China and Vietnam are engaged in a new war of words over disputed territorial waters in the South China Sea. Twenty one Vietnamese fishermen have been detained since March 3 while working off the Paracel Islands (Xisha to the Chinese and Hoang Sa to the Vietnamese) which both countries claim. China says Vietnam’s government should halt the fishing off the Paracels to stop what Foreign Ministry spokesman Hong Lei described as illegal fishing operations by “a large number of Vietnamese fishing ships”. Vietnam insists the fishermen were in Vietnamese waters and should be freed.
Beijing has been beefing up its naval presence in the South China Sea. The Maritime Surveillance Force conducted three times as many missions there last year as in 2008. As well as fishing boats, the vessels were looking for oil and gas drilling, activity off the Spratlys that Beijing also holds to be illegal in what it considers its waters.
As well as China and Vietnam, the Philippines, Malaysia, Brunei and Taiwan all claim sovereignty over often overlapping parts of the South China Sea. China’s claim is the largest, covering a big U-shape over most of the sea’s 1.7 million square kilometers, straddling shipping lanes between East Asia and Europe and the Middle East and below which are believed to be rich oil, gas and mineral deposits.
Monks are an inflammatory issue for Beijing right now. Hence Vietnam’s decision to dispatch six of them to take up six-months of residency on the disputed Spratly Islands in the South China Sea–China calls them the Nansha Islands–is a doubly provocative act.
The sextet will take charge of Buddhist shrines on the sparsely inhabited islands that were abandoned in the mid-1970s, but which Vietnam has recently refurbished, the BBC reports. The Philippines, Brunei, Malaysia and Taiwan, as well as China and Vietnam, claim sovereignty to parts of the islands to establish their claims over the resource-rich waters around them. The BBC has a map of the competing maritime boundaries here.
No official response from Beijing yet, but if and when it comes it will surely be to reaffirm its “indisputable sovereignty” over the islands. Late last month it condemned a plan by Manila to invite foreign investors to explore for oil and natural gas in the area in just such terms.
The dispatch of the Haixun-31 patrol vessel into the South China Sea is blatant muscle flexing, despite its overt purpose of making a routine trip to Singapore for a six-day visit. The vessel, seen above sailing from Zhuhai on Wednesday, is one of the largest and most modern in the Maritime Safety Administration’s fleet. Its voyage comes two days after Vietnam staged a live-fire exercise in the much disputed waters, criticized by Beijing for being a show of force.
It is getting petulant again in the resource-rich waters of the East and South China Seas. Tokyo has protested to Beijing about a Chinese helicopter buzzing a Japanese destroyer close to a disputed natural gas field the East China Sea. Last week, Chinese boats allegedly tried to ram a Philippines ship doing seismic testing for natural resources in the South China Sea. Last month, Vietnam complained about Chinese naval exercises near the Spratly Islands, also in the South China Sea. Last year, Tokyo and Beijing has a serious stand-off over the arrest of a Chinese trawler captain who clashed with Japanese coastguards near a group of disputed islands known as the Senkakus in Japanese and the Diaoyus in Chinese.
These incidents do nothing to diminish the concerns of China’s regional neighbors about Beijing’s build up of its navy and growing willingness to flex its muscles in the waters off its shores. We have been expecting Beijing to be repeatedly testing how far it can push its neighbors and we see little reason that that won’t continue. The next level of this will be a coordinated response from the neighbors (and closer cooperation with Washington), ratcheting up tensions even more.
Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.
It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.
In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.