National Security Evidence File

Jan19: New National Security Information: Indicators and Surprises
Why Is This Information Valuable?
The Party Congress Test: A Minimum Standard For Analyzing Beijing’s Intentions”, by Peter Mattis
The Chinese Communist Party Congress is held every five years. The 19th, and most recent, was in 2017. Mattis emphasizes the important information contained in Party Congress work reports, and how seldom these important indicators are incorporated into forecasts of China’s future actions.

Mattis’ analyzes the most recent work report. He notes that, “One of the benefits of working one’s way through a document like the 19th Party Congress Work Report is that the reader sees a clear nesting of ideas. At the top, national rejuvenation is identified as the overriding objective. The features of national rejuvenation are identified: (1) national reunification; (2) securing China’s international position and leadership in global affairs; and (3) “build[ing] China into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful. Each of those words attached to Chinese modernity, as the party defines it, have specific meanings within the party context that may not resemble how we in a liberal democratic society might understand them.”

For example, “’the great rejuvenation of the Chinese nation’ or ‘the Chinese dream of national rejuvenation’— the shorthand for China’s rise to great power capability and status — operates on two levels: domestic and global. There is no intermediate regional space…the report also notes national rejuvenation requires ‘toppling the three mountains of imperialism, feudalism, and bureaucratic-capitalism that were oppressing the Chinese people.’ Contemporary threats of imperialism and bureaucratic-capitalism come from beyond China’s borders…Simply put, the party congress work report does not provide any evidence for regionally constrained ambitions. To those who reject this analysis on the basis that Chinese capabilities and reach fall short of their ambitious aims, Xi Jinping said ‘we should not stop pursuing our ideals because they seem out of our reach.’ China’s capabilities today simply are not a reliable indicator of its intentions for tomorrow.”
Domestic Repression And International Aggression? Why Xi Is Uninterested In Diversionary Conflict” by George Yin from Brookings
Rising internal opposition to Xi Jinping is an underreported story in the west. This new article provides an excellent overview. It’s key conclusion: “Forces that oppose Xi may be dormant but their powers remain intact, and criticisms of Xi’s administration have been multiplying since the 19th Party Congress.”

The author also notes that, “the theory of diversionary wars posits that leaders often have the incentive to pursue aggressive foreign policies in order to divert the domestic audience’s attention from domestic troubles. Through international conflict, leaders can either foster national solidarity or demonstrate their competence.” He then asks if Xi could “seek to consolidate power by adopting an assertive foreign policy in his second term?”

In his answer to this question, Yin notes that, “crucially, diversionary war theory rests on a number of assumptions, two of which do not hold for Xi today…First, that leaders prefer foreign adventure over addressing domestic troubles…[and] Second, that key domestic players want conflict…A diversionary conflict is likely to further galvanize Xi’s opposition.”

That said, Yin also cautions that, “Taiwan’s pursuit of de jure independence is probably the only issue that could unite the rival CCP factions under Xi for conflict.”
For most of January, there were many stories speculating that the US and China might be able to reach a face saving trade deal. But at the end of the month, the US announced an expanded series of criminal charges against Huawei Communications, in addition to the charges against the company’s CFO that led to her arrest at Vancouver airport, and pending extradition to the US.
In its negotiations with China, the US is demanding structural reforms – e.g., removal of Chinese regulations forcing foreign investors to disclose their technology – that have been an important part of their economic model. Eliminating the Chinese law the compels its technology companies to cooperate with China’s military and intelligence services would be harder still, and could potentially cause sufficient embarrassment to Xi to trigger attempts at removing him from power (and perhaps subsequent infighting between different Chinese Communist Party factions at a time when economic conditions are worsening at an accelerating pace).

These developments raise the probability that rather than a relaxation of the growing US/China conflict, it may instead grow more intense. One important potential consequences of this was recently highlighted by the Financial Times’ Gillian Tett, who wrote: “Do not underestimate the risk of an iron curtain in tech” which could substantially disrupt those supply chains in which China has played an important role. Should this happen, the negative impact on economic growth would likely be substantial.
The newly released US National Intelligence Strategy contains a very sobering warning about cyber threats. So too did the US Intelligence Community’s annual Worldwide Threat Assessment report to Congress.
The National Intelligence Strategy states that, “Despite growing awareness of cyber threats and improving cyber defenses, nearly all information, communication networks, and systems will be at risk for years to come. Our adversaries are becoming more adept at using cyberspace capabilities to threaten our interests and advance their own strategic and economic objectives. Cyber threats will pose an increasing risk to public health, safety, and prosperity as information technologies are integrated into critical infrastructure, vital national networks, and consumer devices.”

The Worldwide Threat Assessment contained this: “Our adversaries and strategic competitors will increasingly use cyber capabilities—including cyber espionage, attack, and influence—to seek political, economic, and military advantage over the United States and its allies and partners.

China, Russia, Iran, and North Korea increasingly use cyber operations to threaten both minds and machines in an expanding number of ways—to steal information, to influence our citizens, or to disrupt critical infrastructure…”

“At present, China and Russia pose the greatest espionage and cyber attack threats, but we anticipate that all our adversaries and strategic competitors will increasingly build and integrate cyber espionage, attack, and influence capabilities into their efforts to influence US policies and advance their own national security interests.”

In the last decade, our adversaries and strategic competitors have developed and experimented with a growing capability to shape and alter the information and systems on which we rely. For years, they have conducted cyber espionage to collect intelligence and targeted our critical infrastructure to hold it at risk. They are now becoming more adept at using social media to alter how we think, behave, and decide. As we connect and integrate billions of new digital devices into our lives and business processes, adversaries and strategic competitors almost certainly will gain greater insight into and access to our protected information…”

For 2019 and beyond, the innovations that drive military and economic competitiveness will increasingly originate outside the United States, as the overall US lead in science and technology (S&T) shrinks; the capability gap between commercial and military technologies evaporates; and foreign actors increase their efforts to acquire top talent, companies, data, and intellectual property via licit and illicit means.”

