Sunday, April 5, 2020

SER 10 (A) OF X SERIALS (Infectious Diseases) :- How Can The iNDIAN Economy Recover From COVID-19

SOURCE:
( A )  https://www.youtube.com/watch?time_continue=243&v=-BRlhQ-F2gE&feature=emb_logo

( B )  https://marcellus.in/blogs/the-foundations-of-indias-economic-recovery-are-in-place/

( C )  http://www.bbc.com/travel/story/20200405-covid-19-how-global-economies-will-recover-from-coronavirus

INDEX

SER 12 (D) OF X SERIALS (Infectious Diseases) VIRUS WAR

https://bcvasundhra.blogspot.com/2020/04/ser-12-d-of-x-serials-infectious.html

SER 12 (C) OF X SERIALS (Infectious Diseases) VIRUS WAR

https://bcvasundhra.blogspot.com/2020/04/ser-12-c-of-x-serials-infectious.html

SER 12 (B) OF X SERIALS (Infectious Diseases) VIRUS WAR
https://bcvasundhra.blogspot.com/2020/04/ser-12-b-of-x-serials-infectious.html

SER 12 (A) OF X SERIALS (Infectious Diseases) VIRUS WAR

https://bcvasundhra.blogspot.com/2020/04/ser-12-of-x-serials-infectious-diseases_16.html

SER 11 OF X SERIALS (Infectious Diseases)

https://bcvasundhra.blogspot.com/2020/04/faith-groups-as-super-spreader-of_15.html

SER 10(B) OF X SERIALS (Infectious Diseases)https://bcvasundhra.blogspot.com/2020/04/ser-10-b-of-x-serials-infectious.html

SER 10(A) OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/04/how-can-indian-economy-recover-from.html

SER 09 OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/04/save-lives-ready-shovels.html

SER 08 OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/04/the-impossible-ethics-of-pandemic-triage.html

SER 07 OF X SERIALS (Infectious Diseases)

https://bcvasundhra.blogspot.com/2020/04/how-it-will-end.html

SER 06 ( B ) OF X SERIALS (Infectious Diseases)

https://bcvasundhra.blogspot.com/2020/03/source-httpsen.html

SER 06 (A ) OF X SERIALS (Infectious Diseases)

https://bcvasundhra.blogspot.com/2020/03/2020-coronavirus-pandemic-in-india.html

SER 05 OF X SERIALS (Infectious Diseases)

HTTPS://BCVASUNDHRA.BLOGSPOT.COM/2020/03/SOURCE-HTTPSWWW.HTML

SER 04 / (C) OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/ser-04-c-of-x-serials-infectious_27.html

SER 04 / (B) OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/2019-2020-cornavirus-pandemic_26.html

SER 04 / (A) OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/2019-2020-cornavirus-pandemic.html

SER 03 OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/novel-coronavirus-covid-19.html

SER 02 OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/history-in-crisis-lessons-for-covid-19.html

SER 01 OF X SERIALS (Infectious Diseases)
https://bcvasundhra.blogspot.com/2020/03/infectious-diseases-infectious-diseases.html

PART - ONE OF FOUR PARTS

How Can The Indian Economy Recover

From

COVID-19

- Prannoy Roy Talks To Experts

CLICK/GOOGLE THE URL BELOW TO OPEN THE VIDEO

https://www.youtube.com/watch?time_continue=243&v=-BRlhQ-F2gE&feature=emb_logo

Prannoy Roy discusses with experts the impact of the COVID-19 pandemic on the economy of India and the world as the coronavirus continues to infect and kill more and more people. Former Chief Economic Advisor Arvind Subramanian says the economic crisis linked to COVID-19 pandemic is something that the world has never seen before. "It's not just another crisis," he says. Nobel laureates Amartya Sen, Abhijit Banerjee and Esther Duflo also analyse the impact of coronavirus on the world economy. SBI Chairman Rajnish Kumar says the Reserve Bank of India is monitoring the situation and it will do everything to ensure the economy is not affected severely due to the lockdown.

============================

PART - TWO OF FOUR PARTS

The Foundations of India’s Economic Recovery Are in Place [ https://marcellus.in/blogs/the-foundations-of-indias-economic-recovery-are-in-place/ ]

Four times in the last 40 years, a US recession alongside falling US bond yields and falling oil prices has been followed by a strong economic recovery in India. In fact, India has NEVER witnessed an economic recovery without a US recession preceding it! Now, all three conditions for an Indian economic recovery – a US recession, smashed crude prices and falling US Government bond yields are – in place. Our portfolios – CCP and LCP – are ideally designed to capitalise on such an economic recovery

Five years ago, in December 2015 in my previous job as a stockbroker, I constructed a note which made me a hate figure in some circles. At a time when the bull run inspired by Prime Minister Modi’s 2014 election victory was still underway, the brokerage which I managed had said that India was heading for an earnings recession as the traditional model of crony capitalist capex was all set to be jammed by Prime Minster Modi and by Mr Rajan (the then RBI Governor). Hence, we said that getting all steamed up about the large cap benchmark indices in India – which were stuffed full of poorly managed crony capitalist companies – was pointless.

Since December 2015, Nifty EPS growth has been a measly 2.5% per annum. The 17 companies which have exited from the Nifty since then are: Cairn India, Punjab National Bank, BHEL, Idea, Grasim, ACC, Bank of Baroda, Tata Motors DVR, Tata Power, Ambuja Cements, Aurobindo Pharma, Bosch, Lupin, HPCL, Indiabulls Housing and Yes Bank.

Five years on, in the midst of the Coronavirus driven mayhem, we believe the opposite call is warranted since all the ingredients are now in place for sustained recovery in Indian earnings growth.

