Part 1: The New Silk Road
Beginning with the marvelous tales of Marco Polo’s travels across Eurasia to China, the Silk Road has never ceased to entrance the world. Now, the ancient cities of Samarkand, Baku, Tashkent, and Bukhara are once again firing the world’s imagination.
China is building the world’s greatest economic development and construction project ever undertaken: The New Silk Road. The project aims at no less than a revolutionary change in the economic map of the world. It is also seen by many as the first shot in a battle between east and west for dominance in Eurasia.
The ambitious vision is to resurrect the ancient Silk Road as a modern transit, trade, and economic corridor that runs from Shanghai to Berlin. The 'Road' will traverse China, Mongolia, Russia, Belarus, Poland, and Germany, extending more than 8,000 miles, creating an economic zone that extends over one third the circumference of the earth.
The plan envisions building high-speed railroads, roads and highways, energy transmission and distributions networks, and fiber optic networks. Cities and ports along the route will be targeted for economic development.
An equally essential part of the plan is a sea-based “Maritime Silk Road” (MSR) component, as ambitious as its land-based project, linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean.
When completed, like the ancient Silk Road, it will connect three continents: Asia, Europe, and Africa. The chain of infrastructure projects will create the world's largest economic corridor, covering a population of 4.4 billion and an economic output of $21 trillion.
Politics and Finance:
The idea for reviving the New Silk Road was first announced in 2013 by the Chinese President, Xi Jinping. As part of the financing of the plan, in 2014, the Chinese leader also announced the launch of an Asian International Infrastructure Bank (AIIB), providing seed funding for the project, with an initial Chinese contribution of $47 billion.
China has invited the international community of nations to take a major role as bank charter members and partners in the project. Members will be expected to contribute, with additional funding by international funds, including the World Bank, investments from private and public companies, and local governments.
Some 58 nations have signed on to become charter bank members, including most of Western Europe, along with many Silk Road and Asian countries. There are 12 NATO countries among AIIB´s founding member states (UK, France, Netherlands, Germany, Italy, Luxembourg, Denmark, Iceland, Spain, Portugal, Poland and Norway), along with three of the main US military allies in Asia (Australia, S. Korea and New Zealand).
After failed attempts by the US to persuade allies against joining the bank, the US reversed course, and now says that it has always supported the project, a disingenuous position considering the fact that US opposition was hardly a secret. The Wall Street Journal reported in November 2014 that “the U.S. has also lobbied hard against Chinese plans for a new infrastructure development bank…including during teleconferences of the Group of Seven major industrial powers.
The Huffington Post’s Alastair Crooke had this to say on the matter: “For very different motives, the key pillars of the region (Iran, Turkey, Egypt and Pakistan) are re-orienting eastwards. It is not fully appreciated in the West how important China's "Belt and Road" initiative is to this move (and Russia, of course is fully integrated into the project). Regional states can see that China is very serious indeed about creating huge infrastructure projects from Asia to Europe. They can also see what occurred with the Asia Infrastructure Investment Bank (AIIB), as the world piled in (to America's very evident dismay). These states intend to be a part of it.”
Buttressing this effort, China plans on injecting at least $62 billion into three banks to support the New Silk Road. The China Development Bank (CDB) will receive $32 billion, the Export Import Bank of China (EXIM) will take on $30 billion, and the Chinese government will also pump additional capital into the Agricultural Development Bank of China (ADBC).
The US: Unlikely Partner on the Silk Road:
Will the US join the effort? If the new Trans-Pacific Partnership (that pointedly leaves out both Russia and China, two Pacific powers) is any indication, US participation seems unlikely and opposition all but certain.
But there's no good reason that America should sacrifice its own leadership role in the region to China. A project as vast and complicated as the Silk Road will need US technology, experience, and resources to lower risk, removing political barriers for other allied countries like Japan to join in, while maintaining US influence in Eurasia. The Silk Road could enhance US objectives, and US support could improve the outcome of the project.
An editorial in the Wall St. Journal argues that the US proposed trade agreement and China's sponsored Silk Road project are complimentary, with the trade agreement aimed at writing rules for international trade, while the Chinese aim at developing infrastructure is necessary for increased trade.