“Many foreign leaders, including Chinese President Xi Jinping and Russian President Vladimir Putin, view strong indigenous science and technology capabilities as key to their country’s sovereignty, economic outlook, and national power.”
New publications have addressed the implications of increased cooperation between Russia and China, and the threat this poses to the west.
The title of a new RAND analysis makes an important point: “Russia is a Rogue, Not a Peer; China is a Peer, Not a Rogue.” As the report notes, “Russia and China represent quite distinct challenges. Russia is not a peer or near-peer competitor but rather a well-armed rogue state that seeks to subvert an international order it can never hope to dominate. In contrast, China is a peer competitor that wants to shape an international order that it can aspire to dominate.”

Another new RAND report, “Russia’s Hostile Measures in Europe” goes into great detail about the nature and use of the “measures short of war” that Russia employs to pursue its goals.
Perhaps most interesting of all this month have been reports related to Putin’s falling domestic support.
In “Don’t Shoot the Messenger” (published in The American Interest), Karina Orloval writes that, “The Kremlin’s trusted polling firm WCIOM, which also happens to be state-owned, has been releasing the results of its surveys faster and faster, and the news isn’t good for Russia’s President Vladimir Putin. The latest poll, measuring Russians’ “trust” in politicians, shows Putin registering only 32.8 percent support—his lowest rating in more than 13 years. This follows a poll released one week ago that had Putin at 33.4 percent. Both of those are a big fall from May of last year, when almost 47 percent of Russians trusted him…[Also], the respected independent pollster Levada reported that 53 percent of the public wants the government to resign, 20 points up from a month ago. Price increases and income drops were cited as prime causes for the discontent.”
There has been continuing chaos in the UK this month, as Theresa May’s government struggled to find an alternative to the draft UK/EU separation agreement that was rejected by Parliament
To oversimplify, the essential stumbling block is where to place the new border between the UK and EU. The problem is that the island of Ireland is divided between the Republic of Ireland (a member of the EU), and Northern Ireland (which is part of the UK). Northern Ireland accounts for about 30% of the population of the island, and 3% of the population of the UK.

Essentially there are three border options: (1) Across the Republic/Northern Ireland border. This border was removed as part of the 1998 Good Friday Agreement that ended the violent period known as “the Troubles”; (2) Across the Irish Sea that separates the island of Ireland from the island containing England, Scotland, and Wales. The Northern Ireland Democratic Union Party objects to having part of the UK treated differently – i.e., remaining under European Union regulations, and since the last UK election, Theresa May’s government’s survival depends on the DUP’s support in Parliament; or (3) Across the English Channel, to which the Republic of Ireland objects because it would be forced to accept UK regulations.

The current UK/EU Separation Agreement (that was rejected by Parliament) contained a so-called “Irish Backstop” to ensure that a physical border would not be rebuilt between the Republic of Ireland and the North. The backstop would force the UK to remain in a customs union with the EU if no subsequent trade agreement between the two was reached by March 2021 – two years after the UK is due to leave the EU. As long as the customs union was in effect, the UK would be prohibited from negotiating separate trade agreements with other nations.

EU negotiators have thus far been unwilling to give any ground on this arrangement, nor has the UK proposed a detailed alternative. The probability has thus increased that in March, the UK will leave the EU without a transitional customs union agreement, and revert to trading with the EU on World Trade Organization terms.
Even if that happens, the Irish border issue may not go away. It has been suggested that the UK could simply state it was not going to establish new customs checks on the Northern Ireland side of the border, and thus continue to comply with the Good Friday Agreement. This would put the EU in the awkward position of having to ask the Republic to build ones on its side. Time will tell.

Overall, however, Brexit has already significantly increased uncertainty, and the likelihood of a negative economic shock for both the UK and the EU at a time when their growth rates are already slowing.
The title of a new column by the FT’s Ed Luce raises a critical issue as we move into a period of heightened US-China competition: “America’s Strange Blind Spot Towards India
As Luce writes, “Some time in the coming years, India will become the largest country in the world. It’s the only possible counterweight to neighbouring China, which is America’s only serious rival. It’s the world’s largest democracy. And it's no longer mired in hopeless poverty…India’s economic growth is likely to be higher than China’s for the next 25 years.”
Dec18: New National Security Information: Indicators and Surprises
Why Is This Information Valuable?
Macron's Ghosts Return To Haunt Him” – Spiegel’ commentary on the Giletes Jaunes demonstrations in France
“For Macron, for his credibility and authority, which he has orchestrated publicly like few others before him, it is too much. If he ends up having to backtrack on his policies, it will represent a U-turn and a watershed moment for his presidency -- a point from which he will struggle to recover Rather than playing the role of a Jupiter, he would be an Icarus; a man who wished to fly high, but fell. He would have to govern with clipped wings… Almost everything he wanted to accomplish for his country is at stake. Up to this point, he and his government had abided by the principle that no matter what happens, they would stay the course. His aim was nothing less than the "transformation" of France. Everything was to become new, different. But now it appears things could turn out very differently… Many are now talking about the forgotten France, about the rural areas, largely disconnected from public life, where people eke out a grim marginal existence… When Macron traveled through France during his election campaign, he often spoke of the "feeling of degradation" he witnessed in some places. He wanted to fight against it, he said. But perhaps he should have done more to heed his own advice. When people picture him, they don't exactly conjure up images of him visiting remote villages.