These ingredients are: (a) cheap oil; (b) cheap money; (c) GST implementation; and (d) the corporate tax rate cuts.

Cheap oil: India’s economic reform process began tentatively in the early 1980s under Mrs. Gandhi and that led to India’s first economic growth spurt between 1982-87 (alongside a tremendous bull run in the Sensex) just as Ronald Reagan was bringing the US out of the 1979-82 recession. India’s second growth spurt came two years after the momentous economic reforms of 1991 and that too triggered a crazy bull run (which Harshad Mehta manipulated to his benefit). Both of these growth spurts and the golden growth period of 2004-08 and again from 2009-11 had a common feature – oil prices crashed at the beginning of the growth spurt alongside falling US Government bond yields (see the periods marked with red chevrons in the chart above). In each of these periods, the oil price crashes and the falling Government bond yields were triggered to a significant extent by a US recession [highlighted in grey in the chart shown above].

The correlation between a recession in the world’s largest economy, tanking oil prices and falling US Government bond yields is relatively easy to understand. But why does this cocktail of factors always trigger an economic recovery in India?

Cheap money: Ever since India liberalised its economy in 1991, foreign capital – both FDI and FPI – has been central to financing its growth story largely because over 80% of the flow of domestic savings has been directed towards physical savings (gold & real estate). As a result, capital inflows from America – which accelerate when US bond yields fall sharply – are all important for India. For example, the drop in the US 10 year bond yield from 6.7% in Jan 2000 to 3.4% in June 2003 (Link) was crucial for igniting China and India’s growth engines in the 2003-07 boom. Equally important for India’s post-Lehman recovery was the flood of foreign capital which swept through India in 2009 and 2010 (remember those oversubscribed crony capitalist IPOs & QIPs with prospectuses that reeked of corruption).

The demise of residential real estate in India as a credible asset class since 2015 has in this regard been useful – it has encouraged households to save through the financial markets. Unfortunately, in parallel, the overall households’ savings rate has fallen in India – from around 25% of income ten years ago to around 17% today. As a result even today, India is dependent on foreign risk capital to finance an economic recovery. Indian lenders can provide debt financing but NOT risk capital. There is only source of risk capital for the Indian economy – the US of A.

In this context, it looks likely that the flooring of interest rates by Western central banks could be doubly beneficial for India. Firstly, it is likely to encourage foreign capital to head towards India as and when the Corona panic abates. Secondly, it will encourage the RBI to do cut rates sharply (since CPI inflation is likely to be taken care of by compressed crude prices). If the Government of India also cuts the rates its offers on its savings schemes, this will help the banks cut their deposit rates and thus their lending rates. Rate transmission can then finally happen in India and SME lending – far more important for spurring GDP growth than crony capitalist capex – could potentially come to life.

With Brent crude having corrected from US$83/barrel to US$30/barrel now, with US Treasury yields now below zero and with the US economy now likely to be in recession, key prerequisites of an Indian earnings recovery are in place. But that is not all – two key domestic reforms have also set the scene for a select few companies to benefit from the rapid formalisation of the Indian economy.

GST is a massive driver of formalisation: Out of India’s workforce of around 600 million people, we estimate that around 250 million people work in the retail sector (shops, markets, supermarkets, etc). A further 50 million odd work in the logistics sector (driving trucks and the assorted light vehicles used for last mile delivery). Thus 50% of India’s workforce is associated with the retail sector. Until GST came along, most of these people never paid taxes and hence enjoyed tax free profit margins of 12-15%. With the Government going full throttle to implement GST due to fiscal compulsions, these profit margins have dropped to 2-4%. As a result, the retail sector is now gasping for working capital (for a detailed explanation see our 17th September 2019 blog). This in turn is pushing these retailers towards seeking financing from organised lenders. However, these lenders – banks like HDFC Bank, Kotak Bank and NBFCs like Bajaj Finance – are discriminating between retailers who sell leading brands like Relaxo, Asian Paints and Pidilite (their retailers seem to be getting channel financing at 8% interest rates) and those who sell laggard brands (such retailers are getting funded at 15%). As a result, the market leaders are gaining market share every quarter from the laggard brands. See, for example Asian Paints’ consistent double digit volume growth in a sector which is unlikely to be growing at more than 6%.

Corporate tax rate cuts help the market leaders: In September last year not only did the Government cut corporate tax rates from 35% to 25%, the Finance Minister also said that if companies committed to fresh capex in new entities, they would get a discounted corporate tax rate of 15%. For market leading firms whose ROCE is well above cost of capital – and hence who generate lots of free cash flow which can be used for capex – this announcement is manna from heaven. Companies like Relaxo, Asian Paints, Nestle and Pidilite anyway double the size of their operations every 3-5 years. Hence their effective corporate tax rates five years hence could be sub-20%. However, for their weaker competitors – who don’t have the financial means to expand capacity – the corporate tax rate is likely to continue to be 25%. A 500bps+ differential in profit margins will decisively swing the balance of power in favour of market leading companies who will then either acquire the smaller companies in their sector (see what Pidilite is doing) or turn them into outsourced suppliers. For more details on the benefit that our investee companies are deriving from these corporate tax rate cuts, read our latest Consistent Compounders newsletter.

Investment implications

Across both our portfolios – Consistent Compounders and Little Champs – we continue to stay invested in companies with clean accounts selling essential products & services with high barriers to entry. These companies have high ROCEs (because of their high entry barriers). As a result they have adequate cashflows to not only self-finance their growth but also to buffer their balance sheet from Coronavirus related lockdowns which could continue for several weeks. Supply issues vis a vis China also seem to be largely under control: see this presentation from our fund managers – Rakshit & Ashvin – on this subject.

