June 20, 2023: Chinese military leaders are observing the War in Ukraine with great interest and anxiety. Chinese generals were surprised that Russia invaded Ukraine. This was unexpected, as was the effectiveness of the Ukrainian forces opposing the Russians. Since the 1990s, China has had a growing trade relationship with Ukraine. This included obtaining Russian and Western military tech from Ukraine. Russia was considered a major military ally of China but its sorry performance in the Ukraine has demonstrated that Russian military capabilities were much overrated. Western nations supplied the Ukrainians with a lot of very effective and some ineffective ones that will have to be upgraded. Russian weapons had a similar experience, but with far more failures than successes. The Chinese generals expected that and have been steadily replacing Russian tech with Western versions. The Chinese believe Russia must upgrade its military equipment and do it with superior Western or Chinese tech. Russia resists that suggestion and continues to believe its own defense industries can develop and deliver what it needs.

Another ominous side effect of the Ukraine War was the more than $10 billion NATO member Poland, and Ukraine neighbor, spent on modern South Korea weapons. This included a thousand K2 (an improved M1) tanks and a more flexible version of the American HIMARS system. The sale was contingent on those South Korea weapons not being used in Ukraine. Poland compiled and sent all its older Russia designed gear to Ukraine, where the Ukrainians appreciated it and were familiar with it. South Korea would have liked to see their weapons get some combat experience, but that would have angered nearby Russia.

China wants an end to the fighting in Ukraine, even if it means Russia having less than nothing to show for their military efforts in Ukraine. China sees no point in Russia continuing to fight the Ukrainians, who have superior troops, weapons and leadership. In Taiwan, the reaction to Ukraine increased popular support for resisting a Chinese invasion as stubbornly as the Ukrainians did in their homeland. China is not just worried about Taiwanese resistance but also about the capabilities of Chinese forces.

China has spent trillions of dollars over the last decade to upgrade its military to the point that it was superior to Russia’s. While studying China’ military modernization, the U.S. intelligence community came to believe that actual Chinese annual defense spending was about $700 billion. Current U.S. spending is $845 billion. It was previously believed that annual Chinese defense spending was about $250 billion. Accurate government spending information is notoriously difficult to come by in China, but it was known that military spending had gone up more than the official data indicated. While defense spending was considered patriotic, other forms of inaccurate financial reporting were not.

The Chinese government ignored these bad accounting practices until it became impossible to do so when their hereto constantly growing (allegedly) economy stopped doing so due to this and a variety of other problems. One was the economic damage done by all the covid shutdowns since 2022. A growing number of Chinese and foreign economists are also questioning the reported size of the Chinese economy because of Chinese attempts at deception to hide the true impact of covid19 on China. That particularly includes the government's effort to silence Chinese scientists criticizing the government's role in trying to suppress the fact that covid19 originated in China, and initially silenced Chinese medical researchers demanding government action against the new disease. China has admitted that provincial governments had, in the past, reported exaggerated economic data to the central government which led to claims of higher economic growth than was actually taking place. These deceptions did not become news until the mismanagement of bank loans by provincial officials became obvious and halted a lot of local economic activity.

China’s economy was already slowing down when the current government-ordered covid19 shutdowns began for Shanghai in early 2022. Despite that citywide shutdown, the virus spread to over a hundred towns and cities. There seemed to be no end to this and the economic problems the shutdowns caused. This was made worse by an unresolved real-estate bubble in which more and more Chinese banks suffered liquidity (cannot meet demands for withdrawals) problems. The economic damage done by all this led to a $5 trillion stimulus program in 2022 which was supposed to alleviate suffering among workers and provide businesses with the cash needed to keep operating. All this is familiar to Americans as the US government did the same thing a bit earlier in the covid epidemic. Much of that, perhaps a quarter to a third, was stolen by fraud from foreign and domestic scammers, and it is likely that the same happened in China.

China’s actual decline in GDP growth is a state secret but is believed to be bad enough to create persistent GDP shrinkage and an official end to the decades of high GDP growth. China’s economy is, at $18 trillion (or less) a year, the second largest in the world. The Americans have economic problems but not to the extent China suffers from. The Americans are not the only foreigners to notice China’s economic distress. All the countries that set up manufacturing operations in China have reacted to Chinese economic problems, and the labor shortage that has made manufacturing in China more expensive, and moved out, often to other nations in east or southeast Asia.

