines, and down to Indonesia and Malaysia. There are two main island chains: the Paracels in the north and the Spratlys in the south, and hundreds of smaller islands and reefs. The sea is of vital importance for world shipping (carrying nearly as much oil as the Straits of Hormuz and more than half the world’s annual merchant fleet tonnage) and because it is believed to hold large reserves of oil and natural gas. It has also become a yardstick for China’s growing power and assertiveness. In 1947, China signalled its ambition to control the area when it issued a nine-dash demarcation line, known locally as ‘the Cow’s Tongue’ (see map) and encompassing nearly 90% of the Sea. That ambition is now being realised.
China has never made clear what the nine-dash line represents: a claim to sovereignty over all the islands and reefs; a claim on the resources under the sea; or just a sphere of influence. However, over the last few years China has embarked on an aggressive programme to build artificial islands capable of supporting military facilities. The scale of the Chinese operation is staggering. For instance, Fiery Cross Reef in the Spratly Islands has been converted from a group of small rocks into a 2.7 square kilometre island with a 3,125 metre runway, an early warning radar site and facilities capable of housing several hundred troops. Six other reefs and atolls have received similar treatment, increasing the surface area of these features from less than 100 to over 3,000 acres. Admiral Harry Harris, commander of the US Pacific Fleet, has called this building programme “China’s Great Wall of Sand”. Others have accused China of creating “facts on the water”, while the international community stands by and watches.
The Philippines has suffered from a steady pattern of Chinese encroachments in its Exclusive Economic Zone (EEZ), including a military takeover of the Scarborough Shoal in 2012. It recently brought a case against China at the Permanent Court of Arbitration (PCA) in The Hague, challenging the legality of China’s actions under the UN Convention on the Law of the Sea (UNCLOS). In its ruling of 16 July 2016, the PCA supported the Philippines on all seven points under consideration and condemned China in the strongest possible terms. The PCA concluded that there was no legal basis for China to claim historic rights to resources within the sea areas within the nine-dash line.
Not surprisingly, China has ignored the ruling, saying that the Court does not have jurisdiction and dismissing it as a farce. However, China’s response has been relatively muted. In contrast to its reaction to the Japanese nationalisation of the disputed Senkaku Islands in 2012, Beijing has not sought to stir up public protests and has offered talks with Manila in an effort to find a diplomatic solution. Beijing has probably calculated that it is better to consolidate its position for the time being rather than risk provoking a stronger reaction from the US and its allies.
China’s objectives are many and varied. It wants to project its growing military power into waters vital to international trade; to strengthen its claims and access to the South China Sea’s natural resources; to create “strategic depth” in the waters off its southern coast; to intimidate smaller neighbours, such as the Philippines and Vietnam; and to check US efforts to operate militarily in the region. China has embarked on a naval building programme designed to create a blue water capability based on the policy adopted at the 18th Party Congress in 2012 to “develop maritime natural resources; maintain the nation’s maritime rights; and build a maritime superpower”.
China is adopting salami tactics to achieve these objectives, taking two steps forward and then one step back when its actions risk a response from the US. Strategically, China is aiming in the long term to displace the US as the dominant regional power. After a century of perceived humiliation at the hands of the Western powers and Japan, President Xi Jing Ping has staked his legitimacy, and that of the Communist Party, on returning China to its former pre-eminent position.
Beijing’s refusal to accept, or even discuss, the Hague judgement based on UNCLOS (to which it is a signatory), suggests that, after 40 years of trying to achieve integration into the international community, China has now begun to write its own rules for Asia. Commercially, China has set up a rival funding mechanism to the World Bank in the shape of the Asian Infrastructure Investment Bank. At the same time, China has promoted its One Belt One Road (OBOR) strategy, a resurrection of the ancient Silk Road which will create an infrastructure of trade throughout Eurasia and Africa with all roads ultimately leading to China. The maritime route for OBOR will run through the South China Sea.
There will be huge opportunities for Western companies to get involved in these projects as China needs access to foreign technology and management expertise. But there will also be risks. Any involvement will be on China’s terms, with all the reputational and integrity risks which are an inescapable part of doing business with Chinese partners. There are also direct risks involved in oil and gas exploration. Some Western companies have shown interest in prospecting in the South China Sea but have remained cautious in view of the uncertain political situation, although ExxonMobil is pushing ahead with the development of its gas field off the coast of Vietnam which falls within the disputed area.
The geopolitical risks in the South China Sea are growing. China is engaged in a struggle with the US and other regional powers for supremacy in the region and, although no side is interested in a war, the risk of an accidental conflict is real. There have already been armed clashes between China and Vietnam and between China and the Philippines. The US has made clear that it will continue its freedom of navigation operations (FONOPS) around China’s artificial islands and, to the intense irritation of the Chinese, Japan (which imports 80% of its oil through the South China Sea) is taking an increasingly hard line in the dispute. Given the growing tension between China and Japan in the East China Sea, the risk of this spilling over into the South China Sea cannot be dismissed.
The overall picture is of a region where Chinese ambitions are coming up hard against the territorial concerns of its neighbours, with unpredictable consequences. Apart from the direct effect on trade and commerce in the region, a conflict, or even heightened tension, in the South China Sea would have serious consequences for the global economy.