In short, we have created two painstakingly curated portfolios which stand to benefit strongly from an economic recovery in India. We reiterate that the power of cheap money and cheap oil is such that the last 40 years of data shows that a recession in America is a necessary and sufficient condition for a subsequent recovery in India.

Disclosure: HDFC Bank, Kotak Bank, Bajaj Finance, Asian Paints, Pidilite, Relaxo and Nestle are part of most of Marcellus’ portfolios.

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Saurabh Mukherjea is the Founder and CIO at Marcellus Investment Managers. He’s also the author of “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”



PART 3 OF FOUR PARTS


COUNTRIES WITH THE MOST

RESILIENT ECONOMIES

By

Lindsey Galloway

6 April 2020

Experts have already begun assessing how a

recovery might look once the Covid-19 virus is

contained, and which countries stand to bounce

back best.

[ http://www.bbc.com/travel/story/20200405-covid-19-how-global-economies-will-recover-from-coronavirus ]   The -19 pandemic has injected an unprecedented amount of uncertainty into the global economy, as countries across the world battle growing infections, implement wide-ranging social-distancing strategies and attempt early fiscal interventions to stabilise ]markets.

Top 10 most resilient countries, according to the 2019 Global Resilience Index

1. Norway
2. Denmark
3. Switzerland
4. Germany
5. Finland
6. Sweden
7. Luxembourg
8. Austria
9. US Central
10. United Kingdom

See the full list here

While managing the immediate health crisis is vital and necessary for economic stability, experts have already begun assessing how a recovery might look once the virus is contained and which countries stand to bounce back best.

To better understand this, we turned to the 2019 Global Resilience Index  by insurance company FM Global, which ranks the resiliency of the business environment across 130 countries, based on factors like political stability, corporate governance, risk environment and supply chain logistics and transparency. Pairing these rankings with their country’s initial response to the virus, we identified the nations across the globe that have a high likelihood of maintaining stability and resilience through the crisis.

We talked to residents and experts in these places to understand how they’re coping now and what they might look forward to in the hopefully near-term future.

Denmark

Ranked second in the index, Denmark scores high marks for its supply chain tracking and low governmental corruption. The country also moved quickly when it came to enacting social-distancing measures in light of the spread of the virus. It announced a shutdown of schools and non-essential private businesses on 11 March and closed its borders to foreigners on 14 March, when the country only had a handful of positive cases. But the moves have already proven effective.

“Regular flu has dropped by 70% versus last year, which must be a good indicator of the effectiveness of the steps taken by the government,” said Rasmus Aarup Christiansen, managing partner of Pissup Tours, based in Copenhagen. “I was sceptical at first but seeing how almost all other countries have taken similar steps [like lockdowns and border closings] soon after Denmark, it seems the government was doing the right thing.”

Most people feel a moral duty to make sacrifices for the sake of public health

Danish culture, which tends to be trusting of authority and willing to stand together for a common cause, has also had an impact on the effectiveness of the measures. “The word ‘samfundssind’ (which roughly translates to “civic sense” or “civic duty”) is the new buzzword in Denmark on both social and traditional media, and most people feel a moral duty to make sacrifices for the sake of public health,” said Aarup Christiansen. “No-one wants to be called out for being responsible for endangering the lives of senior citizens just because they won’t give up their usual luxuries.”

That doesn’t mean there haven’t been challenges, however. Aarup Christiansen has personally seen his travel business revenues plummet. While he appreciates the governmental financial aid packages, announced on 14 March (which include covering some of the costs of worker salaries), the rules and outputs have yet to be fully defined and put in place, leading to more uncertainty and layoffs. Still, the measures, like paying 90% of wages of hourly workers and 75% of those of salaried workers affected by the crisis, are being hailed as a model for the rest of the world, by essentially “freezing” the economy until the storm subsides. The model won’t come cheap however; the measures are expected to cost 13% of total GDP.

There’s also the sense here that this is a global crisis, and Denmark’s resilience will no doubt rely on how the rest of the world adapts and maintains open trade. “Denmark may be able to gain a relative advantage by having dodged some of the more serious consequences,” said Aarup Christiansen. In fact, the country is already talking about loosening some of the restrictions by Easter based on the containment so far, according to a Bloomberg report. “Denmark’s well-developed pharmaceutical sector may prove an advantage,” said Aarup Christiansen. “I would, however, find no pride in Denmark being better off if it comes from other countries having to suffer.”

Singapore

Singapore scores high in the index for its strong economy, low political risk, strong infrastructure and low corruption in the survey, pushing it to number 21 in the overall resilience ranking. The country also moved fast to contain the virus and has had one of the flattest curves in the pandemic.

Surviving this will make

everyone more resilient

“We have tremendous trust in our government, who are relatively transparent about every step they are taking to fight this crisis,” said resident Constance Tan, who works for data analysis platform Konigle. “As a general rule, if the government enforces something, we comply.” That said, there are still rule-flouters, and the country has taken away passports and work passes for those in violation, according to a 21 March report by Channel News Asia. “But as a whole, we work together, and we do not need to worry about social unrest, people dying on the streets or economic destabilisation,” said Tan.

As a small country, Singapore depends on the recovery of the rest of the world to have the most successful rebound, but residents generally believe in the strength of the future here. “As a people, like everywhere else, I think surviving this will make everyone more resilient,” said native Justin Fong. “One thing for sure, this has forced the adoption of technology which will bode well for Singaporeans.” Many businesses like Konigle implemented work-from-home policies quickly, and the government released the Trace Together app to help track the virus, which many residents have downloaded.

United States

To capture the United States’ broad geographic footprint, the index splits up the country into West, Central and East regions, but as a whole, the US ranks well (9th, 11th and 22nd, respectively) for its low-risk business environment and strong supply chain.