Another internal problem is that CCP (Chinese Communist Party) rule in China is failing, especially since president Xi Jinping reversed many of the reforms the CCP implemented in the 1980s to get the Chinese economy going and curb most government efforts to disrupt that economic growth. Democracies have similar problems but, because they are democracies have an effective way to fix things by electing new officials. Xi grabbed more power for the presidency and became leader-for-life. Most Chinese hold him responsible for their economic problems. With long-term rule by a president with so much power, businesses in China face an unpredictable future. This has discouraged local and foreign businesses from expanding operations. Xi is aware of the problem and seeking to reassure local and foreign investors that China is addressing its current economic problems and wants to create a business-friendly environment. This is seen as not credible and contrary to what is actually going on in China.

China’s neighbors see China more as a threat than an opportunity. The most obvious example of this is Myanmar (Burma), where a military government took power in early 2021, ousting an elected government that opposed Chinese influence. Since the coup, several rebel groups have fought the military. The Myanmar armed forces depend on Russia, China and Serbia, in that order, for weapons and ammunition. China and Russia have provided $1.5 billion worth of weapons so far. Since Russia invaded Ukraine over a year ago, Russia has reduced its arms sales to Myanmar. That was a lucrative business, amounting to about a billion dollars’ worth of weapons a year. China is now the main supplier of all the fuel, bombs, shells and other munitions needed to keep the fight going. The army ground forces are reluctant to fight when they encounter armed resistance, which continues in the tribal areas. The urban rebels are slowly arming but still depend on a lot of demonstrations by unarmed protestors. So far, Burmese soldiers and police have killed over 2,000 people and imprisoned nearly 20,000. Aside from China, most nations in the region want the military government to free the elected and appointed officials of the overthrown government. Without Chinese support the Burmese generals could not have sustained their coup and might not even have attempted it without assurances of Chinese support. Russia and China have supplied Myanmar with combat aircraft and weapons for airstrikes against rebels in remote locations. Many of the dead from the air attacks are civilians. India and other nations bordering China see the Burma coup government as a threat.

Unlike most other major powers, China rarely donates weapons to foreign nations, but will sell to anyone who can pay. China needs all the export business it can get because the Chinese banking sector remains weak because the real-estate bad debt crisis was resolving itself too slowly. Less than a year ago, the three major credit rating companies, S&P Global Ratings Moody and Fitch, ceased to offer a rating for the real estate developer China Evergrande Group because the firm no longer supplied reliable financial information. Evergrande is the largest real estate firm in China and is sitting on over $300 billion of bonds and other forms of debt. By the end of 2021 Western credit rating agencies declared that Evergrande was now officially in default and unable to repay its debts. Evergrande debt is as toxic as it can get and in a normal world that can trigger the long-feared financial crisis in China.

The Chinese solution was not normal. The government declared the situation was under control and that apparently means priority will be given to the many individual Chinese who are at risk of losing large down payments on apartments Evergrande has not completed or in some cases not even begun construction on. The fewer individual Chinese hurt by the Evergrande default, the less damage is done to the reputation of other major Chinese real estate developers and supreme leader Xi. Chinese banks and institutional investors are next in line and they are expected to write off (forgive) as much of the debt as they can. The government insists on this. Foreign bond holders, who have between ten and fifteen percent of this debt, are last in line and the government has ordered Evergrande, and other Chinese real estate firms with a lot of foreign debt holders, to handle this as best they can, even though this “screw the foreigners” approach makes it more difficult for Chinese firms to attract foreign investors in the future. In the two months before being declared in default, Evergrande bonds went from “high yield” (junk bond) status to default. The junk bond segment is the first to fail when a national economy suffers from too much bad (unlikely to be repaid) debt. China can avoid the bankruptcy of one real estate firm, but only for so long because several other similar firms are also close to default. This is mainly about too much debt and how much of that debt is uncollectible (“bad” debt). To make matters worse Chinese banks are suspected of using the same deceptive banking methods (trying to repackage bad debt as good debt) that brought on the 2008 financial crises in the United States.

