Economic Turmoil May Slow Chinese Spending


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Feb 19, 2009
TAIPEI - Bureaucratic inertia will likely protect China's major defense programs from cuts until 2010, but the global economic turmoil could see the 2011-15 Five-Year Plan delay procurement and slow modernization. Affected programs could include the indigenous aircraft carrier and acquisition of advanced Su-33 fighters from Russia.

"Once systems get through the bureaucratic hurdles to make it into the plan, it is normally hard to get them out," said retired U.S. Navy vice admiral Michael McDevitt, vice president of CAN, a Washington-based research organization. China is more likely to "simply stretch procurement programs out if there is not enough money in the current budget year."

China might also use military construction programs as "part of an economic stimulus package - building things creates or sustains jobs," he said.

Chinese leaders are closely watching the social upheaval that could follow the economic crisis.

At the annual World Economic Forum in Davos, Switzerland, on Jan. 28, Chinese Premier Wen Jiabao compared the current financial crisis to the Great Depression.

"The current crisis has inflicted a rather big impact on China's economy," Wen said. "We are facing severe challenges, including notably shrinking external demand, overcapacity in some sectors, difficult business conditions for enterprises, rising unemployment in urban areas and greater downward pressure on economic growth."

Wen told delegates China will institute tax breaks, invest in education and infrastructure, and modernize its industries.

The economic tsunami ravaging China's coastal cities is expected to test internal security and challenge leaders in Beijing. As more factories close, migrant workers in the cities have begun boarding buses and trains for the long trip to their home towns in the country's interior. They will be bringing with them big city ideas, a lot of boredom and angst over losing their jobs - all of which could cause problems in the hinterlands that could migrate back to Beijing.

"Peasants already angry at the improper seizure of their land; the larger numbers of unemployed, including always-discontented students who now can't find jobs; the intellectuals will feel more entitled to voice their discontents," said June Dreyer, a China specialist at the Foreign Policy Research Institute in Philadelphia.

Several anniversaries could also make 2009 troublesome for the Chinese Communist Party (CCP), including the 60th anniversary of the establishment of the People's Republic of China (PRC), the 20th anniversary of the Tiananmen Square crackdown and the 50th anniversary of the beginning of the Tibetan uprising.

"The CCP has already muddled through worse - the Great Leap Forward and Cultural Revolution, for example - and may survive this tough situation as well," Dreyer said. "But these developments are social dynamite, and the party/government are acutely aware of it."

At Davos, Wen made no mention of the $1.9 trillion in U.S. debt in Beijing's purse. China might stop buying U.S. treasury bills and the result could be higher U.S. interest rates. But the debt issue poses problems for Beijing: What do you do with that kind of debt? Call it in? Dump it at cut rates? Wallpaper the Great Wall?

Sources are divided. Part of the trouble with looking into the Chinese teacup is reading the leaves under the surface. Transparency has always been a problem with its state-controlled economy, and the military has always been opaque.

"Of course, since China does not disclose total procurement objectives [numbers of aircraft, for example], IOC [initial operational capability] dates and the like, it is hard to tell whether things are slowing down or speeding up," McDevitt said.

"This is where their lack of transparency has practical consequences for outside observers. We really don't know what schedule things like an aircraft carrier might be on. On things being purchased from Russia, sometimes there is a bit more visibility since the Russian trade press sometimes discusses the scheduling details of weapon deals," he said.

However, China may choose to wait on big-ticket items, like aircraft carriers and new fighters, said U.K.-based Thomas Kane, author of the book, "Chinese Grand Strategy and Maritime Power."

He said China has been attempting to "offset the cost of Air Force programs with its ventures into the commercial aerospace market," and would not be surprised if the Air Force programs were "were particularly hard-hit."

"Nevertheless, the PRC used its control over fiscal and industrial 'commanding heights' to buffer the effects of the 1997 currency crisis, and its leaders may hope to repeat that performance," Kane said.

The signing of a variety of historical agreements between China and Taiwan also could slow China's military modernization, as peace in the Taiwan Strait makes war with the United States unlikely.

China must also rebuild defense ties with the United States after Washington's decision to release a $6.4 billion arms deal to Taiwan in October, said Roy Kamphausen, vice president for political and security affairs at the National Bureau of Asian Research, Washington.

Beijing severed military-to-military relations, blaming the Pentagon for the decision. Turning the Pentagon into the scapegoat, said Kamphausen, illustrates that China's "response misses the fact that, as global players, the two defense establishments have much to talk over and collaborate on, well beyond bilateral relations, much as the State Department and PRC MFA [Ministry of Foreign Affairs] have discovered in recent years. The counterpiracy mission off the coast of Somalia is just one recent example."

The economic crisis may also help China and Taiwan become closer in the long term.

"Beijing may view the recession as an opportunity to show the Taiwanese that the West has less to offer them than they might have hoped, and that the PRC has more to offer them than they might have realized," Kane said. Chinese President Hu Jintao's offer of China-Taiwan military cooperation "suggests that Beijing is currently attempting to pursue its cross-Strait objectives through persuasion rather than force."

With the pressure off, the military and security services can focus on maintaining internal security and safeguarding the CCP. In what could be called a warning about public disorder, photographs in the Xinjiang Uyghur Autonomous Region of an anti-terrorism drill showed troops using a flamethrower in the Jan. 19 edition of the Chinese-language Tianshan Net News Web site.

"Conventional wisdom is that the government is already preparing for an increase in domestic instability attributable to economic distress," said Kamphausen, who served two tours as a U.S. Army attaché to Beijing

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