Containing the virus has proven challenging in major metropolitan areas like New York, and unemployment has already jumped to historic levels, in large part due to the mandatory shutdowns of more than half of US states, which has particularly hit restaurant and retail workers and other businesses that rely on foot traffic. But the US government has moved quickly to pass stimulus measures to stabilise the economy, and social distancing strategies enacted elsewhere in the country, which seem to be having an effect, should lessen the overall impact of the virus, allowing for a quicker economic recovery.

Financial institutions like Goldman Sachs and Morgan Stanley are predicting a “V-shaped” recession and recovery, with an unprecedented negative immediate impacts (as is already being seen) but a relatively quick recovery in the later quarters of the year; while consultants like McKinsey are taking a more measured, but still optimistic view, on recovery based on the successful implementation of public health measures – like the lockdowns in place – and policy interventions like the already-announced $2t stimulus package, likely the first of many. The US is also critical to the world economy, representing a nearly a quarter of global GDP, and the recovery of the global economy is highly dependent on how the US fares.

We want money, goods, services, labour and ideas to flow as freely as possible

“Generally speaking, the US economy is better-positioned to recover from large shocks and potential longer-run shifts than much of the rest of the world. The population is on average younger than much of the rest of the world with more mobility, and labour market restrictions are generally lighter, thereby facilitating greater labour reallocation” said Eric Sims, professor of economics at the University of Notre Dame. “More immediately, the Federal Reserve in the US and the Bank of England in the UK (neither of which have yet gone to negative policy rates) have a bit more space to provide monetary accommodation than other central banks around the world, such as the ECB or the Bank of Japan.”

To further enhance the US’ recovery, the presidential administration has proposed dividing the nation into areas that are less hard hit and allowing normal economic activity to recur. “I think those measures would go long way towards ultimately setting up the conditions for strong recovery,” said Peter C Earle, research fellow at the American Institute for Economic Research, a not-for-profit academic think tank. “We want money, goods, services, labour and ideas to flow as freely as possible, not just domestically but internationally as well.”

The US’ lack of universal healthcare has been one criticism of the county’s ability to handle the crisis, and one that needs to be addressed for future resiliency. “I think eventually the world can emerge stronger after the virus is contained and I believe the US can, too. But it all depends on the lessons we learn,” said Michael Merrill, an economist and labour historian in the Rutgers School of Management and Labor Relations. “We are going to have to invest in new forms of public health and create sustainable forms of social protection and institutional resiliency if we are to return to the commercially dense, interconnected, highly networked societies that were the norm only one month ago.”

Rwanda

We felt confident that the Rwandan government would handle the situation way better than in our home countries

Due to recent improvements in corporate governance, Rwanda has made some of the largest leaps in the index in recent years, jumping 35 spots to its current rank of 77th most resilient in the world (and fourth highest in Africa). Most importantly, it looks particularly well positioned to bounce back from this type of crisis as the country successfully contained Ebola from its borders after an outbreak from neighbouring Democratic Republic of the Congo in 2019. With its mix of universal health care, medical supply-delivering drones and thermometer checks at its borders, Rwanda stands to be well-equipped to maintain stability throughout the crisis, especially when compared to other countries in the region.

“A lot of foreign students like me stayed behind because we felt confident that the Rwandan government would handle the situation way better than in our home countries,” said Garnett Achieng, digital content curator for Baobab Consulting and student at the African Leadership University, who lives in Kigali and is originally from Kenya. “Amongst foreign African students, the only anxiety comes with knowing that our families back home are not in the same situation we are in.”

Rwanda was the first country in sub-Saharan Africa to impose a total lockdown, and is already distributing free food door-to-door to the country’s most vulnerable. While tourism is expected to be hit hard, as Rwanda is a popular destination for many international conferences and exhibitions, Achieng is hopeful that the country will have relatively few casualties to the virus, making it well-positioned to recover quickly.

New Zealand

Ranked 12th-most resilient in the index, New Zealand scores especially high in corporate governance and its supply chain. The country has also been able to move quickly to contain the spread of the virus by shutting borders to international travellers on 19 March and enacting a non-essential-business lockdown on 25 March.

It’s our time to sit down as a New Zealand family and decide who we want to be

“As an island nation, it is easier to control our borders, the main source of infections. So the effective border closure makes sense,” said Auckland resident Shamubeel Eaqub, economist at consultancy Sense Partners. “Compared to other countries, the response in New Zealand has been bold and decisive.” The measures are paying off, as some epidemiologists see it as having potential to be one of few “normal” nations left, according to a Guardian report, eliminating all cases if measures remain strong for the coming weeks.

With tourism and exports a major part of the economy, New Zealand will face some struggles to its economy in the near term, but this doesn’t necessarily have to be a bad thing. “By being insulated, we will have time to recalibrate,” said Dunedin resident Ron Bull, director of curriculum development at Otago Polytechnic. “We had already started talking about the impact of campers and backpackers on the environment, and this gives us time to weigh up what’s important against the waves of tourist dollars coming in.

” Overall, the country is well-placed for a stable recovery, with low levels of government debt and the ability to enact quantitative easing to keep interest rates low. “We have fewer constraints to both blunt the impact of dealing with [the] pandemic and supercharge the recovery,” said Eaqub. “Most importantly, New Zealand remains a relatively high-trust country. This will be a strong foundation for recovery from the biggest health and economic shock in generations.”

Bull agrees the country has a likelihood to come out stronger. “Just like a family living in the same house, you have to get to know each other,” he said. “It’s our time to sit down as a New Zealand family and decide who we want to be and make some decisions to make us stronger and better.”

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Living In is a series from BBC Travel that discovers what it’s like to reside in some of the world’s top destinations.