Evergrande is the one of many bad real estate investments that have failed. Because of this, many Chinese banks are still, in practice, bankrupt even though on paper they are solvent. The main problem remains the huge quantity of unsold housing and business properties. Last year the government looked into this and found the situation was worse than anyone had imagined. It turned out that about 50 million housing units (mostly newly built apartments) are unoccupied. That’s about a fifth of all housing in the country. To make matters worse, a lot of the new construction, like so much else in China, was shoddy because of the corruption by builders and government officials who are supposed to prevent such fraud. Many Chinese don’t believe their government can handle this mess and that resulted in hundreds of billion dollars’ worth of Chinese currency held by businesses and individuals being converted into more trusted foreign currencies (like the dollar, euro and yen).

The Military Impact

Chinese military leaders believed that the economic problems might help solve their personnel problems. Too many male Chinese of military age want nothing to do with the military. In turn military recruiters discovered that half of military age men are not physically fit to serve. Overweight, addicted to video games and hostile to authority are a combination the military finds difficult, and often impossible to deal with. Part of this is because most military age Chinese were only children as a result of the three decade long “one-child” policy implemented in the 1980s to prevent overpopulation. This policy came at the same time the market economy and getting rich was legalized. Having only one child suited many Chinese who were making the most of their new economic freedom. The impact of this resulted in three decades to record (often 10 percent) annual GDP growth. China now has the second-largest economy on the planet, and the largest educated middle class of several hundred million well educated and affluent people. China has even become acknowledged as having a modern military armed with world-class weapons.

There were some unexpected and unwanted side-effects. Military-age children of the new Chinese middle class are often not physically fit because the one-child policy made it too easy for the “little-princes” to get whatever they wanted. Too often that was lots of time playing video games and a junk food diet. Over a decade ago the government saw video games as a problem and tried unsuccessfully to ban or limit their use. Video gamers evaded all government efforts to block access to their addictive pastime. There were troublesome side effects in addition to a decline in physical fitness. While military-themed video games were popular, actually being in the military was not. Many gamers who did want to join the military found that they were not physically fit for service. Those who did qualify for military service often turned out to be a bad fit for military life. Many of these only sons had a hard time adapting to military discipline and control.

Fortunately, China reduced the size of its military as it was modernized. Even with conscription along with better pay and benefits, it was difficult to keep personnel in beyond their mandatory two years. This retention problem is common in all modern militaries and the Chinese adapted. More attention was paid to those troops who were enthusiastic about military service. These men were offered additional opportunities which could lead to more demanding jobs and promotions. China wanted to develop a Western-type NCO Corps and were more successful at it than the Russians. Becoming an NCO to lead to a career as an NCO or promotion to officer rank. These policies helped with retention but there was still a problem obtaining suitable recruits.

China recently modified the rules for conscription and implemented policies making service in the military reserve more attractive. The military can now easily change the rules for recruiting, conscription, terms of service and retention related issues. This enabled the military to more easily deal with recruiting and retention problems without having to ask the government to approve every change. The government wants results and the new law was meant to help with that.

Despite these problems with their military, aggressive Chinese behavior against all its neighbors continues, with the Philippines most frequently mentioned. For over a decade China has aggressively sought to take control of the South China Sea, a policy opposed by most nations worldwide. The resistance is most tangible with the military alliance that has formed to support the Philippines from Chinese threats and physical attacks. This alliance now includes major local military powers like South Korea, Japan, Taiwan, Australia and Vietnam. More distant nations like the United States and Britain also back this alliance. Officially, China is not intimidated by this alliance and still undertakes aggressive activity in the South China Sea while never physically attacking anyone. Passive Aggressive diplomacy at its most obvious.

June 9, 2023: In Libya, a few dozen nations have, or are planning to reopen their embassies in Tripoli. China has not waited for its embassy to open and has already negotiated several investment deals, including a $33 billion railroad/bus route transportation project and a license to mine for gold in the south. China is accused of bribing local tribes and others to enable these projects to move forward.

