April 17, 2016: While the Chinese government apparently tried to keep this quiet, Hong Kong media have spent weeks doing stories about high quality counterfeit Chinese currency showing up in China. This began in late 2015 and experts seem to agree that the most likely source was North Korea, which has been turning out similar high-grade counterfeits of American and Japanese currency for decades. In North Korea counterfeiting currency is a government monopoly. Since 2009 foreign (mainly Chinese and American) currency has been preferred in North Korea because the local currency is seen as worthless and unpredictable. The counterfeit Chinese 100 Yuan notes (worth about $13) began showing up in North Korea earlier in 2015 and moved into China via unsuspecting merchants and tourists. Officially the North Koreans deny any responsibility for the fake currency and always have. At the same time North Korea has openly said it will strike back at China for enforcing UN economic sanctions. North Korea has long considered counterfeiting currency as a weapon. China is now blocking essential (in terms of obtaining foreign currency) North Korea exports like coal and iron ore. Imports of aviation fuel are also blocked since early April. To North Korean leaders, counterfeit Chinese currency helps balance the books.

The Chinese anti-corruption campaign continues, which is making a lot of senior officials nervous. That’s because no one obeys all the regulations and laws. That started in the 1980s when the senior leaders told key officials to do whatever they had to do to get the economy going under free market rules. At that time (and to a certain extent today as well) China was technically a communist command (centrally planned) economy. So many leaders who are (as far as they can tell) not corrupt are now going by the rules in all things and suddenly a lot of economic development is not happening. The government is under pressure to make it official that China is no longer a communist state (at least in terms of its economy) and revoke all the unused (since the 1980s) laws and replace them with ones that legalize a free market economy. The government is unwilling to do that because many key leaders still like the illusion that China is a communist state. Meanwhile some banking officials continue to exploit this ambiguity to make China the center of global money laundering. This sort of thing is technically legal in China as long as no Chinese laws are broken. Foreign laws don’t count, that’s the communist way.

Outspending The Enemy

China has triggered an arms race in South Asia. China’s defense spending ($214 billion) is four times larger than India while Pakistan ($7.5 billion) is one seventh the size of India’s. That is why Pakistan is such a close ally of China. Defense spending in South Asia has risen nearly 50 percent since 2001. The main cause is the aggressive territorial claims of China. Indian defense spending rose less than one percent in 2015 (to $51 billion) but that was enough to put in sixth place among national defense budgets worldwide. India is increasing defense spending six percent in 2016 (to about $54 billion). This is why American and Indian relationships are growing stronger.

These relationships influence who exports what weapons to who. While China continues increasing their weapons exports these only account for about six percent of weapons exports. Meanwhile the United States and Russia, long the two biggest weapons exporters have increased their combined share of arms exports from about 50 percent to nearly 60 percent. The growth of American, Russian, Chinese and Israeli exports comes largely at the expense of European exporters. Thus China (now six percent) has replaced Germany (now five percent) as the number three exporter. While Russia accounts for a quarter of all arms exports half those exports go to India and China and both nations are a shrinking market for Russian weapons. The Indians have been buying more Western weapons and found the high prices worth of it because of the superior performance, reliability and tech support. China has similar problems with most (about 70 percent) of its sales going to three South Asian nations (Pakistan, Bangladesh and Burma) that have fragile economies and are constantly tempted to follow the Indian example and buy the more capable (and expensive) Western stuff. In contrast the biggest customers for American arms are the Arab oil states, who account for about a quarter of American exports but are much more credit-worthy (and satisfied) customers. Beyond that American sales are to a much larger number of countries.

April 14, 2016: The U.S. announced that it will be operating joint patrols with Filipino ships and aircraft into parts of the South China Sea claimed by China. The U.S. is also having warships and military aircraft visit the Philippines on a regular basis. In addition there will be more joint training operations with Filipino forces in and around the Philippines. The U.S. also says it believes China has stationed 16 jet fighters on Woody Island in the South China Sea. Earlier in the year the U.S. revealed that China had quietly installed a battery of HQ-9 long range antiaircraft missiles on Woody Island. The HQ-9 is roughly equivalent to the U.S. Patriot. This deployment is apparently an answer to increasing American flights through international air space in the South China Sea that China now claims as Chinese territory. While the presence of the HQ-9 will not stop American military flights, commercial aircraft will probably comply with Chinese demands that they ask for permission before flying through the South China Sea. To emphasize that point China also began operating navy warplanes (J-11s and JH-7s) from the air strip on Woody Island. Throughout 2015 the airstrip and facilities on Woody Island were upgraded to handle warplanes. Now those facilities have become extensive enough to allow the stationing of a squadron of J-11s (an illegal Chinese copy of the Russian Su-27.)

Along the Indian border Chinese and Indian officers met in two different places to provide media with some proof that the two countries were doing something to reduce the tensions along the border.