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RESILIENCE INDEX DATA

The FM Global Resilience Index is an equally-weighted composite measure of three core resilience factors: economic, risk quality and the supply chain itself. Each factor is comprised of four core drivers. Scores are bound on a scale of 0 to 100 with 0 representing the lowest resilience and 100 being the highest resilience. Use the buttons to select the factor and associated driver scores. Click any column header to sort the table by that column.

Click / Google URL below to open

https://www.fmglobal.com/research-and-resources/tools-and-resources/resilienceindex/explore-the-data/?&vd=1

FM GLOBAL RESILIENCE INDEX

Click / Google URL below to open

https://www.fmglobal.com/research-and-resources/tools-and-resources/resilienceindex/explore-the-data/?

China’s Modernizing Military

SOURCE
https://www.cfr.org/backgrounder/chinas-modernizing-military

China’s Modernizing Military

The People’s Liberation Army is aiming to become the dominant force in the Asia-Pacific, strengthening China’s hand toward Taiwan and international disputes in the South China Sea.

Backgrounder

Lindsay Maizland

February 5, 2020

The Chinese government is working to make its military stronger, more efficient, and more technologically advanced to become a top-tier force within thirty years. With a budget that has soared over the past decade, the People’s Liberation Army (PLA) already ranks among the world’s leading militaries in areas including artificial intelligence and anti-ship ballistic missiles.

Experts warn that as China’s military modernizes, it could become more assertive in the Asia-Pacific region by intensifying pressure on Taiwan and continuing to militarize disputed islands in the East and South China Seas. U.S. President Donald J. Trump’s administration believes China is a great-power rival, though the PLA still has a way to go before it can challenge the United States, experts say.

What catalyzed the PLA’s modernization?

More on:

China

Military Operations

Defense and Security

Asia

Xi Jinping

The modern Chinese military got its start during the civil war (1927–1949) between Chinese Communist Party (CCP) forces and nationalist Kuomintang forces. The guerrilla-style army relied on a mass mobilization of Chinese citizens, and the PLA largely preserved this organizational structure in the following decades to protect its borders.

A turning point came in the 1990s, when the CCP witnessed two demonstrations of U.S. military power in its hemisphere: the Gulf War and the Taiwan Strait Crisis. Struck by the sophistication of U.S. forces, Chinese leaders acknowledged that it lacked the technology to wage a modern war and prevent foreign powers from intervening in the region. Officials launched an effort to catch up to top-tier militaries by increasing defense spending, investing in new weapons to enhance anti-access area denial (A2/AD), and establishing programs to boost the Chinese defense industry.

Another shift began in 2012, when President Xi Jinping came to power. Championing what he calls the Chinese Dream, a vision to restore China’s great-power status, Xi has gone further to push military reforms than his predecessors. Xi leads the Central Military Commission, the PLA’s highest decision-making body, and he has committed to producing a “world-class force” [PDF] that can dominate the Asia-Pacific and “fight and win” global wars by 2049.

How are the services being reformed?

Xi has focused on making big, structural changes. Among his most significant reforms are new joint theater commands, deep personnel cuts, and improvements to military-civilian collaboration. He is pushing to transform the PLA from a largely territorial force into a major maritime power.

Army. The army is the largest service and was long considered the most important, but its prominence has waned as Beijing seeks to develop an integrated fighting force with first-rate naval and air capabilities. As the other services expanded, the army shrunk to around 975,000 troops, according to the International Institute for Strategic Studies (IISS). Reforms have focused on streamlining its top-heavy command structure; creating smaller, more agile units; and empowering lower-level commanders. The army is also upgrading its weapons. Its lightweight Type 15 tank, for example, came into service in 2018 and allows for engagement in high-altitude areas, such as Tibet.

Navy. The navy has expanded at an impressive rate to become the world’s largest naval force in terms of ship numbers. In 2016, it commissioned eighteen ships, while the U.S. Navy commissioned five. The PLA’s ship quality has also improved: RAND Corporation found that more than 70 percent of the fleet [PDF] could be considered modern in 2017, up from less than 50 percent in 2010.

Experts say the navy, which has an estimated 250,000 active service members, has become the dominant force in China’s near seas and is conducting more operations at greater distances. Its modernization priorities include commissioning more nuclear submarines and aircraft carriers. China has two aircraft carriers, compared to the United States’ eleven. A third carrier, which is being built domestically, is expected to be operational by 2022.

Air Force. The air force has also grown, with 395,000 active service members in 2018. It has acquired advanced equipment, some thought to be copied from stolen U.S. designs, including airborne warning and control systems, bombers, and unmanned aerial vehicles. The air force also has a collection of stealth aircraft, including J-20 fighters. In 2015, RAND Corporation estimated that half of China’s fighters and fighter-bombers were modern.

Rocket Force. Responsible for maintaining China’s conventional and nuclear missiles, the rocket force was elevated to an independent service during reforms in 2015. It has around 120,000 active troops. China has steadily increased its nuclear arsenal—it had an estimated 290 warheads [PDF] in 2019—and modernized its capabilities, including the development of anti-ship ballistic missiles that could target U.S. warships in the Western Pacific, as part of its A2/AD strategy. China reportedly has the most midrange ballistic and cruise missiles, weapons that until recently the United States and Russia were prohibited from producing.

The PLA is also developing hypersonic missiles, which can travel many times faster than the speed of sound and are therefore more difficult for adversaries to defend against. While Russia is the only country with a deployed hypersonic weapon, China’s medium-range DF-17 missile is expected to be operational in 2020. The Pentagon has said it will likely be several years before the United States has one.

Strategic Support Force. Established during the 2015 reforms, the Strategic Support Force manages the PLA’s electronic warfare, cyberwarfare, and psychological operations, among other high-tech missions. With an estimated 145,000 service members, it is also responsible for the military’s space operations, including those with satellites.