A look at the first project, currently under development, provides a good example of how China plans to proceed.
The first major economic development project will take place in Pakistan, where the Chinese have been working for years, building and financing a strategic deepwater port at Gwadar, on the Arabian Sea, that will be managed by China as the long-term leaseholder.
Gwadar will become the launching point for the much delayed Iran-Pakistan natural gas pipeline, which will ultimately be extended to China, with the Persian section already built and the Pakistan-Chinese section largely financed and constructed by the Chinese.
The pipeline is also set to traverse the country, following the Karakoram Mountain Highway towards Tibet, and cross the Chinese western border to Xinjang. The highway will also be widened and modernized, and a railroad built, connecting the highway to Gwadar.
Originally, the plan was to extend the pipeline to India, with Qatar joining Iran as natural gas suppliers, forging what some considered a “peace pipeline” between India and Pakistan, but India withdrew, under pressure from the US along with its own concerns over having its energy supplies dependent upon its adversary, Pakistan.
Not surprisingly, India, a US ally, countered China's initiative with one of its own, announcing a new agreement to build a port in Iran on the Arabian Sea, only a few hundred miles from Gwadar, bringing Iranian energy to India via Afghanistan, bypassing Pakistan.
Although it would offer an alternative to the Chinese-backed Gwadar initiative, the US warned India not to move ahead with the port project before a final nuclear agreement between Iran and the West is actually signed.
Both the Chinese and Indian projects are clearly in defiance of international sanctions on Iran, but both countries appear unconcerned. The Chinese could also be accused of a ‘double dip’ sanctions violation, given the immense and continuing trade deals it negotiated with Russia.
The rest of the business world is sure to follow, or risk losing out in what is certain to be a new “gold rush” towards Asia in a world still struggling with the lingering effects of the great recession. And New Delhi pointed out the harsh truth: American energy companies are also trying to negotiate deals with Iran. Following on the heels of the US visit, the German mission is due in Tehran soon, with the French beating everyone to the punch in an earlier visit.
What then of sanctions? Sanctions only work in a world united behind them. If a large part of the world chooses to ignore sanctions, they become unenforceable.
China and much of the world is intent on developing the largest economic development project in history, one that could have dramatic ripple effects throughout the world economy.
The project is expected to take decades, with costs running into the hundreds of billions of dollars, if not trillions. What that will mean for the world economy and trade is almost inconceivable. Is it any wonder then, that the world’s largest hedge funds, like Goldman Sachs and Blackstone, are rushing to market new multi-billion dollar international infrastructure investment funds?
No doubt a project as large and complex as this is likely to have failures, and is certain to face many western geopolitical obstructions. Assuredly, the “great game” will continue. Look no further than US President Barack Obama, who also senses the urgency. “If we don’t write the rules, China will write the rules out in that region,” he said in defense of the Trans-Pacific Partnership.
In a world where economic growth is tepid, with Europe still struggling with the aftermath of the global recession, along with China's growth slowdown, where else could a project that promises so much opportunity be found?
It's a good bet that giant iron mining companies like Vale, that have seen their business fall to a thirteen-year low, are currently busy figuring how much steel goes into construction of a new, high speed 8,000 mile railroad. If the project is successful, it could very well spark a boom across the entire depressed international mining, commodities, and construction sectors.
Consider how many jobs could be created in a decades-long construction project that spans a huge region of the world. In practically every sector, the prospects are enormous for a revival of trade and commerce.
The ancient Silk Road increased trade across the known world, but the Road also offered far more than trade. One of its least anticipated benefits was the widespread exchange of knowledge, learning, discovery, and culture.
Beyond the riches of silks, spices, and jewelry, it could be argued that the most important thing that Marco Polo brought back from China was a famous nautical and world map that was the basis for one of the most famous maps published in Europe, one that helped spark the Age of Discovery. Christopher Columbus was guided by that map and was known to have a well-annotated copy of Marco Polo's travel tales with him on his voyage of discovery of a new route to India.
For the world at large, its decisions about the Road are nothing less than momentous. The massive project holds the potential for a new renaissance in commerce, industry, discovery, thought, invention, and culture that could well rival the original Silk Road. It is also becoming clearer by the day that geopolitical conflicts over the project could lead to a new cold war between East and West for dominance in Eurasia.
