An Unnavigable Path
1 May 2021
On this, the day in which Orthodox Christians celebrate the Holy Fire (in Greek, Ἃγιον Φῶς, “Holy Light”) at the Church of the Holy Sepulcher in Jerusalem, I thought it might be fitting to reflect on the light we might shed and heat we might bring in response to Chinese military aggression against Taiwan or other democracies, like India, Japan, or even Australia.
While gaps in U.S. and Allied layered deterrence remain, China lacks the economic, diplomatic, and military capacities to mount an invasion OR maintain a blockade of the Strait of Taiwan AND simultaneously prevent, for any sustained duration, a blockade by allied forces of the Strait of Malacca, the Strait of Hormuz, and/or the Panama or Suez Canals, which is, of course, to our strategic advantage. Moreover, China's ability to fight a two-front war — for instance, against both Taiwan and India — remains limited.
China's production-driven economy is inherently fragile to a disruption in inputs… the present value of the Chinese economy's constituent sectors is largely a reflection of the expectation that future production targets will be met. In other words, China's economy is highly “expectation-dependent.” This is why they struggled to their feet so quickly after the pandemic, acting as if everything was fine. “'Tis but a flesh wound,” they told global markets.
Sun Tzu said, “all warfare is based on deception” and goes on to advise his student strategists thusly: “when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near. […] If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them.”
Any assessment about the Chinese regime’s military intent must begin with the understanding that they're attempting to deceive multiple audiences in multiple dimensions simultaneously in the context of their risk-fragile, highly-managed, production-driven, expectation-dependent economy:
Chinese citizens must be deceived generally about the present so as to induce them to expect a future of endless growth, a necessary prerequisite for maintaining domestic social stability generally, and more specifically for maintaining a birth rate sufficient to signal to markets that China can overcome its 421 problem and its debt-saddled SOE problem. Without a rosy view of the future and a belief in the Party to deliver endless, unsustainable growth, Chinese citizens may well revolt, if not outrightly, then by “laying flat.” https://time.com/5523805/china-aging-population-working-age/
Chinese consumers and borrowers must be deceived about the sustainability of the regime’s economic model so as to deceive them about their own prospects for future prosperity, maintaining a level of consumer confidence which projects optimism (but not exuberance) and supports sufficient (but not excessive) levels of spending and borrowing. https://www.statista.com/statistics/271697/consumer-confidence-in-china/
Chinese savers must be deceived about the solvency of Chinese state-owned enterprises and banks, so as to dissuade them against reverting to the formerly-widespread practice of holding their savings in physical currency, thereby ensuring adequate reserves for Chinese lenders to extend credit… an increasingly-necessary means for them to service their own existing debt. https://data.worldbank.org/indicator/NY.GDS.TOTL.ZS?locations=CN
Chinese bond holders must be deceived about the serviceability of corporate debt in negative-, neutral-, or low-growth scenarios so as to dissuade them against liquidating those holdings, as that would drive down bond prices.
Foreign investors — particularly central banks, sovereign wealth funds, and institutional investors — must be deceived about the aforementioned, so as to deceive them about the composition and real net present value of China’s foreign-exchange reserves (a state secret). These reserves are administered by the ironically-acronymed State Administration of Foreign Exchange (SAFE), which is subordinate to the China Investment Corporation (CIC), itself subordinate to the State Council. (Aside, CIC is a partner w/ France’s Engie, w/ America’s Carlyle Group, w/ Luxembourg’s CVC, et al. in GDF Suez, in Neptune Energy, etc.). The opacity of China’s reserves is of critical importance to obscuring the actual magnitude of general systemic risk and specific counter-party risks inherent in both inbound and outbound investments. This obscured risk advantages CIC and its domestic partners in their financial risk arbitrage strategies, disadvantages foreign investors in theirs, and facilitates the political management of major financial counter-party risks, which, were they exposed, might catalyze a devastating chain-reaction of downgrades, a global market liquidity crisis, and a severe solvency crises at banks dependent on the Ponzi (likely such as Deutsche Bank). This political management manifests itself most tellingly in the deferential foreign policies of countries home to TBTF banks and other entities with high levels of financial risk exposure to the Chinese regime.
Foreign governments must be deceived about the regime’s willingness to engage in overt military aggression, and its capacity to do so without precipitating a cataclysmic economic implosion. Overt diplomatic aggression complicates the political management of financial risks, and overt military aggression would nullify it completely. Thus, the regime would have to switch overnight to a war economy to generate sufficient levels of economic activity to meet production-driven GDP targets in the hopes of maintaining the illusion of solvency to those still willing to trade with the regime, who would be exposing themselves to even more acute levels of risk after such an act of aggression.
Foreign militaries must be deceived about the imminent nature of aggression so as to induce pressure on their governments to make political concessions, about the possible targets of said aggression so as to induce them into overextending themselves, and about possibility of deterrence failure where overmatch is extant so as to induce a misallocation of resources and inattention to gaps in other layers where deterrence may be insufficient.