How much does China spend on its military?

China’s Ministry of Finance said the 2019 defense budget was $177 billion, however, analysts’ estimates are often higher than what Beijing reports. The PLA enjoyed a soaring budget as China’s economy boomed over the past few decades. Defense spending increased more than sevenfold, from $31 billion in 1998 to $239 billion in 2018, according to the Stockholm International Peace Research Institute (SIPRI), making it the second-largest spender in the world, behind the United States.

What’s the state of China’s defense industry?

For much of its history, the PLA relied on foreign military equipment, especially from Russia. But in recent decades, the Chinese government has invested heavily in state-owned and private-sector defense companies. Xi has pushed to reduce barriers between the two, emphasizing what he calls military-civil fusion. Many firms have forged relationships with foreign companies and universities, allowing them to acquire technologies and know-how with military applications. Experts say this has been especially helpful for developing the PLA’s automation and artificial intelligence capabilities.

Much of the PLA’s equipment is now built domestically. In fact, China is estimated to be the world’s second-largest arms producer, trailing the United States and ahead of Russia, according to a 2020 report by SIPRI. Most of its exports go to developing countries, such as Pakistan. China still imports some specialized equipment, such as jet engines, and has been accused of copying Russia’s, the United States’, and other countries’ designs without permission.

How does the military serve China’s defense and foreign policy interests?

The PLA is the armed wing of the CCP, and its main objective is to protect the party’s rule, which it fears rival countries, particularly the United States, aim to undermine. It plays a critical role in achieving Xi’s objective of becoming the dominant power in the Asia-Pacific, and its overarching strategic objective is to safeguard China’s sovereignty, security, and development interests. Its top priorities are deploying military infrastructure on disputed islands in the South China Sea, particularly the Senkaku/Diaoyu Islands; preventing Taiwanese independence; and securing its land borders with fourteen countries, including India and North Korea. The PLA, however, is not responsible for internal security, which falls on the People’s Armed Police.

Some experts have said that Taiwan is the main catalyst for the PLA’s modernization. The island has been governed independently for decades, but Beijing views it as a part of China. The Xi government has taken an aggressive approach, saying in a 2019 defense white paper that the PLA would “resolutely defeat anyone attempting to separate Taiwan from China.” While many analysts don’t expect Beijing to use force against Taiwan soon, it could use its military to discourage independence movements and deter U.S. involvement in future conflicts.

Does China want to project military power globally?

Many analysts believe China wants to be the dominant military power in the Asia-Pacific, capable of deterring and, if needed, defeating the United States in a future conflict. But it’s unclear whether China’s ultimate ambition is to project power throughout the world, much like the United States does today.

The Chinese government said in its 2019 white paper that it will “never threaten any other country or seek any sphere of influence.” It maintains a no-first-use nuclear policy, has no military alliances, and claims to oppose interference in other countries’ affairs.

Joel Wuthnow, a China expert at the U.S. National Defense University, told CFR that, at least in the near term, the PLA will be kept busy close to home. “China is still a long way from becoming a global force like the U.S. military because their attention is confined to the region,” he says.

Yet, as Beijing’s economic interests expand through Central Asia and Europe—part of its Belt and Road Initiative—the military could increasingly be called to operate abroad. Some U.S. officials, including Vice President Mike Pence, warn that the colossal development project could eventually be used for military purposes. However, Beijing claims this is untrue, with most projects currently protected by Chinese private security companies.

China opened its first overseas base in Djibouti in 2017, despite swearing off bases in one of its first white papers nearly two decades earlier. There were reports in 2019, which Chinese officials denied, that China was constructing another base in Cambodia. China has conducted an increasing number of joint military exercises, including with Pakistan, Russia, and members of the Shanghai Cooperation Organization. PLA service members also participate in UN peacekeeping missions, with more than 2,500 active peacekeepers as of 2019.

What are the PLA’s major challenges?

Acknowledging in its 2019 defense white paper that the PLA “still lags far behind the world’s leading militaries,” the Chinese government believes it must invest more in new technologies and improve logistics. But many analysts say the military’s main challenge is personnel, in that it has struggled to recruit, train, and retain a professional fighting force. “The skills are the most difficult things to teach and teach quickly,” says IISS’s Meia Nouwens. “And with the Chinese military, the scale is enormous.”

Part of this stems from a lack of experience: the PLA hasn’t fought a major military conflict in the forty years since it invaded Vietnam (it had a brief confrontation with Vietnam in 1988). Additionally, some experts have found that recent reforms have increased pressure and stress on service members.

Another challenge has been corruption and what Chinese leaders perceive as weakening loyalty to the CCP. During Xi’s first six years in office, as part of a wider anticorruption campaign, he oversaw the punishment of more than thirteen thousand PLA officers, including one hundred generals, for giving and accepting bribes, according to the U.S. Department of Defense.

How are countries responding to China’s military rise?

The U.S. military maintains a strong presence in the Asia-Pacific region, with bases in Australia, Guam, Japan, Singapore, and South Korea. But as China’s military approaches parity with U.S. forces, the United States could have a harder time deterring Chinese assertiveness [PDF]. The Trump administration has increasingly treated Beijing as an adversary, characterizing both China and Russia [PDF] as “revisionist powers” intent on “trying to change the international order in their favor.” Through its Free and Open Indo-Pacific strategy, the United States has sought to strengthen its regional alliances, including with Japan and South Korea, protect freedom of navigation at sea, and maintain peace and rule of law.

