With all the focus on European financial markets, let’s not forget geopolitics. Just as financial panics evolve into social and political crises, so too do political crises have the potential to become military crises. Nowhere is this more true right now than the South China Sea.
If you asked the average person on the street what simmering political conflict is most likely to turn into a shooting war, most of them would probably tell you Israel and Iran or North Korea and South Korea. Hardly anyone would mention China and the Philippines. But don’t count that possibility out.
In early May the China National Offshore Oil Corporation (CNOOC) deployed CNOOC 981 in the South China Sea. 981 is China’s first self-developed deep sea drilling platform, according to the Financial Times. The platform is located in disputed waters – an area between the Paracel Islands which is claimed by China and Vietnam and the Macclesfield Bank, which is claimed by China and Taiwan.
The South China Sea is lucrative for its fishing grounds and its potential oil and gas assets. That’s why China, Malaysia, the Philippines, Vietnam, and Taiwan all lay claim to parts of it. You can probably throw in Japan, the United States, and Australia, as all three Pacific powers are bound to be drawn into any serious dispute between the five countries whose land borders the Sea.
In fact the skirmishing has already started. A Philippine naval vessel made an attempt to detail Chinese vessels it said were illegally fishing near the Scarborough Shoal. The Chinese call the Scarborough Shoal Huangyan Island. And that’s the problem. Ownership is disputed.
The result has been a tense one-month standoff. The Philippines can’t really do anything to enforce their claim. And China is flexing its new regional muscle by pushing the Philippines around. The US Navy is nowhere to be seen, or at least heard.
I’m not predicting any kind of imminent conflict. But I am saying you can expect to see more of this. America’s willingness to clash with China in the Pacific is in doubt. Its ability to project force in the middle of a long-term fiscal crisis is also in doubt. China certainly doesn’t have a Blue Water navy that can compete with the US yet. But you’re getting a taste of things to come.
And of course there’s the possibility that financial crises actually accelerate military conflicts. To the extent that a financial crisis radicalises politics, it puts fringe parties in power. The whole political dialogue becomes more bellicose. And as always, blaming an external enemy is a great way to distract angry people from poor economic times.
We knew the popping of the credit bubble would involve deleveraging, first at the household and then the public level. What we didn’t expect so soon is that the bear market in globalisation could quickly lead to State on State conflict. Everyone thought that era was over forever. That’s what they thought in 1914 too.
Dan Denning
Editor, Australian Wealth Gameplan
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