"The yellow vests' revolt is also one of the rural areas against Paris, led by French people who, contrary to what is often said about them, do not belong to the middle class. It is the little people, the 'class populaire,' or working class -- those to whom Macron promised social advancement and who voted for him instead of the Socialists in response and helped secure his win. These people feel degraded, even if that is more of a sentiment than reality… If you were to try to sum up the yellow vests, as varied as they may be, one would describe them as pessimists and people who trust nothing, especially not things that take a long time. And democracy takes time. These days, they only rely on themselves -- and, if necessary, on their own capacity for violence. They have also registered that this can be effective given the zig-zagging by a government that appears to be increasingly unstable. It might also be that people in France feel particularly neglected because inequalities seem even crueler in a country that constantly invokes the noble virtue of equality…

"Macron, of all people, is becoming the target of an anger that has been growing for years, and even decades. He is paying for others' mistakes, which is, on the one hand, unfair, but, on the other, understandable.”
A Macron Failure Would Bode Ill for the EU’s Future”, by Wolfgang Muchau, Financial Times, 29Dec18
“The new year promises to be one of important decisions for the EU. The biggest of these will probably not be Brexit but the European parliamentary elections in May and the resulting decisions on the future direction of the EU. The polls will determine whether the balance of power will tilt towards EU reformers, assorted populists or a new group of Nordic decelerators of European integration.

This coalition is also known under the misnomer of the “ new Hanseatic League” and is led by Mark Rutte, prime minister of the Netherlands. The so-called populists stand no chance of taking control of the European Parliament, but they could end up shifting the balance of power in one direction or another…It is too early to conclude that we are staring at the abyss of yet another failed French presidency — he still has time to recover. But that would require a dramatic presidential reboot…

The more immediate issue is whether he can recover in time for the European elections. He might not, and such a failure would probably end any hopes of further European integration for a long time. Without him, there will be nobody else of weight in the European Council to push for it….

If Mr Macron were to fail, the EU would retreat in on itself and become at the mercy of outside forces, China among them. At no point will you hear a loud bang, but you might discern a faint echo of deflating soft power. That said, we Europeans still have a lot going for us. We are liberal and rich, have some of the world’s most beautiful cities, great art and great wine and are vastly over-represented in international institutions. But we are not investing in the future. We are falling behind in innovation and we are getting old. The 2019 elections are about whether the EU can stand on its own in a more hostile world.”
Two Roads for the New French Right” by Mark Lilla, 20Dec18

“Journalists have had trouble imagining that there might be a third force on the right that is not represented by either the establishment parties or the xenophobic populists… In countries as diverse as France, Poland, Hungary, Austria, Germany, and Italy, efforts are underway to develop a coherent ideology that would mobilize Europeans angry about immigration, economic dislocation, the European Union, and social liberalization, and then use that ideology to govern. Now is the time to start paying attention to the ideas of what seems to be an evolving rightwing Popular Front.”
Divided Kingdom: How Brexit is Remaking the UK’s Constitutional Order” by Amanda Sloat, from Brookings

While the media is filled with stories about the last minute game of three way Brexit chicken being played between UK Prime Minister Theresa May, the EU, and the British Parliament (current estimate: Parliamentary vote in favor of draft UK/EU separation treaty fails, after which many outcomes seem possible at this point), Sloat’s analysis is unique and takes a closer look at how the Brexit experience is affecting domestic politics in the UK, and where this could lead.
On 20Dec18, in a widely reported speech to a military conference, “Rear Admiral Lou Yuan has told an audience in Shenzhen that the ongoing disputes over the ownership of the East and South China Seas could be resolved by sinking two US super carriers.”

The Hoover Institution (and partners) released a report on China’s broad attempts to influence domestic American institutions and politics (“Chinese Influence & American Interests: Promoting Constructive Vigilance”). “To achieve its global ambitions it is exercising a new form of power—not the hard power of military force, but not the soft power of transparent persuasion either. Rather, this is "sharp power" that seeks to penetrate the institutions of democracies in ways that are often what a former Australian prime minister called "covert, coercive, or corrupting." We need to learn to recognize these forms of influence and strengthen our institutions to resist them.”

There were a variety of indicators related to concerns about the sharp slowing of China’s economy, including Apple’s earnings miss due to weakening sales in China, widening problems in China’s non-bank financial system (and losses being incurred by the nation’s middle class), and increasing unemployment (e.g., “China Factory Jobs Dry Up as Trade Tensions Hit Manufacturing”, Financial Times 26Dec18). Trade tensions continued to increase, with the CFO of Huawei being arrested at US request (on charges of evading US sanctions on trade with Iran) during a transit stop at Vancouver airport (e.g., “Chinese Elites Reel From Shock of Huawei Executive’s Arrest”, Financial Times 12Dec18).

Finally, in the 17Dec18 Financial Times, Gideon Rachman questioned whether China’s leaders have fully grasped that “there has been a profound bipartisan shift in US thinking” about China, while on 14Dec18 Graham Allison wrote an article in National Affairs titled, “China and Russia: A Strategic Alliance in the Making.” Finally, in his 18Dec18 speech
on the 40th anniversary of Deng Xiaoping’s economic reforms, president Xi Jinping aimed squarely at many Chinese’ resentments over past humiliations when he stated that “No one is in a position to dictate to the Chinese people what should or should not be done.”
All of these are further indicators of worsening of China’s domestic economy and its growing conflict with the United States. While we may yet see some sort of face-saving truce in the trade war between the two nations (which will give US President Trump the public relations victory he seeks), it is very unlikely that this will reverse the current trajectory of Chinese-US relations.
Trump Delivers a Victory to Iran” by Gerecht and Dubowitz

“Trump’s decision to withdraw U.S. forces from Syria, concurrently with his intention to drastically reduce the number of American soldiers in Afghanistan and the likely soon-to-be-announced further drawdown of U.S. personnel in Iraq, has made mincemeat of the administration’s efforts to contain Iran. If you add up who wins locally by this decision (the clerical regime in Iran, Russian President Vladimir Putin, the Syrian dictator Bashar al-Assad, Lebanese Hezbollah, Iraqi Shiite radicals, and Turkish President Recep Tayyip Erdo─čan) and who loses (Jordan, Israel, the Syrian and Iraqi Kurds and Sunni Arabs, everyone in Lebanon resisting Hezbollah, the vast majority of the Iraqi Shia, the Gulf States), it becomes clear that the interests of the United States have been routed.”
Pattern Analysis of World Conflict Over the Past 600 Years”, by Martelloni et al (See also, “Trends and Fluctuations in the Severity of Interstate Wars” by Aaron Clauset, and “On the Statistical Properties and Tail Risk of Violent Conflict”, by Cirillo and Taleb)
Previously, Clauset has concluded that, “historical patterns of war seem to imply that the long peace may be substantially more fragile than proponents believe, despite efforts to identify the mechanisms that reduce the likelihood of interstate wars.” Cirillo and Taleb have also found that claims of a drop in the frequency of wars and severity of casualties are not supported, and that previous studies have very likely underestimated tail risks. As Reinhart and Rogoff concluded in their study of eight centuries of financial crises, “this time isn’t different.”

