China Defence and Security Report Q2 2008

The ninth China-US defence consultation was held in Washington, the US, in December 2007. Issues discussed at the meeting included US-China military relations, regional and global security, the antiterrorist war and missile defence. Although China had denied port calls of warships to Hong Kong for rest and reorganisation of the aircraft carrier USS Kitty Hawk, and several other US warships, this did not delay or postpone the meeting. Many media outlets noticed that the White House, the Pentagon and officials of the US Pacific Command were cautious in what they said about the matter and did not make critical remarks when they spoke about the incident. In short, the US Government and military have taken a very 'low-key' attitude in handling the matter. Nor was this the first time such an incident has occurred.

China did not allow US warships to have access to the port of Hong Kong following a series of incidents that caused tension in China-US relations, such as the US bombing of the Chinese Embassy in Yugoslavia in 1999, the incident of collision between Chinese and US aircraft in 2001 and the US authorities allowing Taiwan 'Defence Minister' Tang Yiao-min to attend a US-Taiwan military meeting in the US in 2002. The denial of Kitty Hawk's entry into Hong Kong this time will not affect China-US military exchanges, and the US appears hopeful of maintaining good military relations with China.

Meanwhile, relations between China and Japan appear to be improving. For instance, the Chinese warship Shenzhen arrived in Tokyo in November 2007 on a goodwill trip: this was the first such port call since World War Two. Japanese and Chinese officials stressed the significance of the event as an indicator of harmony within Asia. The commander of the Chinese vessel, Rear Admiral Xiao Xinnian, stressed on the visit that Chinese military strategy is only for self-defence. Nonetheless, a continuing row between the two nations over territory and natural resources in the East China Sea remains unresolved, and Beijing is wary of Tokyo's intentions as Japan seeks a bigger global security role by stretching the limits of its post- World War Two pacifist constitution.

As we have explained in recent quarters, business is booming for China's indigenous arms companies.

This is partly because of the actual (and likely to continue) double-digit growth in the economy. It is also partly because of the ongoing transformation and modernisation of the armed forces - with major procurement programmes for each of the three major branches. Moreover, China has shown that it is competitive as an exporter of advanced equipment. In Q207, AVIC I announced a number of new orders for its ARJ21-900 airliners: in addition, several Chinese organisations signed technological co-operation agreements with foreign governments. Nevertheless, huge challenges remain to be overcome. As we explain in this report, many of the Chinese arms companies are operating facilities that are over-manned, inefficient and - for historic reasons - in sub-optimal locations that are a long way from major manufacturing centres such as the Pearl River Delta region.

It also appears that despite economic growth slowing slightly in Q307, China now looks all but guaranteed to secure its fastest annual pace of expansion since 1993. This has increased expectations of further tightening from the authorities, especially in view of stubbornly high inflation, but we nonetheless remain sanguine on the prospect of this happening at a faster pace than we are currently witnessing. The upcoming 2008 Olympic Games to be held in Beijing in August will also be China's highest-profile public event to date, and will - at least symbolically - mark its emergence onto the world stage.