June 6, 2023: China is having problems with Pakistan, the largest export customer for Chinese weapons and the destination for billions in Chinese construction investments. Foreign lenders and investors, including the IMF (international monetary fund), China and Saudi Arabia, have lost patience with Pakistan and are unwilling to take further financial risks there. One financial risk is the $77 billion debt to China and Saudi Arabia. This money is supposed to be repaid between 2023 and 2026. Pakistan doesn’t have the money to make the payments and is trying to negotiate an extension. Until this issue is resolved there will be no more loans or investments from China or Saudi Arabia. A side-effect of all this financial turmoil is high (47 percent) inflation which is felt by all Pakistanis. Another failed investment was the Taliban and various Islamic terrorist groups. The Taliban was supported so it could take control of Afghanistan and show its gratitude by shutting down Islamic terrorists and separatist groups in Afghanistan that attacked Pakistan. That has not happened. The Taliban were also supposed to provide stability for Pakistani investments and trade. China was willing to make major investments in Afghanistan if conditions were stable. That has not happened and Pakistan gets most of the blame.

June 3, 2023: In the Taiwan Strait, China tried to disrupt two foreign warships (an American destroyer and Canadian frigate) carrying out a FONOP (freedom of navigation operation). The American destroyer was in the lead and a Chinese destroyer suddenly veered in front of the American destroyer, forcing the American ship to drastically reduce speed to avoid a collision. The Chinese destroyer missed the American ship by about 140 meters before speeding away. China calls these FONOPs a provocation, even when they occur in international waters in the South China Sea. Chinese jets have used similar tactics against American RC-135 SIGINT (Signal Intelligence) aircraft over international waters. China wants to discourage the use of American SIGINT near the Chinese coast.

June 2, 2023: The economy continues to have problems, especially when it comes to jobs. While the overall unemployment rate was 5.6 percent, it increased for young (16-24) Chinese from a record high 20.4 percent in April to 20.8 percent in May. This many young unemployed men and women is considered politically risky for the communist government. There are already more strikes and protests from workers who have seen their pay and work hours reduced as business owners try to regain a competitive edge with exporters in other countries. Strike activity hasn’t been this high since 2016 and is getting worse.

May 29, 2023: Off the south coast (Hainan Island), the Chinese navy is installing underwater communications cable links with its small land bases in the South China Sea. China currently occupies fifteen reefs and artificial (with dredged up sand) islands. This island building process began over a decade ago and by 2015 the dredging had created seven artificial reefs and small islands for China to begin construction of buildings on six. The three largest (Mischief Reef, Fiery Cross Reef and Subi Reef) eventually had roads, docks, airstrips and aircraft hangars on six of them with construction or reconstruction continuing to the present. By 2022 China claimed to have 5,000 personnel stationed on these islands and most had radars and a growing number of weapons installed. There were shelters for anti-aircraft and anti-ship missiles, as well as hangars for aircraft to protect them from the corrosive effect of salt water. This is something navies with aircraft carriers have to do for aircraft based on the carriers. Without the application of anti-corrosion coating, the aircraft soon develop equipment problems. The salty sea air is a problem for radars and other exposed electronic equipment components. The underwater communications cables will lessen dependence on equipment providing wireless communications. China will frequently contact foreign military aircraft flying over or past one of their occupied artificial islands and warn them that Chinese permission is needed for overflights. So far, the foreign aircraft have ignored these warnings and their governments quietly informed China that firing on any of these aircraft would result in return fire against its island bases. If there is any escalation, China will have to start it and face the consequences. The underwater communication cable makes the islands more capable of surviving wartime conditions.

May 28, 2023: The Chinese developed and manufactured C919 airliner carried out its first commercial flight. This is a major achievement for the Chinese aviation industry. COMAC (Commercial Aircraft Corporation of China) delivered the first C919 to China Eastern at the end of 2022 and the plan was to begin regular passenger service with the C919 in early 2023. Getting the first Chinese designed and built commercial airliner delivered is a big deal for China. For over fifty years China has been working towards designing and building its own commercial airliners. Finally, COMAC, a state-owned firm, did it with the C919 narrow-body twin-engine airliner.

