China is making moves to take over 1.4 million square miles of sea and all the fish in it – not to mention a massive oil and gas reserve, as well as the world’s second-busiest trade route.
The country may be able to accomplish this with one simple strategy… ignore the law.
The whole South China Sea is boiling with legal, political, and economic tension that won’t simmer down anytime soon.
And I have just three words for investors in that area: Get out now!
You see, for years China has claimed almost 90% of the South China Sea as its territory. But since 2013, the Chinese have made moves to expand their claim on the sea by building islands and claiming them as their own!
As you can imagine, Vietnam, Indonesia, Malaysia, Brunei, and the Philippines – the other countries boarding the South China Sea – are not happy with China’s complete disregard for the rules. Nor is anyone else with Asian trade interests.
The South China Sea is home to the second-busiest trade route in the world. Through it flows a supply of critical commodities, including crude oil, liquefied natural gas (LNG), coal, and iron ore.
For years, China has claimed almost 90% of the South China Sea as its territory. A document first published in the 1940s labels the sea and land inside the so-called “nine-dashed line” as China’s.
Back in 2001, China and The Association of Southeast Asian Nations (ASEAN) – which represents 10 countries in the region – agreed on and signed a code of conduct that stated neither side would make a unilateral move without consulting and negotiating with the other parties.
Well, so much for that agreement…
Fast forward to late April 2015. ASEAN issued a formal statement calling out China for its massive island-building program in the Spratly Islands in the South China Sea.
Yes, China is actually creating new artificial islands – deemed China’s “great wall of sand” – and laying claim to them.
Bill Hayton, in his book The South China Sea: The Struggle for Power in Asia, writes “China has convinced itself that it is the rightful owner of almost the entire sea.” He goes on to say, “China has a sense of entitlement to these lands.”
Since 2013, China has been using dredging ships and construction teams to turn at least six coral reefs into large bases with harbors. This year, China started building two military air strips, one on Fiery Cross Reef and one on Subi Reef.
Hayton points out that, although Chinese fishermen and traders have sailed the Sea for centuries – along with their Southeast Asian counterparts – there’s no record of any Chinese officials landing on the Spratly Islands before 1946. And the PRC only arrived there in 1988, when they occupied features that were either underwater at high tide or consisted of just a few rocks at best. None were naturally inhabitable.
But, China argues it’s just protecting its territorial rights and fishing fleet. Still, ASEAN members are increasingly concerned that China will use these bases as springboards to assert control over the whole of the South China Sea.
So, why does China want these tiny islands, some barely above sea level, that cover a mere six square miles?
Because these approximately 250 rock outcroppings, reefs, and islands are the first step toward owning 1.4 million square miles of sea. And what may be one of the biggest oil and gas reserves in the world.
In fact, according to the U.S. Energy Information Administration (EIA), the South China Sea has proven reserves of 11 billion barrels of oil (about the same as Mexico or Brazil), and proven natural gas reserves of 190 trillion cubic feet (about half the quantity of the United States)!
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Peter M. Solomon, an International Political Economy graduate from the University of London, Kings College, emphasizes the significance of these reserves in his paper, The EU and The South China Sea: A Role to Play.
“As a result of the considerable value of the oil and natural gas, the potential for disagreement is exceptional and therefore the potential for conflict over territory in the South China Sea cannot be understated,” Solomon writes.
Trumping International Law
Of course, the larger problem is China’s blatant rejection of the International Laws of the Sea.
You see, under current international law, laid down in the United Nations Convention on the Law of the Sea, a country can only own an area of a sea if it owns the land adjacent to it. A country that owns an island can claim 12 nautical miles of seabed around it, and has the rights to the resources (but not the territory) up to 200 nautical miles around it.
But, China is writing its own laws…
The government and its state-owned oil and fishing enterprises, in particular, are trying to assert ownership of the whole sea, along with its seabed and resources, many hundreds of miles away from the Chinese coast.
A Long Time Coming
“It will be a long, drawn out situation” states Dr. Anders Corr, of the Journal of Political Risk.
“A country cannot expect to be successful in offshore drilling there. If countries such as Vietnam, the Philippines or India explore for oil, China could cut the cable, as they did to Vietnam and India in 2012.”
Dr. Corr also referenced the Haiyang Shiyou 981 Standoff when the China National Offshore Oil Corporation moved its 981 oil platform to the South China Sea and established an exclusion zone around it.
Soon thereafter, Vietnam protested the move as an infringement of its sovereignty and sent 29 ships to disrupt the rig.
Both nations accused one another of repeatedly ramming and spraying each other’s ships. While in Vietnam, protests escalated to heated riots aimed at foreign businesses.
Corr states that “anytime there is exploration there, it’s a hot button and the project gets knocked out.”
Chinese vessels have been known to board and search ships in contested areas of the waterway, as well as intervene in the exploration of energy resources by other nations.
Meanwhile, things got tense between the Philippines and China in April 2012 over a region of the disputed territory known as the Scarborough Shoal. As a result, trade wars, fishing bans, and cyber security attacks between nations ensued.
Two years later, in March 2014, the Philippines filed a lawsuit challenging China before a UN court at The Hague.
The world is still waiting for a decision, but it’s unlikely that China will comply. And when the decision comes out, the onus will be on the United States to enforce it. The Bush administration took no stance on this matter. Obama has, but only recently.
Last Friday, the United States was forced to take a stronger stance on the contested territory after the Chinese repeatedly ordered an American military surveillance plane to abandon flights over their artificial islands.
The Pentagon is discussing sending warships there, while the Navy said it had no intention of stopping its almost daily reconnaissance flights.
No matter how this shakes out, investments in the South China Sea are at risk.
According to economist Nouriel Roubini, China has become much more protectionist in the last five years, while ASEAN nations are now becoming increasingly fractious with respect to the South China Sea.
Companies with stakes in the South China Sea will likely lose out in the near to midterm. It’s likely the problem will get worse before it gets better.