The outcome is far from certain.
Coming soon, Part 2: Cold War or Competition on the New Silk Road.
Nobody has "suffered" more under central planning than billionaire hedge fund managers.
As we have shown year after year, the centrally-planned "New Paranormal" has been a total disaster for traditional alpha generation, since with all traditional fundamental relationships flipped upside down thanks to the Fed, the only way to generate outsized returns for one's investors (and one's offshore bank account) is to be massively levered beta, or merely wrong (for a great example of how the bigger the fraud, the higher the stock price goes before it crashes one last time read the case study of Hanergy).
Recall that it was in 2012 when we first showed that the best strategy in this so-called market is to be long the most hated/shorted stocks in hopes of generating a short squeeze among the hedge funds who still expect rationality and fundamentals to eventually prevail over zero-cost money. That "strategy" has outperformed materially since 2012.
To be sure, some hedge fund managers such as Icahn and Ackman have become experts at black (or green) mailing management teams to issue massive amounts of debt and using the proceeds to buy back stock or engage in long-term value destroying roll ups, an extortion strategy known in polite circles as "activism." But the vast majority of hedge fund managers continue to underperform.
And, with over a third of 2015 already in the history books, Goldman reports that "the low dispersion market continues to challenge stock-pickers as the average hedge fund lags the S&P 500 for the seventh straight year (2% vs. 4% YTD)." Cue countless insulted paper traders screaming how the S&P is never the benchmark for any one hedge fund. Which in theory is correct. In practice, however, any hedge fund which has underperformed the S&P for 7 years even if beating some arbitrarily chosen benchmark has likely been redeemed into oblivion long ago.
There is some good news for hedgies: their Sharpe ratio is better than the S&P500, which however is hardly a consideration for anyone who would rather avoid paying 2 and 20 and just buy the SPY: after all in this rigged market, any time even a hint of a correction appears, some Fed president jawbones stocks right up. From Goldman:
The average hedge fund returned 2% YTD through mid-May. The average equity long/short hedge fund has returned 2.8%, lagging the S&P 500 (+3.9%) modestly in absolute return, but with a much higher Sharpe ratio (1.2 vs. 0.5) due to volatility of fund portfolios less than half that of the broad market index. Global macro funds are the exception, posting a poor -0.5% YTD return as the cross-asset trend reversal in interest rates, FX, and equity markets that began in mid-April unwound what had been a strong start to the year for fund performance.
Ironically, in 2015 even barbaric relics are generating a better return than the smartest money in the room.. with a higher Sharpe.
And yet, despite their now chronic underperformance, for some increasingly inexplicable reason, everyone still obssesses with hedge fund holdings, even though on average the universe of smart money has shown beyond a doubt it is unable to outperform the market, or rather "market."
So for all those who still care what hedge funds are buying, here from Goldman, is a list of the 50 most widely held hedge fund stocks. No surprise, for the 4th year in a row, AAPL is on top. And yes, despite what pundits say, with 191 holders, there is little "smart money on the sidelines" that isn't already fully allocated to AAPL. Which is also why the Carl Icahns of the world are desperate for AAPL management to buy back as much (and as fast) of these hedge funds' shares as possible. Because without management backstopping the market bid, the Hanergy sub-second collapse case study may quickly come to the US.
As usual the most valuable information comes not form the most popular stocks, but the most shorted. Because it is here that as is now usual under the New Paranormal - which won't change as long as the Fed and its money distorting peers are around - that the biggest outperformance will come from: by being long the most shorted stocks, stocks which will be squeezed until the max pain threshold for most is reached and breached, sending the underlying stock soaring. In fact, the more worthless, fraudulent or corrupt the stock, the higher its price will likely shoot up (once again, see Hanergy).
So without further ado, here is Goldman's list of the 50 stocks that represent the largest hedge fund short positions.
Fed and CPI missing housing inflation yet again: The CPI is completely missing the increase in housing prices.
“We’re not gonna make it, are we ? People, I mean.”
“It is in your nature to destroy yourselves.”