Martelloni’s study adds to this growing body of research. He and his co-authors find that, “he causes of human conflicts remain largely an unresolved subject, especially for the large conflicts that we call “wars.” Historians often tend to see wars arising from specific decisions of human actors, in turn the result of specific economic or political strains pitting nations or social groups against each other.

But another possible interpretation is that wars are related to the structure of the human society as a whole.” Based on data covering 600 years of human conflict, they find that “the number of casualties [normalized for human population at the time] tends to follow a power law, with no evidence of periodicity. We also observe that the number of conflicts, again normalized for the human population, show a decreasing trend as a function of time.

Our result agree with previous analyses on this subject and tend to support the idea that war is a statistical phenomenon related to self-organized criticality in the network structure of the human society” and the behavior of human beings that produces it.”
2019 Index of US Military Strength” by the Heritage Foundation
This new analysis, like similar ones by other organizations (e.g., RAND) documents in detail the decline of relative US hard power versus key military contingencies.
The Eroding Balance of Terror: The Decline of Deterrence” by Andrew Krepinevich in Foreign Affairs

“Deterring aggression has become increasingly difficult, and it stands to become more difficult still, as a result of developments both technological and geopolitical. The era of unprecedented U.S. military dominance that followed the Cold War has ended, leading to renewed competition between the United States and two great revisionist powers, China and Russia. Military competition is expanding to several new domains, from space and cyberspace to the seabed, and new capabilities are making it harder to accurately gauge the military balance of power.

Meanwhile, advances in cognitive science are challenging the theoretical underpinnings of deterrence by upending our understanding of how humans behave in high-risk situations— such as when facing the possibility of war. Taken together, these developments lead to an inescapable—and disturbing—conclusion: the greatest strategic challenge of the current era is neither the return of great-power rivalries nor the spread of advanced weaponry. It is the decline of deterrence.”
How a World Order Ends” by Richard Haas in Foreign Affairs
Haas uses historical analogies to explain the deterioration of the current world order, and where it might lead.

“A stable world order is a rare thing. When one does arise, it tends to come after a great convulsion that creates both the conditions and the desire for something new. It requires a stable distribution of power and broad acceptance of the rules that govern the conduct of international relations. It also needs skillful statecraft, since an order is made, not born. And no matter how ripe the starting conditions or strong the initial desire, maintaining it demands creative diplomacy, functioning institutions, and effective action to adjust it when circumstances change and buttress it when challenges come.

Eventually, inevitably, even the best-managed order comes to an end. The balance of power underpinning it becomes imbalanced. The institutions supporting it fail to adapt to new conditions. Some countries fall, and others rise, the result of changing capacities, faltering wills, and growing ambitions. Those responsible for upholding the order make mistakes both in what they choose to do and in what they choose not to do. But if the end of every order is inevitable, the timing and the manner of its ending are not. Nor is what comes in its wake.”
Understanding the Emerging Era of International Competition” by Mazarr et al from RAND

Mazaar and his colleagues in some ways take up with Haas’ article leaves off. This excellent new report from RAND provides a useful framework for better understanding the evolving world of weaker rules and intensified interstate (and inter-bloc) competition.
Nov18: New National Security Information: Indicators and Surprises
Why Is This Information Valuable?
The Role of AI in Future Warfare”, by Michael O’Hanlon, published by Brookings
Good, concise overview. The author concludes that, “Robotics and AI could take on a central, and very important, role in warfare by 2040—even without anything resembling a terminator or a large killer robot.” Critically, this increases the risk of faster escalation of future conflicts.
U.S.-China Economic And Security Review Commission, 2018 Report To Congress
The U.S.-China Economic and Security Review Commission is mandated by Congress to investigate, assess, and report to Congress annually on “the national security implications of the economic relationship between the United States and the People’s Republic of China.”

This very thorough, 539 page report provides extensive evidence to support key findings that have become familiar but are still critical and in many cases unmet.

Economic Challenges

“China’s state-led, market-distorting economic model presents a challenge to U.S. economic and national security interests. The Chinese government, directed by the Chinese Communist Party (CCP) leadership, continues to exercise direct and indirect control over key sectors of the economy and allocate resources based on the perceived strategic value of a given firm or industry. This puts U.S. and other foreign firms at a disadvantage— both in China and globally—when competing against Chinese companies with the financial and political backing of the state.”

“The Chinese government continues to resist—and in some cases reverse progress on—many promised reforms of China’s state led economic model.”

“Chinese President and General Secretary of the CCP Xi Jinping has prioritized efforts to consolidate control over economic policymaking. However, this strategy may have unintended consequences for China’s economic growth. Increased state control over both public and private Chinese companies may ultimately reduce productivity and profits across a range of industries, with firms pursuing CCP—rather than commercial—objectives.”

“China’s debt burden poses a growing threat to the country’s long-term economic stability. Even as Chinese banks’ nonperforming loans rise and unofficial borrowing by local governments comes due, Chinese policymakers continue to spur new credit growth to combat fears of an economic slowdown.”

“The Chinese government structures industrial policies to put foreign firms at a disadvantage and to help Chinese firms. Among the policies the Chinese government uses to achieve its goals are subsidies, tariffs and local content requirements, restrictions on foreign ownership, intellectual property (IP) theft and forced technology transfers, technical standards that promote Chinese technology usage and licensing, and data transfer restrictions.”

“China has reaped tremendous economic benefits from its accession to the World Trade Organization (WTO), and participation in the rules-based, market-oriented international order.”