April 11, 2016: South Korea revealed that a North Korean colonel had defected to South Korea in 2015. The colonel worked for military intelligence, more specifically the GBR (General Reconnaissance Bureau). The GBR operates agents in South Korea and China. In 2015 the GBR got permission from China to send over a hundred agents additional agents into China. These men were trained them to speak better Chinese and how to operate under cover in China. These GBR men were to seek out defectors in China, kidnap them and return them to North Korea (where they go straight to a labor camp, possibly for life). This program was meant to make North Koreans less willing to flee the country. The GBR teams were told to concentrate on those defectors attempting to get to South Korea (via South Korean embassies in places like Thailand). China tolerates GBR agents as long as they do not carry weapons or create much fuss. This policy is apparently changing as China put more pressure on North Korea. Another South Korean report told of a North Korean diplomat who defected in early 2015. But the GBR colonel is the more important defector. The GBR was formed in 2009 by combining several other intel agencies and that required a lot of data to get reorganized and combined. GBR handles a lot of Cyber War operations and provides information for attacks on South Korea. This includes the 2010 attacks. Getting an GBR insider is a big deal as it will not only provide more details on who is doing what in North Korea but what exactly is going on between China and North Korea. .

April 9, 2016: China is not happy with the EU (European Union) openly criticizing Chinese claims in the South China Sea. The Europeans say such claims are an economic threat to them.

April 8, 2016: The U.S. announced the arrest of an American naval officer who is accused of spying for Taiwan or China. That appears to be unclear yet but the man was definitely passing classified info onto someone. The accused officer, Lt. Commander Edward Lin, was born in Taiwan but grew up in the United States, joined the navy and has become an expert on the sensors and electronics used on EP-3E electronic surveillance and P-8A maritime patrol (and anti-submarine) aircraft.

South Korea announced that 13 North Koreans had reached South Korea and were accepted for the refugee aid and adjustment program that would help them adjust to life in South Korea. A few days later China dropped a major bombshell when it admitted that, for the first time, these North Koreans were able to legally leave China. The 13 were all slave laborers in one of the many Korean restaurants North Korea operates in China. Sanctions, and growing Chinese hostility to all things Korean led to most of these workers not being paid for over a month. The workers are officially paid the prevailing wage but the North Korean government takes over 80 percent of it in “taxes”. Even so these North Koreans are making more than they would back in North Korea and send most of what they get back to their families. The workers are constantly watched and not allowed to freely move outside their cramped living quarters or the place where they work. Somehow these thirteen got their North Korean travel documents and fled. What was really surprising is that this is the first time China has not cooperated with North Korea to catch and return such “traitors.” This is a big deal because nearly all the 25,000 North Koreans who made it South Korea did so via China. If the Chinese continue this lenient policy a lot more North Koreans will seek to escape via China and the North Korean leaders will not be amused as this sort of thing is seen as an act of war.

April 7, 2016: South Korean experts are inclined to believe recent North Korean claims that they have developed a workable nuclear warhead for ballistic missiles. There is still no real proof North Korea has a working nuclear warhead that can survive use on a ballistic missile. If true, this warhead is bad news for China and Russia as well the United States, South Korea and Japan. Everyone understands that North Korea is likely to use workable nukes to bully anyone who does not cooperate with them. This is the main reason China and Russia have been willing to go along with more sanctions against North Korea after years of not cooperating. China has now officially banned mineral (mainly coal and iron ore) imports from North Korea. This is the largest source of foreign currency for North Korea and worth over a billion dollars a year. By going along with sanctions China and Russian now have a North Korea that has now become visibly more hostile against its two neighbors and former staunch allies. By officially backing the sanctions China is merely going along with Chinese public opinion which has, for years, been very anti-North Korea. To the average Chinese the North Korean government was greedy, unreliable and hopelessly corrupt. Until recently China kept these sentiments out of the state controlled media. That has now changed.

April 6, 2016: China is trying to portray a month old incident involving Filipino fishermen near Scarborough Shoal as Filipino aggression. The Filipino fishermen involved tell it differently and describe how they were forced from their traditional fishing areas by Chinese warships on March 5th and 6th. One fishing boat shows damage from being rammed by a larger (Chinese coast guard) ship. China complains that they felt threatened by fisherman waving knives and firebombs at nearby Chinese coast guard ships and demand that the Philippines apologize. This is not an isolated incident, even for Scarborough Shoal. In 2015 China left buoys at Scarborough Shoal to warn non-Chinese ships to stay away but Filipino fishermen not only ignored the warning but towed the buoys back home and turned them over to police. In response Chinese coast guard ships visited Scarborough Shoal more frequently with orders to force foreign fishing boats they encountered away from the area. Scarborough Shoal is 220 kilometers from one of the main Filipino islands (Palawan) and 650 kilometers from Chinese territory (Hainan Island) and according to international law is Filipino. The Chinese coast guard has a reputation for ignoring international law and illegal activity by Chinese ships. It appears that China encourages its coast guard to do whatever they can get away with to drive foreign fishermen from their traditional fishing grounds that are now claimed by China in the South China Sea. It is believed that China is preparing to create an artificial island at Scarborough Shoal and station military personnel there. Meanwhile it only wants Chinese fishing there.