“Yeah. Major drag, huh ?”
From James Cameron’s ‘Terminator 2: Judgment Day’.
Here is a thought experiment. It is January 2000. The last wild Pyrenean ibex has been found dead, squashed by a tree. America Online has just announced an agreement to buy Time Warner for $162 billion – the largest corporate merger in history. It is all very exciting. Suddenly, a sourceless wind rises; papers blow across the pavement; windows rattle; the air fills with electrical crackling. Arnold Schwarzenegger emerges from the darkness. “It is 2015,” he tells you in his distinctive Austrian drawl. “The US unemployment rate is 5.4%. The S&P 500 is at a record high. We have record M&A activity. The corporate debt markets are booming. High end real estate is on fire. A Picasso has just broken the record for artwork sold at auction.”
“So where are US interest rates ?” you ask the Austrian Oak. “Where are Fed Funds ?”
He is impassive.
“Fed Funds are at zero. The Fed Funds Target Rate for the upper bound is 0.25%.”
“Wow,” you respond.
Too right. If you could have told anyone back in 2000 just how insane monetary policy would have become by 2015, they probably wouldn’t have believed you.
But it is what it is.
Human beings are suckers for a narrative. We love stories, perhaps more than we like reality itself. A team of equity analysts at Citigroup – no stranger to boom and bust, having gone bankrupt itself at least twice – has just published “It’s bubble time”, a note on the current madness of markets.
Citi identify four key drivers to bubble conditions:
- A ‘new paradigm’ story with convincing fundamentals
- Excess liquidity
- A demand / supply imbalance
- Business risk amongst asset managers.
Doug Noland takes up the story:
“By their nature, the final phase of an epic Bubble will indeed “destroy many contrarian investors.” There’s a confluence of important dynamics at play. First, during final Bubble phases, officials are by then responding to serious fundamental deterioration with heightened policy desperation. So-called “bears” – positioned based on negative fundamental factors – are squashed by the policy whirlwind. Meanwhile, flows gravitate to the most bullish and aggressive (tending to be those content to overlook weak fundamentals and fragilities).
“Such a backdrop foments dangerous Bubble Dynamics. “Money” chases inflating risk markets, while a depleting few retain the resources or willingness to take the other side of this “bull” trade. The upshot is a self-reinforcing market supply/demand imbalance. Over time, as bull market psychology and speculative impulses build, unhinged markets succumb to upside dislocation and “melt-up” dynamics: Too many anxious buyers facing a dearth of sellers.”
There is, of course, a crowning irony in the supposed custodian of monetary stability, the Fed, being behind most of the fundamentals (overly easy monetary policy, and huge surplus liquidity), but we’ll pass over that. Janet Yellen is only human too, after all, presumably.
And there’s another gigantic irony at work – the suggestion that the financial services industry is itself hard-wired for the creation of bubbles:
“From Citi: “Business/Career risk: A weary client once defined a bubble to us: ‘something I get fired for not owning’. It is career-threatening for an asset manager to fight a big bubble. For example, the late 1990s TMT bubble almost destroyed the value-based fund management community. Any bond manager hoping that valuations were mean-reverting would have been fired many years ago. Big bubbles are especially dangerous. TMT stocks already represented a large part of equity market benchmarks when they rerated aggressively in the late 1990s. By contrast, Biotech stocks might currently be expensive but their small market cap means they are still not a big benchmark risk.
You don’t get fired for not owning Biotech stocks now, but you did get fired for not owning TMT stocks in the late 1990s. Bubbles are obvious in hindsight, but they are very hard to fight in real time. Indeed, proper bubbles are so overwhelming that they force sceptical fund managers to buy into them in order to reduce benchmark risk and avoid significant asset outflows. As these sceptics capitulate, of course they contribute to the bubble and so force other sceptics to capitulate and so on and on until there are no sceptics left to capitulate. It makes sense for an asset management company to manage its business risk but this can end up contributing to the madness.”
There is a rational question to pose at this point: why follow the benchmark, in anything ? Bond indices allocate the largest weights to the most heavily indebted issuers. From the perspective of quality, this is clearly nonsense. Equity indices allocate the largest weights to yesterday’s winners, which tells you precisely nothing about the future – only that investment policy out of the rear view mirror might not be the best tactic for survival in a world of dynamic change. The rational response is to throw the benchmark out of the window and practise something more sensible.