“However, more than 15 years after China’s accession, the Chinese government’s state-driven industrial policies repeatedly violate its WTO commitments and undermine the multilateral trading system, and China is reversing on numerous commitments.”

Security Challenges

“China signaled a decisive end to its more than quarter century- old guidance to ‘hide your capabilities and bide your time, absolutely not taking the lead’ as President Xi issued a series of new foreign affairs and military policy directives calling on China to uncompromisingly defend its interests and actively promote changes to the international order.”

“The United States faces a rising power in China that sees the security structures and political order of the Indo-Pacific as designed to limit its power. The widening gap in military capability between China and the rest of region also enables Beijing to coerce its neighbors with the increasingly credible implied threat of force.”

“Beijing is currently capable of contesting U.S. operations in the ground, air, maritime, and information domains within the second island chain, presenting challenges to the U.S. military’s longstanding assumption of supremacy in these domains in the post-Cold War era.”

“By 2035, if not before, China will likely be able to contest U.S. operations throughout the entire Indo-Pacific region…China’s large-scale investment in next-generation defense technologies presents risks to the U.S. military’s technological superiority. China’s rapid development and fielding of advanced weapons systems would seriously erode historical U.S. advantages in networked, precision strike warfare during a potential Indo-Pacific conflict.”

“China continues to develop and field medium- and long-range air, sea, and ground-launched missile systems that substantially improve China’s capability to strike both fixed and moving targets out to the second island chain. China’s ability to threaten U.S. air bases, aircraft carriers, and other surface ships presents serious strategic and operational challenges for the United States and its allies and partners throughout the Indo-Pacific.”

“Prior to the PLA [Chinese military] achieving its objectives of becoming a “modern” and “world-class” military, Beijing may use coercive tactics below the threshold of military conflict rather than resorting to a highly risky use of military force to achieve its goals in the region. However, as military modernization progresses and Beijing’s confidence in the PLA increases, the danger grows that deterrence will fail and China will use force in support of its claims to regional hegemony.”
A Fifth of China’s Homes Are Empty: That’s 50 Million Apartments”, Bloomberg News, 8Nov18

This article provides further evidence that improvements in China’s military capabilities are occurring at the same time as its financial system and economy’s situation is becoming more fragile and precarious.

“The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral. The latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation -- considered by leaders a key threat to financial and social stability -- are coming up short.”

In “China’s Real Estate Market”, Liu and Xiong provide more important background on this issue.

As they note, “The real estate market is not only a key part of the Chinese economy but also an integral component of China’s financial system. In 2017, housing sales totaled 13.37 trillion RMB, equivalent to 16.4% of China’s GDP. The real estate market is also deeply connected to China’s financial system through several important channels.”

“First, housing holdings are the biggest component of Chinese households’ asset portfolios, partly due to a lack of other investment vehicles for both households and firms in China’s still underdeveloped financial markets.”

“Second, China’s local governments heavily rely on land sale revenues and use future land sale revenues as collateral to raise debt financing.”

“Third, firms also rely on real estate assets as collateral to borrow, and since 2007, firms, especially well-capitalized firms, have engaged heavily in acquiring land for investment purposes.”

“Finally, banks are heavily exposed to real estate risks through loans made to households, real estate developers, local governments, and firms that are either explicitly or implicitly backed by real estate assets…”

Through the third quarter of 2016, property-related loans totaled 55 trillion RMB, accounting for about 25% of China’s banking assets. Among these loans, mortgage loans to households accounted for 17.9 trillion, loans to real estate developers accounted for 14.8 trillion (including 7 trillion in regular loans, 6.3 trillion in credit through shadow banking, and 1.5 trillion through domestic bond issuance), and loans collateralized by real estate assets to firms and local governments accounted for 22.2 trillion. This heavy real estate exposure of banks makes the real estate market systemically important in China’s financial system.”
Risks in China’s Financial System”, by Song and Xiong“
The authors argue that while “a financial crisis in China is unlikely to happen in the near future, the ultimate financial risk lies with declining Chinese economic growth.” They point to “a vicious circle of distortions in the financial system has lowered the efficiency of capital allocation and thus economic growth, which will eventually exacerbate financial risks.”
Chinese Influence and American Interests”, published by the Hoover Institution
“For three and a half decades following the end of the Maoist era, China adhered to Deng Xiaoping’s policies of ‘reform and opening to the outside world” and “peaceful development.’

“After Deng retired as paramount leader, these principles continued to guide China’s international behavior in the leadership eras of Jiang Zemin and Hu Jintao. Admonishing Chinese to ‘keep your heads down and bide your time,’ these Party leaders sought to emphasize that China’s rapid economic development and its accession to “great power” status need not be threatening to either the existing global order or the interests of its Asian neighbors.”

“However, since Party general secretary Xi Jinping came to power in 2012, the situation has changed. Under his leadership, China has significantly expanded the more assertive set of policies initiated by his predecessor Hu Jintao. These policies not only seek to redefine China’s place in the world as a global player, but they also have put forward the notion of a “China option” that is claimed to be a more efficient developmental model than liberal democracy.”

“While Americans are well acquainted with China’s quest for influence through the projection of diplomatic, economic, and military power, we are less aware of the myriad ways Beijing has more recently been seeking cultural and informational influence, some of which could undermine our democratic processes. These include efforts to penetrate and sway—through various methods that former Australian prime minister Malcolm Turnbull summarized as ‘covert, coercive or corrupting’—a range of groups and institutions, including the Chinese American community, Chinese students in the United States, and American civil society organizations, academic institutions, think tanks, and media…”

“China’s influence activities have moved beyond their traditional United Front focus on diaspora communities to target a far broader range of sectors in Western societies, ranging from think tanks, universities, and media to state, local, and national government institutions. China seeks to promote views sympathetic to the Chinese Government, policies, society, and culture; suppress alternative views; and co-opt key American players to support China’s foreign policy goals and economic interests.”
China’s Xi Jinping revives Maoist call for ‘self-reliance’”, Financial Times 12Nov18

Even as Xi has sought to position China as a champion of globalisation amid the US retreat into protectionism, the call for “self-reliance” highlights how he is also advocating mercantilist policies that could reshape global supply chains…
False hopes of trade truce between US and China after the G-20 meeting in Argentina were quickly dashed by the arrest in Vancouver of the CFO of Huawei (on a charge of conspiring to evade US sanctions on Iran), and China’s subsequent threat to impose grave consequences on Canada if she is not released.
Make no mistake. The Second Cold War has begun.

