April the 4th 2012 was an important day in Australia’s history.
This was the day 200 US marines arrived in Darwin from Hawaii.
Australia is now officially a pawn in a dangerous geopolitical chess game between the US and China.
This game is moving fast. It was just November when Obama gave his speech to the Australian government, and said:
‘So let there be no doubt: in the Asia-Pacific in the 21st century, the United States of America is all in…’
A few awkward and public tender moments between Obama and Gillard later, Australia had blindly signed up to being America’s Pacific lapdog. And I mean ‘Pacific’ as in ‘Pacific Ocean’; not in the sense ‘peace loving’ – unfortunately.
For years the Pentagon’s mandate had been to fight counter-insurgency in the wake of 9/11. This is changing. With limited, and shrinking, financial resources the Pentagon’s new mandate is to respond to the growth in China’s military strength and domination of the Pacific region.
The Pentagon has got its work cut out. China’s military budget could double in four years.
People often make the comment that China’s budget is peanuts compared to the US military budget. But America’s is forecast to fall at the same time that China’s is rising.
So although China’s budget is just 15% the size of America’s NOW, in four years time it will have grown to be about 40% the size of America’s. That gap is closing. Fast.
And bear in mind, Chinese military pay is a fraction of US military pay. A US$240 billion budget pays for a much bigger Chinese force than an American force.
China’s military might is surging. The US is ‘all in … in the Asia-Pacific of the 21st century’. And Australia is in the middle of the two like a punter in a bar fight.
We have effectively aligned ourselves with our biggest customer’s biggest adversary.
Nice one, Prime Minister.
So Where Does This Leave You?
Last year the Chinese state-run newspaper, The Global Times, spelt it out:
‘The US is carrying out smart power diplomacy that takes China as its target in Asia. Stopping it is not realistic, but it is equally unrealistic to expect China to stand idly by and indulge Asian countries as they join the US alliance to guard against China one by one. Confronted with such frictions, which has the most resources and means at its disposal? Is an all-out confrontation possible?
These should be the real concerns….China has more resources to oppose the US ambition of dominating the region than US has to fulfil it…As long as China is patient, there will no room for those who choose to depend economically on China while looking to the US to guarantee their security…Any country which chooses to be a pawn in the US chess game will lose the opportunity to benefit from China’s economy…This will surely make US protection less attractive.’
To be clear, Aussie policy makers must work out some way of keeping good with China and the US at the same time. This delicate diplomatic task may be beyond the current government.
Former US Secretary of State, Henry Kissinger, made a diplomatic suggestion. As Peter Leahy wrote in the Australian recently…
‘Kissinger notes the importance of not seeking to confront or contain China. He does not see China’s military build-up as an exceptional problem and emphasises China’s internal troubles. He argues that the challenge for the two nations is to move to a genuine effort at co-operation rather than an assumption of confrontation.’
Kissinger has a knack of nailing the point. This was the same guy who once said ‘He could never trust European politics until there was just one phone number to call.’
But let’s back up a second. The reality is the Chinese are not our only customers.
True, they are the biggest buyer of Australian commodities, but still only take 22% of the value. China is important to our country’s prosperity, but not the be-all-and-end-all.
Take Japan. It buys 16% of our exports. This is eternally overlooked, but provides a stable base line of demand. (Japan has its own problems of course, but that’s another story.)
The rapid rise in exports to India never gets much airplay, but is a story to watch. Indian commodity demand has climbed from 1% to 7% of our business in the last decade. India is plotting a similar path to China’s, and is an international relationship to foster.
The other point is China doesn’t have many options for finding large amounts of commodities such as iron ore and coal elsewhere at short notice. The Chinese need Australia. But even if they could cut us out, we have other potential buyers. In short, we are in a better position than we often realise.
China and Its Neighbours
The rising might of China’s military has another angle to it for resource investors.
If China and the US don’t find a diplomatic answer to their shared quest for dominance of the Asia-Pacific, then countries around the South China Sea, including the Philippines, Indonesia, Malaysia, and Vietnam, may become higher risk to invest in.
These all cluster around the South China Sea, which is known as Asia’s most important flashpoint. For good reason.
The area of the sea is the same size as Western Australia, and more than two billion people live in the countries that surround it. The busiest shipping lanes in the world run through it. It is host to some huge oil and gas fields as well as valuable fisheries. The problem is that China in the north claims most of the sea as its own, drawing its lines well inside areas that its neighbours also claim.
China has a third of its fleet close to the Spratley islands, which contain some of the region’s best oil and gas fields. But Vietnam also claims them. China’s military strength is growing rapidly, and there is a risk that at some point Vietnam will have to watch impotently as China starts drilling.
After China, the most powerful navies in the South China Sea belong to Singapore and Vietnam.
But even if they combined forces against China to try and reclaim the land, it would be suicide.
Don’t Forget Gold
The South China Sea region is gold rich as well. Some of the biggest gold deposits in the world are in the Philippines, Malaysia, Thailand, Vietnam, Indonesia, PNG, Solomon Islands, as well as New Zealand and Fiji. The reason for this is that this region makes up a key part of a geological structure with a great name – The Rim of Fire.
This Rim of Fire was born out of volcanic activity that tore plates apart to form the Pacific Ocean. This process continues today and there are around 400 volcanoes still active along it.
This volcanic activity on the Rim of Fire is the reason Indonesia hosts the immense Porgera gold mine, containing at least 22 million ounces of gold. Or why the Tampakan deposit in the Philippines is host to 19 million ounces of gold. The Rim of Fire is also why Lihir Island off the coast of Papua New Guinea is home to the monster deposit containing 49 million ounces of gold.
In yesterday’s Money Morning you saw China wants to grow its gold reserves. And it is cheaper to do this by acquiring gold mines than buying gold on the market.
So, the risk is that as Chinese military power grows, it abuses its dominance of the South China Sea to take control of the valuable gold assets lying at its doorstep – on the Rim of Fire.
The messages coming out of the Chinese military are quite belligerent. I’m not sure that China will go as far as starting conflicts to gain control. But I do think that as the big bully, China is likely to intimidate its less powerful neighbours into selling stakes of key gold mines at prices that screw existing investors.
Every aspiring empire before it has used military dominance to wrestle control of key commodities.
It’s hard to imagine China won’t now do the same.
Dr. Alex Cowie
Editor, Diggers & Drillers
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