Doug Noland, again:
“I would, however, suggest that it is not so much that “modern fund management is almost hard-wired to produce bubbles” as it is that the entire financial services complex has been transformed by central banks inflating serial Bubbles. Inflation psychology has become deeply, deeply ingrained: everything revolves around purchasing securities that will benefit from ongoing central bank market manipulations and interventions. To survive has meant to climb aboard the great bull. This ensures the entire industry is now on the same side of the “trade” – with functioning “two-way” markets relegated to history. And markets will remain seductively “abundantly liquid” only so long as bullish psychology is sustained.”
There is something exquisitely awful about the whole mess. The central bank is tasked with maintaining monetary stability and yet is in the midst of inflating the most terrifying bubble in history. Fund managers are tasked with shepherding their clients’ assets through this uncertainty and yet they are the very players gate-crashing the party even as the cop cars arrive outside.
From ‘Supermoney’ by Adam Smith:
“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, “What time is it ? What time is it ?” But none of the clocks have any hands.”
By the time the sequel to ‘Terminator’ has come around, Arnie’s killer cyborg has morphed into an altruist fighting for humanity and not against it. “Come with me if you want to live.” The advice he might give comes straight from the American author Philip Wylie (hat-tip to Rob Chapman):
“Ignorance is not bliss – it is oblivion. Determined ignorance is the hastiest kind of oblivion.”
As investors, we have all been warned. Not by the future, but by the past.
Last week, Chicago got some bad news from Moody’s. On the heels of an Illinois Supreme Court decision that struck down a pension reform law, the ratings agency cut the city to junk status, triggering some $2.2 billion in accelerated payment rights for the city’s creditors and complicating Mayor Rahm Emanuel’s efforts to refinance nearly a billion in floating rate notes and borrow another $200 million to pay off the accompanying swaps.
The Moody’s downgrade in many ways punctuates what has been a rapid deterioration in state and local government finances across the country, a situation that’s forcing lawmakers to slash budgets and cut funding for a variety of state-funded programs.
As a refresher, here’s some context on Chicago’s underfunded pension problem:
In downgrading the city, Moody’s said it expected “Chicago's credit challenges will continue, both in the near term and in the long term [as] unfunded liabilities of the Municipal, Laborer, Police, and Fire pension plans grow and exert increasing pressure on the city's operating budget.” That looks to have been an accurate assessment, because as Bloomberg reports, Chicago’s budget gap is set to triple by 2017.
Chicago's budget gap is expected to triple with statutory contributions to pension funds, after the city improved its fund deficit for four straight years to less than $300 million in fiscal year 2015.
"Notwithstanding the gains achieved by the city in recent years in addressing its structural budget deficit, the budget gap in coming years is likely to widen from the 2015 level due largely to growing salaries and wages and funding requirements from city pension plans," Chicago bond documents, released yesterday, said. A budget gap of $430.2 million was projected for 2016 and $587.7 million for 2017. However, "statutory obligations to the [police pension fund] and [firemen's pension fund] will, in the absence of legislation modifying the city's contributions to these funds, increase the projected budget gaps for 2016 and 2017 by more than $500 million," the documents said.
So Chicago taxpayers, get ready to take one for the team, because as one muni bond analyst told the Chicago Tribune earlier this month, “raising taxes is going to have to be a part of the solution.”
* * *
Incidentally, this is just one more example of the unintended (we hope) consequences of monetary policy gone ZIRP, because when reality forces you to lower the rate of return you can expect on your investment, your unfunded liabilities balloon, and as you can see from the following table, the assumed rates of return for Chicago’s pension funds are nowhere near the risk-free rate meaning, in short, this could get very, very ugly.
The history books tell us about how evil and wicked the Nazis were, so why aren’t we more alarmed that the United States is becoming more like Nazi Germany with each passing day? More than three years ago, I wrote an article entitled “25 Signs That America Is Rapidly Becoming More Like Nazi Germany” which got a ton of attention. Unfortunately, nothing has gotten better since I first published that piece.