As Ely Ratner notes in Foreign Affairs this month, “There is No Grand Bargain with China”:

“The days when the world’s two largest economies could meet each other halfway have gone. Over the course of his first five-year term, Xi passed up repeated opportunities to avert rivalry with Washington. His increasingly revisionist and authoritarian turn has instead eliminated the possibility of a grand bargain between the United States and China. On most issues of consequence, there is simply no overlap between Xi’s vision for China’s rise and what the United States considers an acceptable future for Asia and the world beyond.”
Change in Post-Putin Russia?” by Andrew Wood, in The American Interest

This is an excellent analysis that should improve investors’ mental model(s) of the forces driving future scenarios for Russia.

“Putinist authoritarian rule has returned Russia to the dilemma confronting the Soviet Union at the end of the Brezhnev era: whether it can rethink or reformulate its fundamental purposes without un-leashing forces that its rulers cannot control.”

“Russia has reverted to a condition comparable to that which led in the end to the fall of the USSR. Today’s Kremlin, like its Soviet predecessor, has proved unable to adequately address the linked questions of how to secure beneficial relationships with the outside world, responsible governance, and stable economic and social development.”

“Putin’s Russia is ruled by an opaque and shifting power structure centered on the Kremlin. It is now devoid of authoritative institutions beyond that framework that would enable Russia to develop into a fully functional or accountable state.” Can this change? Putin’s mission was from the beginning to re-establish “order,” with the recipe of a centralized KGB/FSB as its mandatory magic ingredient. Maintaining such order is still his central purpose, within Russia and beyond it.”

“Putinist authoritarian rule has thereby returned Russia to the dilemma confronting the Soviet Union at the end of the Brezhnev era: whether it can rethink or reformulate its fundamental purposes without unleashing forces that its rulers cannot control. Putin’s Kremlin has in consequence become increasingly determined to centralize decision making and to preserve its hold on power.”

“Rethinking Russia’s options as to its international relations, system of governance, and economic and social policies has thereby over time become more difficult and more risky than it once might have been…Putin has no compelling view as to what new domestic policies he can or should offer his public. That has made the myth of defending a besieged Fortress Russia an essential buttress for his regime.”

“Russia’s governing structures have become predominantly staffed and directed by law enforcement and security agencies (Siloviki). The KGB was never in overall political charge in Brezhnev’s time, or even Andropov’s. It occupied a much-reduced place under Yeltsin. But the FSB in its various guises is now at the undisciplined heart of government under Putin, expressed in a variety of security organs under differing acronyms and troubled by internal rivalries. The link between the Russian security organs and Putin’s preoccupation with Russian nationalism is an essential element in that dominance, a preoccupation naturally shared with Russia’s military organizations.”

“The Siloviki, broadly defined, also have parallel interests in the opportunities for enrichment opened up to them by their role. Those interests extend to cooperation with organized crime groups and working with illegitimate but tolerated vigilante forces.”

“The Siloviki will have their say in determining whoever or whatever succeeds Putin. There may well be divisions among them but it would take a stubborn courage to suppose that any of their leaders might perhaps favor liberalizing reform…Absent a change of direction over the next few years, [the Siloviki] will inherit a Russia weakened by an economy and society troubled by low growth, secured in place by the politically determined structures imposed upon it.”

“It follows from the above account that Russia will not in the predictable future find a way to address the linked questions of how to secure beneficial relations with the outside world, responsible governance, and stable economic and social development.

“Those Russians who fear that a car crash is inevitable sooner or later, and possibly even before 2024, have a persuasive case to make. There are a number who judge that only such a catastrophe will enable Russia to escape from its present travails. If the fear of an imminent internal crisis while Putin is still in charge proves justified, its implications for the West could well prove troubling. That would also be the case if, as seems more plausible, the next Russian leadership proves unable to establish and legitimate its authority.”
“Providing for the Common Defense”, by the independent, non-partisan “Commission on National Defense Strategy for the United States”, established by the US Congress.

This report reviews the 2018 National Defense Strategy published by the Trump Administration.

Its key conclusion is blunt, and needs to be seen in the context of the Report of the US-China Economic and Security Review Commission.

“The security and wellbeing of the United States are at greater risk than at any time in decades. America’s military superiority—the hard-power backbone of its global influence and national security—has eroded to a dangerous degree. Rivals and adversaries are challenging the United States on many fronts and in many domains. America’s ability to defend its allies, its partners, and its own vital interests is increasingly in doubt. If the nation does not act promptly to remedy these circumstances, the consequences will be grave and lasting.”
The Power of Nations: Measure What Matters” by Michael Beckley

Most quantitative assessments of relative national power are based on comparisons of gross resources. Beckley argues (and provides evidence) that comparing net resources is a better measure.

Using this metric, he claims that the United States’ net power advantage over China is still substantial. A very thought provoking challenge to a lot of today’s conventional wisdom.

“China may have the world’s biggest economy and military, but it also leads the world in debt; resource consumption; pollution; useless infrastructure and wasted industrial capacity; scientific fraud; internal security spending; border disputes; and populations of invalids, geriatrics, and pensioners. China also uses seven times the input to generate a given level of economic output as the United States and is surrounded by nineteen countries, most of which are hostile toward China, politically unstable, or both. Accounting for even a fraction of these production, welfare, and security costs substantially reduces the significance of China’s rise.”
What Deters, and Why” by Mazarr et al from RAND

Another report from RAND that will improve our mental models of conflict.

