Thursday, September 20, 2012

How serious is the China/Japan dispute?

Ambrose Evans-Pritchard wrote a rather alarmist account of the Chinese/Japanese clash over the Senkaku/Diaoyu Islands. He drew parallels with an event in 1911 that eventually led up to World War I:
This is a calibrated crisis to test the strength of the US alliance with Japan. It reminds me of the Agadir Crisis in 1911, when Kaiser Wilhelm sent the warship Panther to Morocco to prevent French annexation, though there were a series of such seemingly preposterous episodes.

In a strict sense, the Kaiser was correct. The French were violating earlier accords. But his real purpose was to probe and weaken the British Entente with France (not quite a formal alliance) by picking on an issue where London had little natural sympathy for French actions.

The Japanese have walked straight into the trap. In fairness to the Democratic Party of Japan, it interceded to buy three of the five disputed islands to head off an even more dangerous move by the nationalist governor of Tokyo, Shintaro Ishihara.

And in fairness to Chinese government, they have sent paramilitary vessels to the islands rather than a naval squadron. That is a crucial difference.
He indicated that this incident could draw the US into a conflict that it doesn't want:
Washington guarantees Japan’s defence under its US nuclear umbrella. It uses military bases on Japanese soil as an unsinkable aircraft carrier. It works hand in glove with Tokyo in a tight military alliance.

The question is whether Washington is really willing to uphold the Japanese alliance as the going gets tougher. Will it let America to be led by the nose by Japanese nationalists into a clash that is not obviously – or immediately – in US national interest?
On the surface, this sounds very scary. Also scarier the account of how an angry Chinese mob attacked US ambassador Gary Locke's car:
A crowd of around 50 Chinese protesters surrounded the official car of the United States ambassador in Beijing, who escaped unharmed, a State department spokesman said.

The melee occurred outside the gates of the US embassy on Tuesday and security guards had to intervene to protect Gary Locke, 62. The protesters caused minor damage to the vehicle, a statement from the embassy said.

“Embassy officials have registered their concern regarding today’s incident with the Chinese Ministry of Foreign Affairs, and urged the Chinese Government to do everything possible to protect American facilities and personnel,” the statement said.
That headline sounds even more alarmist. Then consider this account buried in the same report [emphasis added]:
Meanwhile, the protests against Japan have now evaporated. The road outside the Japanese embassy in Beijing has reopened and there was no sign of any discord.

“It seems the protests in front of our embassy have subsided,” the Japanese embassy said in an email to Japanese citizens.

Beijing police sent out a mass text message telling the public not to stage any more protests, according to the Japanese embassy.
Then ask yourself, how serious is the Chinese government about this dispute if they are trying to rachet down the protests against Japan?

This is a tempest in a teapot. When tensions between China and Japan subsides, global risk premiums will fall as well and asset prices will respond accordingly.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


WimpyInvestor said...

Somehow I have a gut feeling (no data to support) that if the situation gets even worse:

1. Rich Chinese (include military and government officials) move money out of China.

2. Rich (overseas) Japanese move money into Japan to fund conflict with China.

Long EWJ, short FXI?

Any thoughts?

Anonymous said...

The Chinese govt. is deliberately escalating the dispute with Japan to distract attention from a leadership transition that is not going well (as evidenced by the Bo Xilai saga and the disappearance and reappearance of Xi Jinping).

I think the dispute will end once (if?) the transition is over.