China’s Gamble

China is in a tricky position. They aspire to be a superpower, but that aspiration requires them to take certain steps — majority of which fall under foreign policy.

In late October, the United States sent its guided missile destroyer, the USS Lassen, into the South China Sea. The destroyer passed the 12-nautical mile “boundary” and entered waters that China claims as its territory.

The world watched. How would China react?

On October 15, weeks before the Lassen moved close to China’s artificial islands, a naval officer in the People’s Liberation Army (PLA) warned that they would “deliver a head-on blow to any foreign forces violating China’s sovereignty”.

The expectation was that China would fire warning shots or surround any vessel that infringed on their sovereignty.

Weeks later, the USS Lassen moved passed the 12-nautical mile boundary without any obstacle or limitation. China’s response was minimal. They shadowed the USS Lassen with their own guided missile destroyer and naval patrol ships. The US Ambassador was also summoned.

The decision to send the USS Lassen was a calculated geopolitical decision by the United States to test China, who had two options at that point: i) fire and risk war or ii) don’t fire and risk loosing face.

The choice to pick the latter option meant that China publicly accepted that its artificial islands in the South China Sea have “loose sovereignty” — they are not yet as important to China’s territorial integrity as mainland China or Hong Kong.

The problem is, China can’t continue down the same path of hoping words and warnings will stop other countries from pursuing their own geopolitical objectives.

The United States has to soothe any worries that allies such as Japan and the Philippines have over China’s growing military clout.

China has to show that it is a formidable power, capable of leading a new “Asian” order.

The United States has warned that more patrols are likely. Even Australia is debating patrols in the South China Sea. The question now becomes, how will China respond to repeated “incursions” on their territory?

Will China risk war with the United States and by extension Japan and NATO?

Or, will China respond via other avenues, such as:

Cyber War: When Xi Jinping recently visited the United States, the main topic was cyber attacks. The most controversial is the recent hack on the Office of Personal Management (OPM) which exposed millions of current and former government workers.

Repeated incursions in the South China Sea by the West may push China to launch more devastating cyber attacks on Western multinationals and governments. Crashing a stock market or power grid or exposing the product design or future strategy of a multinational are all possible.

Selling US Debt: China is the largest foreign holder of US debt, holding approximately $1.25 trillion in treasury bills. In early-September, it was reported that Chinese foreign reserves had dropped to $3.6 trillion, of which the decline was speculated to be due to selling off US Treasury holdings. If tensions spike between China and the US in the South China Sea, China could begin selling off US Treasuries at record pace and limit future purchases, contributing to a destabilization in the US economy as foreign lending dries up.

PetroRenminbi: China is the largest trade nation in the world and is becoming the most important energy purchaser in the Middle East and Africa. Increased tensions in the South China Sea can push Beijing to begin actively proposing the Chinese Renminbi as an alternative currency to $US for oil/natural gas purchases.

All it will take for Renminbi to become a viable energy currency is one oil exporter signing on, like Angola where China is the biggest oil importer.

Syria: Already, China is reported to be sending military advisors to Syria, which will then be followed by PLA troops. Deeper division between Beijing and Washington can mean more strategic agreements between China, Russia and Iran, of which helping sustain Assad in Syria will be a major objective. China can send soldiers, fighter jets, financial aid, refugee assistance, infrastructure rebuilding and more.

American Corporations: American multinationals have been the target of several “crack downs” by the Chinese government. Chinese companies were instructed to stop using consulting services from McKinsey and Boston Consulting Group while Windows 8 was banned from government computers. A heated South China Sea may serve as fuel for another round of crack downs against American corporations. The justification will be breaching anti-trust or anti-competition laws, exacerbating pollution problems or being a “threat” to national security.