“The challenge of deterring territorial aggression, which for several decades has been an afterthought in U.S. strategy toward most regions of the world, is taking on renewed importance. An increasingly belligerent Russia is threatening Eastern Europe and the Baltic States with possible aggression, conventional and otherwise. China is pursuing its territorial ambitions in the East and South China Seas with greater force, including the construction of artificial islands and occasional bouts of outright physical intimidation. North Korea remains a persistent threat to the Republic of Korea (ROK), including the possibility of large-scale aggression using its rapidly advancing nuclear arsenal.”

“Yet the discussion of deterrence—as a theory and practical policy requirement—has lagged in U.S. military and strategy circles. This study aims to provide a fresh look at the subject in this context, with two primary purposes: to review established concepts about deterrence, and to provide a framework for evaluating the strength of deterrent relationships…”

“The study stems from a specific research question: What are the requirements of effective extended deterrence of large-scale military aggression? … Our research highlighted several specific themes about successful extended deterrence, including:”

“Potential aggressors’ motivations are highly complex and typically respond to many variables whose interaction is difficult to anticipate.”

“Generally, opportunism in aggression seems less common than desperation caused by real or perceived threats to security or status.”

“Clarity and consistency of deterrent messaging is essential. Half-hearted commitments to allies risk being misperceived.”

“A ‘firm but flexible’ approach strengthens, rather than weakens, deterrence; leaving an adversary no way out is not an effective way to sustain deterrence. Compromise and concession are typically part of any version of successful extended deterrence of large-scale aggression.”

“Multilateral deterrence contexts are especially dangerous. Deterring an aggressive major power while restraining an ally from taking provocative actions at the same time is extremely difficult…”

“In sum, this analysis suggests that aggressor motivations serve as the first, and in some ways decisive, variable for interstate deterrence outcomes. Weakly motivated aggressors are easy to deter; intensely motivated ones, whose level of threat perception verges on paranoia, can be impossible to deter….”

“This analysis also suggests that clarity in what is to be deterred, and how the United States will respond if deterrence fails is the second essential element of a successful deterrent posture.”
Uncertainty in Western Europe continues to increase.
Brexit confusion has only gotten worse this month. Meanwhile, France is faced with worsening street demonstrations over tax increases (and Macron’s policies more generally); in Germany the CDU party struggles to decide on a successor to Angela Merkel who is sufficiently conservative to slow the growth in support for the (right) populist AfD party without moving so far the the right that they lose support of in the center; and Italy continues to play a game of budget chicken with the EU.
Oct18: New National Security Information: Indicators and Surprises
Why Is This Information Valuable?
Beijing’s Nuclear Option: Why a U.S. – Chinese War Could Spiral Out of Control” by Caitlin Talmadge, in Foreign Affairs (Also, “Would China Go Nuclear?” by Caitlin Talmadge in International Security)

“The odds of a U.S. – Chinese confrontation going nuclear are higher than most policymakers think.”

Chinese nuclear forces are embedded with conventional forces, and thus vulnerable to loss in US deep strike against the latter, which could create a “use them or lose them” situation.
America’s New Attitude Towards China is Changing the Countries’ Relationship” in The Economist 18Oct18
A broadly-based interdependence ties Beijing’s pigs to Iowa’s fields, interweaves supply chains and distribution networks across the Pacific and has seen copious Chinese investment in America. That had, until recently, led observers in both China and America to think attitudes like Mr. Trump’s could be nothing but bluster.”

“Though relations might be testy from time to time, the economic logic which favoured getting along was simply too strong to ignore. But American unease about China’s growing technological heft, increasing authoritarianism and military strength is now overriding that logic.”

“America is undergoing a deep shift in its thinking about China on right and left alike. There is a new consensus that China has a deliberate strategy to push America back and impose its will abroad, and that there needs to be a strong American response”.

Meanwhile in China, “Well-connected scholars and retired officials have shared their concerns with Western contacts about a febrile mood within China’s national security establishment. They detect genuine excitement over the prospect of a great-power contest in which China is one of the protagonists. This coincides worryingly with the squeezing of public space for discussion. Scholars are not now supposed to debate foreign policy in the open, and strident nationalists dominate what debate there is.”

“Even the idea of an expensive arms race with America strikes some Chinese experts as a fine plan, given their confidence in the long-run potential of their economy. In this dangerous moment, blending grievance and cockiness, it seems astonishing to remember that less than a generation ago Chinese leaders assured the world that they sought only a ‘peaceful rise’.”
Many stories about China’s mass detention of several hundred thousand to more than one million Muslim Uighurs in the western province of Xinjiang
China has stopped denying, and is now defending its actions in Xinjiang, calling the camps “vocational and educational training centers”. This further worsens China’s relationship with Western nations, and especially the US.
China Faces a Debt Iceberg Threat, Warns Rating Agency”, Financial Times, 16Oct18
“China could be facing a “debt iceberg with titanic credit risks” following a boom in infrastructure projects at local governments around the country, rating agency S&P Global has warned.”

“Local governments could have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.5tn to $6tn) following “rampant” growth in borrowings, said S&P Global.”

“The mounting debt in so-called local government financing vehicles, or LGFVs, hit an “alarming” 60 per cent of China’s gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to small governments across the country.”
This month saw more indicator stories about protests by Chinese homeowners angry at falling prices; by parents angry at the education system; and by veterans angry at their treatment. (The Economist has a story about the broader context of these protests (“Why Protests are So Common in China”) and concludes that they are all indicators of rising social stress.
Protests add to pressure on the Chinese government to stimulate the economy, despite already high debt levels and the declining marginal productivity of debt (the amount of GDP growth produced by additional amounts of debt).