The C919 competes with the latest Boeing 737 model, the 737 Max. The Max ran into serious quality problems after introduction, which was later traced back to a change in management selection as Boeing sought to reduce costs and increase its ability to compete with its major rival AirBus by no longer requiring senior managers to have an engineering, as well as a business background. Fixing that problem will take the rest of the decade to complete. China has noted the problems Boeing had and avoided them. This approach has enabled China to achieve new capabilities much faster and completely than Russia was ever able to do during decades of Cold War-era efforts. After the Soviet Union collapsed in 1991, the new Russia retained a lot of the Soviet bad habits. This explains why China has surpassed Russia in so many areas since 1991. The success of the C919 is another example of this as 1,200 C919s have been ordered and COMAC expects to establish production capabilities of 150 C919s a year within five years. This production rate is similar to those of AirBus and Boeing. Russia is still way behind China and the West when it comes to developing and manufacturing commercial airliners. As impressive as all this is, a lot of the tech inside the C919 has to be imported. China built the airframe and assembled the completed aircraft and that would not have been impossible without access to lots of foreign (mainly Western) components.

May 24, 2023: In the Indian border, China is increasing military buildup in areas where they claim Indian territory. The upgrades include new roads or upgrades for existing ones. China and India carried out the 17th round of talks to avoid clashes between Indian and Chinese troops.

May 19, 2023: China considers the Philippines opposition to Chinese claims to the entire South China Sea as the easiest to brush aside but that plan failed when the Philippines fell back on its mutual defense treaty with the United States and the Americans agreed to cooperate, even though Chinese forces were not actually attacking any of the main Philippine islands and population centers. The Philippines finds itself part of a growing anti-China coalition dedicated to preventing China from exercising control over the South China Sea. This coalition now includes South Korea, Japan, Taiwan, Indonesia and Vietnam as well as the United States, Australia and several NATO nations with navies and lots of trade passing through the South China Sea. To China this coalition is seen as an obstacle, not a defeat.

May 18, 2023: China fined a Chinese comedian nearly $2 million for telling a joke about the Chinese army. The media company that hired the comedian will pay the fine. The comedian apologized.

May 17, 2023: Even before Russia actually invaded Ukraine, China advised that such an operation would be unwise. Russian leader Vladimir Putin ignored that advice, which implied that Putin did not have an accurate assessment of what the Russian military was actually capable of. Chinese leader Xi Jinping was further dismayed when Putin also ignored Chinese calls for withdrawing from Ukraine and limiting the long-term damage to the partnership with China. Successful Chinese leaders tend to be more mindful of historical lessons and seek not to misinterpret them. Russia insists that Ukraine is part of Russia and must be reunited with the motherland. China has a roughly similar situation with Taiwan. Unlike Russia, China does not consider a major attack on Taiwan a suitable solution because of the side effects and risks. The Ukrainian experience has already persuaded most Taiwanese that they could reliably defeat or disrupt Chinese attack plans.

May 16, 2023: Near the northern border of the South China Sea (off Okinawa) a Chinese carrier task force carried out a live fire exercise employing destroyers and frigates that were part of the carrier escort group. China has two operational aircraft carriers with a third on the way.

May 10, 2023: South Korea suffered another outbreak of hoof and mouth disease, the first since 2019. Back then the disease first showed up in North Korea. This one came in via China, which, like South Korea, can afford to cope with these outbreaks. North Korea cannot, especially not just now. Worse, the first cases, which were near the Chinese border, where the virus can get across the rural border areas because it is airborne. Farmers tried to hide the flu by insisting that the cattle deaths were from malnutrition. This early misdiagnosis led to the rapid spread of hoof and mouth. Most (about 80 percent) of North Korean farmers use cattle for plowing and, very rarely as a source of milk and meat (which fetches a high price on the markets) but cattle that die from hoof and mouth must be buried or burned for the dead animal harbors the virus. Killing cattle without government permission is a capital crime in North Korea thus an uncontrolled hoof and mouth outbreak is a potential disaster. Outbreaks of these farm animal diseases are common throughout the region but North Korea suffers the most because they lack the resources to quickly contain the diseases. All their neighbors can deal with the problem and control their losses. North Korea cannot afford the losses and these diseases are more a disaster than just a nuisance in neighboring nations.

May 9, 2023: South Korea and Japan are seeking to link their missile and aircraft detection networks via an American system to provide all three nations with a better and more timely picture of North Korean threats. This has to be via an American intermediary because South Korea and Japan have a difficult time cooperating directly. South Korea and Japan have many reasons to be allies, but have a difficult time making formal agreements to cooperate against North Korean or Chinese aggression. When pressed on this, South Korea points out that because of the widespread antipathy towards Japan for past events, the Japanese must do something dramatic to improve their popularity in South Korea. There have been many efforts to deal with this problem and none have done enough.