Government control freaks are still watching us, tracking us, recording our phone calls and monitoring our emails. TSA thugs at our airports are still fondling the private parts of our women and children and laughing while they do it. Our police and our military are still training for civil unrest and martial law in America. And even though our politicians are socializing our economy and destroying our constitutional freedoms, the American people keep sending most of them back to Washington time after time. It is an incredibly sad thing to watch the country that you love slowly die right in front of your eyes.
At the heart of Nazism was a desire to control everyone and everything, and that is exactly what we are seeing in America today. Most of our “leaders” are psychotic control freaks that want to micromanage every aspect of our lives. For example, a bill that was just introduced in Congress would force all children in public schools nationwide to be vaccinated with no exceptions whatsoever. Other new legislation that was just introduced would ban all sales of ammunition over the Internet and require ammo dealers to report all bulk sales to individuals to the government. Our founders intended for this nation to be a place where individual freedom and liberty were maximized, but today we literally have millions of laws, rules and regulations that wrap us so tightly in red tape that we can hardly breathe.
To say that we are becoming just like the Nazis is a very strong statement, but I think that after reviewing the evidence you will agree with me. The following are 10 pictures that show how America is becoming just like Nazi Germany…
#1 It surprises most people to learn that the Nazis were actually radical leftists that had great animosity for free market capitalism. For example, National Socialist theologian Gregor Strasser once made the following statement…
We National Socialists are enemies, deadly enemies, of the present capitalist system with its exploitation of the economically weak … and we are resolved under all circumstances to destroy this system.
With that in mind, I want you to check out the following political cartoon from 1934. The same kinds of things that helped the communists rise to power in Russia and the Nazis rise to power in Germany are happening in the United States today…
#2 Just like in Nazi Germany, political leaders in America tend to foster cult followings. At this point, there are millions of Americans that would support Barack Obama and believe whatever he had to say even if he was sacrificing children on the White House lawn. These kinds of followers are called “sheeple” for a reason…
#3 The Nazis were well known for their brutal police tactics, and that is definitely true of us today. The following photo is a powerful commentary on the transformation of police in America over the past several decades…
Just recently, representatives from 117 countries confronted the U.S. about all of this police brutality at the United Nations’ Human Rights Council. Unfortunately, I don’t think that this is actually going to change anything…
The United States was slammed over its rights record Monday at the United Nations’ Human Rights Council, with member nations criticizing the country for police violence and racial discrimination, the Guantánamo Bay Detention Facility and the continued use of the death penalty.
The issue of racism and police brutality dominated the discussion on Monday during the country’s second universal periodic review (UPR). Country after country recommended that the U.S. strengthen legislation and expand training to eliminate racism and excessive use of force by law enforcement.
#4 Why do so many of our police insist on dressing up like Darth Vader these days? Yes, I know that body armor is called for in certain situations, but many believe that the primary goal of these outfits is to intimidate. The following photo was submitted to Flickr by Elvert Barnes…
#5 In recent years, the American people have become conditioned to seeing troops in our streets. This next picture is from the Ferguson protests. The fact that sharpshooters were deployed on rooftops during the unrest there is more than a little disconcerting…
#6 Just like in Ferguson, when rioting started in Baltimore the police were initially ordered to stand down and allow it to spiral out of control. Then after a few hours, National Guard troops were finally deployed to help restore order. We are slowly getting used to the idea that martial law in our cities is a good thing…
#7 Meanwhile, “progressives” continue to use our system of public education to launch a relentless attack on the values that this country was founded upon. The Nazis were also big believers in “public education”, and they used it with shocking efficiency. Today, our children are being brainwashed to accept “progressive values”, and most Americans don’t seem to be too concerned about what is happening…
#8 Yes, the Nazis loved gun control. In fact, they eventually had everyone in the general population turn in their guns, and that is precisely what the “progressives” would love to see take place in the U.S. today. But what would this country look like if that actually happened? I think that this next photo which has been circulating on Facebook gives us a clue…
#9 Under the Nazis, the Germans were taught to salute a new flag and to adopt an entirely new set of values. In America today, it is not “politically correct” to display the American flag publicly or to show honor for it. Instead, we are being trained to think of ourselves as “global citizens” and to never question the growing power of international institutions such as the United Nations. Fortunately, there are many Americans that never plan to accept the “global governance” that the elitists have planned…
#10 In the end, the reason why the Nazis were so successful in Germany was because the vast majority of the German population simply complied with their demands. As Americans, we are going to be faced with our own choices in the years ahead…
So what do you think?