Foreign populations must be deceived about the general strength and untouchability of the regime so as to induce reluctance about the imposition of legal, financial, diplomatic, and other non-kinetic costs on the regime for its economic predations, violations of international law inc. human rights atrocities, symbiosis with transnational criminal organizations, negligence in biocontainment or wet market sanitation leading to the pandemic, and so forth.
Foreign ratings agencies must be deceived about the aforementioned structural economic issues, about the possibility of the aforementioned political liabilities being transmuted into financial claims, about the impenetrability of Chinese sovereign immunity and its general extension to state-owned enterprises, about the unseizable of nature of state-owned assets in the course of civil and criminal forfeiture proceedings, etc.
And so on…
We are, at present, headed in the general direction of successful deterrence which, should the aforementioned deceptions be dispelled, might lead to conditions favorable to democratization of the Chinese mainland (Option A). Should the aforementioned deceptions be accommodated, those with financial exposure might fantasize about the possibility of politically-managed Western decline in the context of sustained competition and internationally-imposed constraints (Option B), but such a scenario only provides the regime time to prepare for “the day after” its inevitable economic collapse as it makes performative gestures on topics such as climate.
Pursuing Option B with any seriousness is inadvisable, as the regime cannot be expected to adhere to future agreements (i.e., on climate) when they’ve violated previous agreements with impunity. Moreover, our current advantages in deterrence will erode as the regime seeks to integrate itself into a post-pandemic green economy while accelerating the development of asymmetric military offsets. Pursuing this option with any seriousness may trigger highly-complicating interventions by non-state actors and third-parties, like banks, corporations, and sovereign wealth funds, as they lose faith in US grand strategy. Ergo, it remains imperative to dispel the aforementioned deceptions wherever possible, to increase our deterrence capabilities and capacities, and to maintain pressure on the regime to honor its commitments pursuant to the UN Charter, the UDHR, the ICCPR, etc., in order to steer events towards Option A.
The most likely risk, should the Free World behave in a rational manner by continuing to move towards rendering unnavigable all future paths for regime survival (Option A), is that the regime might seek to heighten military tensions at the margins — i.e., by seizing an island, stoking some border conflict, conducting a false flag which might be used as justification for military flexing, by encouraging third parties (like North Korea) to generate a crisis-on-demand, etc. — in order to create pressure for political engagement along the path of Option B.
To avoid such a scenario, all efforts must be made to strengthen layered deterrence, especially at sea.
As long as we hold fast to Alfred Thayer Mahan’s imperative of controlling the choke points, overt kinetic aggression against Taiwan itself, Japan, or India will likely quickly escalate to the legally-permissible imposition of blockades, embargoes, and other measures to bring China’s maritime enterprise to a halt.
The ongoing pandemic, last August’s deadly $15bn explosion of ammonium nitrate seized from the MT RHOSUS, the recent blockage of the Suez Canal by the EVER GIVEN, and recent attacks on the Israeli vessels HELIOS RAY and HYPERION RAY have caused the shipping industry — from ship owners, to operators, to longshoremen, to insurers and re-insurers — to reassess the risks posed by black swan events at key ports and around key choke points, particularly as it relates to cargo to and from China, which itself carries an inherent risk. It appears commercial shipping operators are, by and large, prepared to (or are preparing to) batten down the hatches to weather such disruptions. Certain parties likely may have already purchased (or are preparing to purchase) insurance against such disruptions.
Moreover, although the Treaty of Paris’ Declaration Respecting Maritime Law effectively prohibited privateering and other certain acts, it did so with the caveat that “the present Declaration is not and shall not be binding, except between those Powers who have acceded, or shall accede, to it.” The list of parties may be found here: https://ihl-databases.icrc.org/applic/ihl/ihl.nsf/States.xsp?xp_viewStates=XPages_NORMStatesParties&xp_treatySelected=105
It's not outside the realm of possibility that certain nations may have already signed, or intend to sign, letters of marquee and may have prepositioned them in sealed envelopes, ready for prompt issuance to certain navy-commanding heads of state, the owners of certain companies, the operators of certain vessels, and so forth, licensing them for privateering activities in the event said nations’ interests come under attack or under imminent threat, i.e., in the event of an invasion of Taiwan or a naval confrontation in the Indo-Pacific. These are the types of prudent preparatory actions that nations might take when it appears that a dragon, like China, may lash out at its neighbors.
The risk of deterrence failure, which will be catastrophic for the Chinese regime, is compounded by informational asymmetries concerning capabilities, capacities, willingness to retaliate in proportionate or disproportionate ways, what costs such retaliatory actions might carry, the potential for third-party intervention, etc. Ergo, in addition to dispelling the aforementioned deceptions wherever possible, strategic clarity is advisable in order to prevent miscalculation by the Chinese side. Through its deceptions, China’s regime has charted an unnavigable path to the future, and this will remain the case unless massive, substantive political and economic reforms are put into effect. Through the deepening darkness, we can and must take heart knowing that we still have within our reach a flame of truth to enlighten billions of minds and set the world on fire.