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Oil-aholic aggression

In the late 1980s, shortly before the first Iraq War, a client of mine, General Ho (he had been general under Chiang Kai-shek), complained that we 'Wall Street' people didn't take political and military trends sufficiently into account when analyzing economic and financial trends. Personally, I follow geopolitical trends quite closely, but I am aware that the short-term momentum players, who dominate the financial markets, pay little attention to these trends, since it is their belief that any economic, political, or social factors will be reflected in the market action of the various asset classes. A hawkish leadership in the US, the war in Iraq, terrorism, soaring commodity prices, the economic rise of China and its thirst for resources (oil in particular), several recent articles concerning the growing tensions between Japan and China, and instability in Saudi Arabia all suggest to me that global geopolitical tensions are on the rise and could, at some point in the future, have a very negative impact on the global economy and financial markets. Today we focus on China. Last year, China replaced Japan as the world's second largest importer of crude oil. Soon after taking over power, a year ago, President Hu Jiantao and Premier Wen Jiabao decided that, "securing reliable supplies of petroleum and other scarce resources was not only crucial to sustained economic development, but integral to China's national security."

According to Willy Lam, a Hong Kong-based specialist in Chinese politics and foreign policy, China's thirst for oil "is the real story behind Beijing's worsening territorial dispute with Japan over the group of supposedly oil-rich islands claimed by China as the Diaoyus, and by Japan as the Senkakus. That same concern also explains the recent flare up in China's dispute with some South East Asian nations over their claims to the resource-rich Spratly Islands in the South China Sea. It's a thirst that threatens to pit China against its neighbors, despite Beijing's avowed policy of 'peaceful emergence' in the global community" In addition, reliable, firsthand sources in the oil industry have told me that, on numerous occasions, when Chinese oil companies have wanted to acquire oil concessions around the world, the American State Department has interfered and tried to prevent such acquisitions.

It may initially seem far-fetched, but with all these threats, it's not hard to see why China might want to invade Taiwan.

To anyone who looks at a map of the region, the reasons are obvious. Taiwan's strategic location makes it extremely valuable. The Taiwan Strait is a critical sea lane, and taking Taiwan would allow China to choke off international commercial shipping, especially oil, to Japan and South Korea, should it ever decide to do so." Wendell Minnick, Jane's Taiwan correspondent, published a disturbing article recently. Under the title "The year to fear for Taiwan: 2006." (Most analysts believe that China's military strength will exceed Taiwan's defense capabilities by 2005, hence 2006 is the year to fear.)

Minnick postulates that should China decide to take this route, it would be unlikely to be a large-scale, Normandy-type of amphibious assault, but involve something more akin to a "decapitation strategy".

Minnick explains that "decapitation strategies short circuit command and control systems, wipe out nationwide nerve centers, and leave the opponent hopelessly lost. As the old saying goes, 'Kill the head and the body dies.' All China needs to do is seize the center of power, the capital and its leaders." According to Minnick, US Defense Department officials are now reexamining China's military threat to Taiwan, and with a potential decapitation strategy now believed to be in the works, "US defense officials are beginning to think what had once been unthinkable: losing Taiwan in only seven days." The Taiwan takeover scenario would involve the initial deployment of China's Special Forces and rapid deployment forces, combined with air power and missile strikes. The second phase of the decapitation operation would begin after airborne forces had captured Sungshan Airport. With a secure landing strip, China could fly in elements of its troops with the air support of its 1,000 bombers and fighters. Minnick says: "If the Chinese assaulted the capital, Regular Taiwanese army units, all based outside of Taipei, would take hours, perhaps days, to respond. It would be up to the MPC to hold the Chinese back until reinforcements arrived - which might be never..." Pre-positioned Special Forces, smuggled into Taiwan months before, would assassinate key leaders, and attack radar and communication facilities around Taiwan, a few hours before the main attack. Taiwan's navy would have little to do in this war scenario, except sink like rocks. Taiwan's air force would be kept busy trying to repair runway damage caused by the estimated 500 short-range ballistic missiles deployed along China's coast and targeting Taiwan.

Once Taipei was captured, a new government chosen by Beijing would be sworn into office. There would be plenty of Taiwanese politicians to choose from. It is well known there are many pro- China legislators who have investments in China and more than a few who have had private meetings with Beijing officials. There would be too many pro-China people in the US State Department undefined privately relieved the Taiwan issue was finally settled undefined to say anything in Taiwan's defense.

With the new government inaugurated, the new president would declare an end to all hostilities with China. During a nationwide televised speech, the new president would order all military forces to stand down. With the pro-China sentiments running high in the Taiwan military, it is likely that most would grudgingly accept the new president. Normally, I don't take futuristic war scenarios too seriously, but very well informed sources with close connections to China's military leadership have heard first-hand that, if Taiwan were to push for independence, China would have no alternative but to invade the "renegade province". Taiwan is strategically important for the US and Japan, as Minnick pointed out above, but from the Chinese perspective it is vital. After all, whoever controls the Island of Taiwan also controls the shipping lines in the Strait of Taiwan. Thus, an independent Taiwan, with a hostile government, could block the supply of oil to China, which would cripple the mainland, both militarily and economically.

This vulnerability is China's Achilles heel. Rest assured that the administration will consider every option to ensure China's continued growth, including military operations.

Regards,

Marc Faber
for The Daily Reckoning

Editor's note: Dr. Marc Faber, editor of The Gloom, Boom and Doom Report, has been headquartered in Hong Kong for nearly 20 years, during which time he has specialized in Asian markets. Dr. Faber is a member of Barron's Roundtable and a major contributor to:

Strategic Investment

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