China’s neighbors are also on alert. In 2019, Japan’s defense ministry identified China as the country’s greatest national security threat. Tokyo plans to boost defense spending and purchase U.S. weapons, and it has reinterpreted its pacifist constitution to give the military greater latitude. At the same time, though, South Korean President Moon Jae-in has tried to avoid confrontation and even strengthen ties with Beijing, in an effort to defuse the threat from North Korea. Another U.S. treaty ally, the Philippines, has also tilted toward Beijing. President Rodrigo Duterte has visited China multiple times, signed agreements to strengthen cooperation, and courted Chinese investors. However, tensions between Manila and Beijing persist over their competing claims in the South China Sea. Other Southeast Asian nations with claims, including Vietnam, have relatively small defense budgets, and they have not yet been able to coordinate joint military actions through the Association of Southeast Asian Nations (ASEAN).

Taiwan, which has increased its purchases of U.S. weapons, including F-16 fighters, assumes that the United States will defend it in the case of a Chinese attack. However, as China has enhanced its military capabilities, some Taiwanese officials have reportedly questioned whether Washington would do so.

CFR’s Mira Rapp-Hooper points out that many governments face the same challenge of having to respond to China’s military modernization while preserving close economic ties with Beijing. “They’re grappling with the reality that China is their closest trading partner, and the United States is their closest defense ally,” she says. “Most likely, U.S. allies will not make a single choice between the two, but they may shift toward China if they come to doubt American staying power in the PacificCreative

China: War Without Rules

SOURCE:
https://journals.sagepub.com/doi/full/10.2968/055006007

China: War Without Rules

Ming Zhang

First Published November 1, 1999 Brief Report

Article information

If China should engage in warfare sometime in the future, should it employ Western methods of war and should it be bound by Western “rules of war”? The highly provocative answer from two Chinese military officers is “no.”

In the 1990s, high-tech weapons seem to have reshaped the way wars will be fought in the future. The Gulf War in 1991 against Iraq and NATO's air war earlier this year against Serbia demonstrated the power of a new generation of Western weaponry and theory. Western methods of war–often called the “Revolution in Military Affairs”–seem to have triumphed.

But two senior Chinese air force colonels are not so sure. In early 1996, Qiao Liang and Wang Xianghui participated in the massive Chinese military exercises aimed at intimidating Taiwan during the runup to that island's first presidential elections. In turn, the exercises prompted the United States to send two aircraft carrier groups to the area as a demonstration of military might.

Later, the colonels met in a small town in southeastern China's Fujian Province and pondered China's military weakness compared to the United States. How could China defend itself against a nation that powerful–if it ever needed to?

The result: a co-authored book, Chao Xian Zhan: Dui Quanqiu Hua Shidai Zhanzheng yu Zhanfa de Xiangding (Warfare Beyond Rules: Judgment of War and Methods of War in the Era of Globalization), published by the People's Liberation Army Art Press in February. The central premise: If China ever has to defend itself, it should be prepared to conduct “warfare beyond all boundaries and limitations.”

The existing rules of war, according to Qiao and Wang, include a body of international laws and agreements developed over the decades by Western powers. As for methods of war, there is a kind of worship in much of the developed world of high technology and new weapons, areas in which the United States has a clear lead. But what is “right” for the United States, the authors say, may not be appropriate for China.

Western commentators, who generally have not read Beyond Rules because it is in Chinese, have focused on such matters as the authors' advocacy of terrorism, should China find itself in dire straits. And yet, the most controversial aspect of the book is perhaps its critique of–and challenge to–current U.S. military doctrine and strategy.

Qiao and Wang begin by arguing that–paradoxically–as more weapons are invented and deployed, each particular kind of weapon will play a lesser role in actual combat. No single kind of weapon can be decisive except nuclear weapons in “total” war, an unlikely event.

But because of ever-higher costs, the authors say, cutting-edge weapons made for national defense may at some point cause a national economic collapse. They argue that the United States may be following in the “dust” of the former Soviet Union by plunging into the costly Revolution in Military Affairs.

The authors cite the extraordinary sums invested in the B-2 stealth bomber program and the even greater amounts being spent on the F-22 fighter program. The financial burden of national defense is heavy for the United States, and even more so for other countries.

The People's Liberation Army: How adaptable is it?

Only a nation as rich as the United States can afford extremely expensive weapons and then use them on inexpensive targets, say the authors. But even for the United States, there are limits. The collapse of the Soviet empire did not come with loud thunder but rather with the hiss of leaking air. That may be the eventual fate of the United States.

The driving force behind the costly U.S. weapon programs and its strategic thought is the notion of “zero casualties,” the authors say. The United States balances its strategic goals against the possibility that it might have casualties in achieving them. The United States is increasingly unwilling to risk lives to achieve its goals. That is a mistake, the authors assert.

But a more serious mistake, they add, is the perception that international disputes can be definitively resolved, if necessary, on the battlefield. Thus, the United States focuses on the goal of maintaining the capability to fight and win two regional wars at roughly the same time. In fact, the kind of battlefield-type war that characterized so much of the twentieth century is not nearly so likely in the twenty-first century.

The Chinese military should avoid that trap. It should not spend itself into bankruptcy to fight battlefield wars with high-tech weapons. Rather, China should be prepared to fight with whatever means it has on a variety of fronts. What the authors are getting at is summed up in the common Western phrase, “Thinking outside the box.”

Following the Gulf War, Chinese military leaders were so impressed by U.S. weaponry and strategy that they almost completely accepted the new U.S. definitions of war, the authors say. But by the end of the 1990s, they started to have second thoughts, largely because of the huge expense.

The authors examine the Revolution in Military Affairs from defense strategy to force structure to military doctrine. They acknowledge that the United States is the leader in imagining new types of warfare, including information warfare, precision warfare, joint-forces warfare, and non-war military action.