May 8, 2023: In Afghanistan the IEA (Islamic Emirate of Afghanistan) government believes there are nearly four million opium and heroin addicts in Afghanistan. The government is destroying poppy crops and arresting about a thousand drug dealers. The major drug cartel operations in Kandahar and Helmand provinces were left alone. China insisted it was more likely to invest in Afghanistan if the IEA did something about the heroin and other drugs produced in Afghanistan and exported to neighboring countries, including China as well as worldwide. The IEA agreed and issued a decree banning farmers from growing poppies, the plant that produced opium, which is further processed into heroin. The farmers, especially in the south (Helmand province), ignored the decree, pointing out that poppies were the most profitable crop they could produce and the heroin cartels had more firepower than the IEA. Just another reminder to be wary of Taliban promises. Money talks. Farmers can obtain 7-15 pounds of opium per acre (8-17 kg per hectare), to create the opium which is refined into heroin. The farmer is paid about a thousand dollars per acre for the opium. But the value of that opium increases fifty times once it is refined into heroin and sold in foreign markets. Most of that increase goes to middlemen (refiners, smugglers and distributors). Most of the increase in value occurs once the heroin gets out of the country, but that still makes the opium and heroin trade the biggest single segment of the Afghan economy.

May 7, 2023: The three nations (China, Russia and Pakistan) that have the most economic activity with Afghanistan are urging the IEA to help Afghanistan as well as the IEA by allowing women to work. Another needed activity is cracking down on the drug cartels and Islamic terror groups that currently operate freely. So far the IEA has ignored these suggestions. In response, the world largely ignored the IEA and Afghanistan.

May 6, 2023: The IEA agreed to allow the Chinese BRI (Belt and Road Initiative) project to extend from Pakistan into Afghanistan. The Pakistan portion of BRI is called CPEC (China-Pakistan Economic Corridor) project. While China is picking up most of the $60 billion cost of CPEC, it means that China owns many of those new economic assets, especially the new port of Gwadar. In early 2017 China and Pakistan signed an agreement granting China a 40-year lease on new Chinese-built facilities at Gwadar. The lease granted China most (over 80 percent) of the revenue brought in by port and free trade zone operations. China usually imports its own workers from China to do most of the work on projects like this. By 2022 China had several hundred thousand Chinese in Pakistan, some of them with their families. Extending CPEC into Afghanistan will involve several billion dollars’ worth of spending in infrastructure and thousands of jobs for Afghans. Chinese engineers and supervisors will manage the work and the IEA will be responsible for keeping the Chinese safe. There are already some Chinese working in Afghanistan and they have to be careful when they travel because kidnapping foreigners for ransom is popular with many Afghan outlaws.

May 2, 2023: The media watchdog “Reporters Without Borders” (RSF) has placed China at or near the bottom of its World Press Freedom Index every year since the Index was created in 2002. North Korea currently ranks last, at 180th place, followed by China (179th), Vietnam (178th), Iran (177th) and Turkmenistan (176th).

April 30, 2023: Iran and Pakistan share borders with each other and Afghanistan. Iran and Pakistan have prosperous and peaceful relationships, but have problems with the new government in Afghanistan. Pakistan was the first nation to officially recognize the new (2021) IEA (Islamic Emirate of Afghanistan) IEA government in Afghanistan. There are still disagreements between the two countries and the resumption of diplomatic relations makes it easier to discuss possible solutions to disputes. Currently the only countries willing to trade with Afghanistan are Iran, China, Russia and Pakistan. Since IEA took over in 2021, Afghanistan has been a much more difficult country to do business in. Iran recognized the IEA and exchanged ambassadors in March 2023. Inside Afghanistan the economic and security situations are chaotic. It is in the interests of Iran and Pakistan to try and remedy this.

April 26, 2023: In southern Congo (Lualaba province), Gecamines, Congo’s state mining company, and China's CMOC mining corporation announced they have reached a new royalty agreement that could re-open the Tenke Fungurume Mining cobalt operation.