Is America becoming more like Nazi Germany?
Things are escalating rapidly in the South China Sea where Beijing has figured out an innovative solution to the notion of “disputed waters.”
As regular readers are by now acutely aware, China appears to have adopted the maritime boundary equivalent of the old “possession is nine tenths of the law” axiom because Chinese dredgers have been busy for some time now creating islands out of reefs in the Spratly archipelago. Once the islands are complete, China promptly colonizes them. Next comes the construction of cement plants, ports, and 10,000 ft airstrips.
Not surprisingly, Washington isn’t fond of China’s “sandcastles” and everyone from President Obama to the Pentagon is now shouting from the rooftops about territorial sovereignty and Chinese “bullying.”
The US took it up a notch this week when it flew a spy plane over Fiery Cross Reef, presumably just to see what would happen. A CNN camera crew went along for the ride. What Washington discovered is that when it comes to protecting its new islands, bashful China is not. “This is the Chinese Navy… YOU GO!” was the message that came over the radio.
The rhetoric and sabre rattling haven’t let up a bit since then and in fact, there’s been a steady stream of quotables from both sides over the past 48 hours. Here’s the latest.
The United States vowed on Thursday to keep up air and sea patrols in international waters after the Chinese navy repeatedly warned a U.S. surveillance plane to leave the airspace over artificial islands China is creating in the disputed South China Sea…
The incident, along with recent Chinese warnings to Philippine military aircraft to leave areas around the Spratly archipelago in the South China Sea, suggested Beijing is trying to enforce a military exclusion zone above its new islands there.
Some security experts worry about the risk of confrontation, especially after a U.S. official said last week that the Pentagon was considering sending military aircraft and ships to assert freedom of navigation around the Chinese-made islands.
The senior U.S. diplomat for the East Asia, Assistant Secretary of State Daniel Russel, told a media briefing in Washington the U.S. reconnaissance flight was "entirely appropriate" and that U.S. naval forces and military aircraft would "continue to fully exercise" the right to operate in international waters and airspace.
He said the United States would go further to preserve the ability of all countries to move in international waters and airspace.
"Nobody in their right mind is going to try to stop the U.S. Navy from operating - that would not be a good bet," he said.
Chinese Foreign Minister Wang Yi last week asserted Beijing's right to reclaim the reefs and said China's determination to protect its interests was "as hard as a rock."
China has also said it had every right to set up an Air Defense Identification Zone (ADIZ) in the South China Sea but that current conditions did not warrant one.
ADIZs are used by some nations to extend control beyond national borders, requiring civilian and military aircraft to identify themselves or face possible military interception.
And as if that isn’t enough, here’s more from a separate Reuters piece:
China said on Friday it was "strongly dissatisfied" after a U.S. military plane flew over part of the South China Sea near where China is building artificial islands, and called on the United States to stop such action or risk causing an accident…
Foreign Ministry spokesman Hong Lei said the Chinese military drove away the U.S. aircraft, in accordance with relevant regulations, labeling the U.S. action a security threat to China's islands and reefs.
"Such action is likely to cause an accident, it is very irresponsible and dangerous and detrimental to regional peace and stability. We express our strong dissatisfaction, we urge the U.S. to strictly abide by international law and international rules and refrain from taking any risky and provocative actions," he told a news conference.
It's impossible to overstate the magnitude of what China is attempting here. Beijing has literally created new sovereign territory in the middle of the ocean and is now effectively enforcing a no-fly zone.
And despite the rheotric out of Washington regarding how no one "in their right mind" would try to curtail the movement of American military operations, that is exactly what China did this week when it essentially told the P8-A Poseidon spy plane to either stop it with the spying or become a part of a reef underneath a Chinese sandcastle.
We can't wait to see what happens next week.