Non-war military action is particularly creative, they say, because it points to the possibility of using military forces in a variety of roles, such as peacekeeping, humanitarian aid, and counterterrorism.

But the colonels insist that there is still no complete “revolution” in U.S. military thought, because U.S. theory lacks the concept of “non-military war action.” When contrasting “non-military war action” with “non-war military action,” the authors are not merely playing a language game. Rather, the term attempts to expand the definition of warfare beyond commonly accepted bounds.

Military action should not define the complete meaning of “war”; it is just one dimension of war. According to the authors, the American Revolution in Military Affairs comes close to constituting a revolution in military thinking, but it is too focused on military technology. The revolution cannot halt at the level of new technologies and system reforms or other material changes. Genuinely new thinking must lie at the heart of a revolution–and in that, the Chinese must not fall behind.

Geographical security is an outdated concept, the authors argue, because threats to national security may not come from cross-border invasion, but from non-military actions. Definitions of security must now include geographical, political, economic, resource, religious, cultural, data, environmental, and near-earth space security.

The authors acknowledge that international laws and rules of war are supposed to put limits on the way war is waged. This body of laws and rules cover a wide spectrum, ranging from the requirement that armed forces operate in uniform to a prohibition against the indiscriminate killing of noncombatants to bans on chemical or biological weapons and land mines.

But whether a country actually accepts these rules regulating war, the authors say, depends on whether the laws and rules are favorable to its own national interests. Weak countries invoke rules of warfare to protect their interests. Powerful nations sometimes use the rules to control others, for instance, by banning chemical and biological weapons. But when the rules conflict with national interests, most countries sacrifice them in an effort to achieve their own goals.

In essence, the authors urge that China should feel free to fight wars in any way possible, without having some means being ruled out in advance by agreements and codes developed over the decades by the Western powers.

Chinese doctrine should embrace the principle of addition, they suggest, in which many methods of war can be–and should be–added together to reach the desired outcome. Based on this theme, they sketch the following ways in which war can be defined:

▪ Military: Nuclear, conventional, biochemical, ecological, space, electronic, guerrilla, and terrorist war.

▪ Beyond military: Diplomatic, data network, intelligence, psychological, technological, smuggling, drug, and simulated war (defined in the West as deterrence).

▪ Non-military: Financial, trade, resources, economic-aid, legal, sanctions, media, and ideological war.

The authors elaborate on many of these methods. Some methods are commonly practiced by the United States and other nations, such as trade embargoes. Others are not practiced, such as manipulating environmental conditions so as to produce, for instance, heavy rains on an enemy's territory.

Beyond Rules emphasizes “asymmetric warfare”–for instance, guerrilla war (mostly urban), terrorist actions, and cyber attacks against data networks. The idea is to strike in unexpected ways against vulnerable targets.

A true revolution in war, the authors say, combines conventional with non-war actions; military with non-military actions. “War” may include a blend of stealth planes and cruise missiles along with biochemical, financial, and terrorist attacks.

Countries have instinctively used a variety of means to defend themselves since ancient times. Combining methods of war is simple addition, familiar to all, and it produces a “magician's cocktail” of offensive and defensive strategies.

Nevertheless, the authors add, no military planners in history have ever systematically elaborated the art of “addition” in formulating military doctrine before the fact. When additional means of war have been piled on in the past, war has usually already gotten under way.

In theory, say the authors, “beyond rules” means going beyond everything–thinking “out of the box.” But in reality, it is impossible to operate without some limits. In fact, the Chinese military should set limited goals that existing means can reach. Limited goals help define the means that will be used. The actual use of nuclear weapons, for instance, cannot serve limited goals. Their value lies strictly in deterring the use of nuclear weapons by others.

Otherwise, China should not hesitate–if it should have to defend itself–to use as many means of warfare as possible, including weapons that are not “permitted” by international law and the rules of war, such as chemical and biological weapons.

Beyond Rules has received high level attention in China. Many Chinese military officers have praised it. But when a Chinese diplomat introduced the book to an international conference in Russia, American and European participants were startled.

Major U.S. media did not learn of the book until August 8, when the Washington Post carried a story and interviewed the authors. The Voice of America held a discussion of the book the following day. News stories and commentaries in the West have tended to suggest that Beyond Rules advocates terrorism and other vicious methods of war.

Although Beyond Rules is not official policy, some of the extreme methods recommended in it will cause outsiders to worry about China's commitment to the ban on chemical and biological weapons. Yet, the book does not advocate an expansionist policy for China. Although the means suggested in the book are more aggressive than the international norm, they would be employed only in national defense.

Beyond Rules is a fresh work that breaks the rigid bounds of thinking characteristic of the Chinese military. The authors take a realist view of military affairs by looking at existing laws and rules applicable to warfare, and noting that they originated in the West. China, they say, should not be bound by them when defending its interests.

Whether the authors make legitimate arguments regarding the Revolution in Military Affairs in the United States is certainly debatable. But the book is a non-Western response or challenge to American military thought, which itself makes it worth the attention of Western experts.

Beyond Rules also reflects a general trend in China toward openness. The book is straightforward compared to past studies in China regarding military methods and doctrine. Last summer, China opted for transparency and deterrence as a military posture when it declared that it possessed neutron bombs. It also announced a test launch of the DF-31, a second-generation intercontinental ballistic missile. And many new weapons from fighters to missiles were displayed in October on the fiftieth anniversary of the revolution.

Finally, it is worth pondering why a book that opposes international rules has emerged in China and has been well received by many Chinese military officers and the public alike. In its August 8 article, the Post comment-ed–correctly–that “the book is an important expression of China's feelings of powerlessness when confronted by U.S. might.”

Have the authors of Beyond Rules gone too far? Or is the book a way of suggesting that the United States has already gone too far down the road of military dominance?