April 5, 2016: China officially imposed new economic sanctions on North Korea and, unlike previous Chinese efforts in this area, this time China is definitely enforcing the sanctions. China has been increasingly unhappy with North Korean attitudes. One of the more recent annoyances came during March when China became aware of a document recently published by the North Korean government that justified the use of nukes against China because of the increasing diplomatic and economic pressure on North Korea to halt development of nuclear weapons and ballistic missiles. If China cuts off all its economic cooperation with North Korea the North Korean economy (or what is left of it) collapses. China is embarrassed by how badly its investment in North Korea has turned out. During the Korean War (1950-53) China sent over a million troops to rescue North Korea from defeat. China lost half a million dead. While Russia paid to rebuild and sustain North Korea from 1954 to 1991, since then China has been the main source of assistance. While not as generous as Russia China has become North Korea’s only ally and main source of trade, investment and much more. That is all coming to an end and China knows it will be seen as a major defeat for China. At this point there seems to be no way to avoid it.

April 4, 2016: Japan announced that a new naval task force to patrol and defend the Senkaku Islands was operational. This force consists of ten new 1,500 patrol ships and two older vessels carrying helicopters. This comes in the face of increasing Chinese aggression. In late 2015 armed Chinese warships entered Japanese territorial waters (within 22 kilometers one of the Senkakus) for the first time. China has been increasingly aggressive about sending coast guard and navy ships into waters around the Senkaku Islands that both China and Japan claim to own. These are actually islets, which are 167 kilometers northeast of Taiwan, 360 kilometers from China and 360 kilometers southeast of Japan's Okinawa Islands and have a total area of 6.3 square kilometers. Taiwan also claims the Senkakus, which were discovered by Chinese fishermen in the 16th century, and taken over by Japan in 1879. They are valuable now because of the 380 kilometer exclusive economic zone (EEZ) nations can claim (via an international treaty) in their coastal waters. This includes fishing and possible underwater oil and gas fields. Technically parts of the Senkakus fall within the EEZs of China and Taiwan as well as Japan. But Japan has controlled the Senkakus for over a century and says it will use force to retain possession.

April 3, 2016: Japanese warships (a sub and two destroyers) arrived in Subic Bay to participate in training exercises and announced that the two destroyers would later move through South China Sea areas China claims are now Chinese territory. This is the first time since 2001 that Japanese warships have visited the Philippines. After about a week these three Japanese ships will visit Vietnam. Because of changes in their constitution Japan can now have its armed forces work more closely with the Philippines and the United States to confront China in the South China Sea.

April 2, 2016: During the first three months of 2016 South Korean exports to China declined 15 percent mainly because of a Chinese recession.

March 31, 2016: Vietnam seized a Chinese tanker for intruding into Vietnamese waters. This is meant to remind China the Vietnam can do what China has long been doing to Vietnamese ships as part of the ongoing resistance to Chinese claims to own the South China Sea.

March 29, 2016: Changes in the Japanese constitution took effect and now Japan can send troops abroad for peacekeeping and for joint defensive operations. The new rules also allow Japanese troops to do whatever they must if an ally is attacked. This means allies that Japan has a mutual defense treaty with, mainly the United States. With this Japan has made a fundamental change in its post-World War II constitution by declaring that its military forces could engage in offensive (attacking) operations while outside of Japanese territory. Attacking was always allowed once an invader had entered Japanese territory, as Japan never agreed to not defend itself. But the post-World War II constitution banned overseas offensive operations, which Japan had been engaged in for decades before it attacked the United States in 1941. China sees this Japanese decision as an aggressive act aimed at China. Japan sees it as a necessary move to deal with increased Chinese aggression.

March 23, 2016: Thailand has decided back out of a deal with China to jointly build a major new railroad. This was a solution to a disagreement over construction costs for a $4.8 billion rail line from Bangkok to the Chinese border in the northeast. Thailand will build a rail line of their own design and finance it themselves. There were many disagreements on details of the entire 900 kilometer rail line from Laotian border to Bangkok. China was to supply most of the $23 billion cost and construction was expected to be complete by 2021. This is part of a larger project to build a “Shanghai to Singapore” high speed rail line. This would cut the cost of travel (currently mainly by air) for Chinese by more than half and increase the number of Chinese tourists to Thailand by at least two million a year. The Chinese were too insistent on doing the 900 kilometer long rail line their way and resisted Thai suggestions and preferences. Finally the Chinese were told that the two years of negotiations were at an end and that Thailand would proceed on its own.

March 22, 2016: Taiwanese Coast Guard arrested 41 Chinese fishermen for illegally operating in Taiwanese waters. Chinese fishermen have become increasingly bold in their poaching activities, in part because their government will often rescue them if caught.