While Xi Jinping appears to be firmly in control, protests indicate an underlying level of dissatisfaction, which, at some point, could support rapid change in China.
Danger: Falling Powers” by Hal Brands

“We often lose sight of a different pathway to great-power war, for peril may emerge when a country that has been rising, eagerly anticipating its moment in the sun, peaks and begins to decline before its ambitions have been fulfilled. The sense that a revisionist power’s geopolitical window of opportunity is closing, that its leaders cannot readily deliver the glories they have promised the population, can trigger rashness and risk-taking that a country more confident in its long-term trajectory would avoid.”
China’s Coming Financial Crisis and the National Security Connection” by Stephen Joske
This article offers a scenario that is an example of Brand’s thesis.
Improving C2 and Situational Awareness for Operations in and Through the Information Environment” by Paul et al from the RAND Corporation
Noting that “defeat is a cognitive outcome” RAND analyzes the extent to which information operations (IO) in the information environment (IE) have been integrated with situation awareness and operations in the land, sea, air, and space environments. The authors conclude that the integration of IE situation awareness and operations with the other environments has, up to now, been weak.

This echoes findings from Defense Science Board 2018 Summer Study on “Cyber as a Strategic Capability”, which concluded that, “Current cyber strategy is stalled, self-limiting, and focused on tactical outcomes. The DoD must build and adopt a comprehensive cyber strategy.”
US Vice President Mike Pence’s 4Oct18 speech at the Hudson Institute

Pence effectively declared a new Cold War with China. His speech complemented the new US National Security Strategy that describes “a new era of great power competition.”

“America had hoped that economic liberalization would bring China into a greater partnership with us and with the world. Instead, China has chosen economic aggression, which has in turn emboldened its growing military.”

“Nor, as we had hoped, has Beijing moved toward greater freedom for its own people. For a time, Beijing inched toward greater liberty and respect for human rights. But in recent years, China has taken a sharp U-turn toward control and oppression of its own people”

“By 2020, China’s rulers aim to implement an Orwellian system premised on controlling virtually every facet of human life — the so-called “Social Credit Score.” In the words of that program’s official blueprint, it will “allow the trustworthy to roam everywhere under heaven, while making it hard for the discredited to take a single step.”

While there have been many indicators that a return to the previous relationship between China and the United States is increasingly unlikely, this speech was a surprisingly blunt statement that the US administration’s view that the relationship will be characterized by higher levels of conflict in the years ahead.
Interagency Task Force Report: “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States

Also: GAO Report: “Weapons Systems Cybersecurity
This new report found significant vulnerabilities, particularly dependence on foreign made components (including components manufactured in China), as well as weakening worker capabilities in the United States.

The GAO concluded that, "The Department of Defense (DOD) faces mounting challenges in protecting its weapon systems from increasingly sophisticated cyber threats. This state is due to the computerized nature of weapon systems; DOD’s late start in prioritizing weapon systems cybersecurity; and DOD’s nascent understanding of how to develop more secure weapon systems. DOD weapon systems are more software dependent and more networked than ever before.”

“Automation and connectivity are fundamental enablers of DOD’s modern military capabilities. However, they make weapon systems more vulnerable to cyber attacks. Although GAO and others have warned of cyber risks for decades, until recently, DOD did not prioritize weapon systems cybersecurity. Finally, DOD is still determining how best to address weapon systems cybersecurity.”
Sep18: New National Security Information: Indicators and Surprises
Why Is This Information Valuable?
In addition to headlines about the growing China-US trade war, (and to a lesser extent high Chinese debt/GDP and the fragility of its shadow banking system), other stories appeared in September, including growing frustrations as increasing automation produces rising layoffs, repression of Marxist student movements that have attempted to unionize workers, protests by People’s Liberation Army veterans over their treatment, and parental anger over school crowding.
As summarized by George Magnus in his new book, “Red Flags: Why Xi’s China is in Jeopardy”, increasing use of repression in China – from growing use of surveillance technology to Uyghur concentration camps to forced acquisitions of private companies by state owned companies – comes in response to evidence of growing dissatisfaction within the nation. In the context of Chinese history, this is a pattern that repeats. These indicators provide a reminder that as China-US conflict increases, its domestic problems are also serious.
China Doesn’t Want to Play by the World’s Rules: Beijing's plans are much bigger than the trade war.” By Abigail Grace

“Securing economic growth is a question of existential importance for Xi and his comrades. The Chinese Communist Party knows that it must deliver a higher quality of life to Chinese citizens in order to retain popular support—or else increase repression of internal dissent.

Xi has personally staked out hypernationalist positions and silenced any opposition to his authority, thereby increasing his own personal culpability for losses in a trade war. In fact, rumors that Xi could be facing domestic political trouble have abounded in recent weeks, raising questions about the costs of his shift away from the collective leadership model.

China’s leadership knows that addressing the U.S.-China trade imbalance is a personal priority for
Trump and is priming its own population for a long and ugly fight.

Despite U.S. pressure, China remains committed to its own economic agenda because it believes that achieving technological supremacy today will enable it to write tomorrow’s rules…As long as Chinese leaders
think that the key to winning tomorrow is dominating today’s technology through all means short of war, they will remain unwilling to address the structural issues driving economic tensions between the United States and China.”
An insightful compliment to Magnus’ book, that helps to develop a better mental model of the various forces driving Chinese behavior, that could push us closer to, or away from, potential critical national security thresholds.
The Perfect Weapon: War, Sabotage, and Fear in the Cyber Age” by David Sanger “Bluntly, there are no effective laws which govern cyberhacking originating in St Petersburg or Shanghai— or, for that matter, in Tehran or Pyongyang”
Further evidence of the profound change that is occurring in the nature of international conflict, which has substantially heightened uncertainty and the potential for non-linear events with substantial negative impact.
Assessment of the Role of Cyber Power in Interstate Conflict” by Eric Altamura.

“To understand how actors attack computer systems and networks to accomplish limited objectives during war, one must first identify what states actually seek to accomplish in cyberspace… Achieving such an advantage requires targeting the key functions and assets in cyberspace that enable states to accomplish political objectives…To deny an opponent the ability to utilize cyberspace for its own purposes, states can either attack information directly or target the means by which the enemy communicates its information.

Once an actor achieves uncontested use of cyberspace, it can subsequently control or manipulate information for its own limited purposes, particularly by preventing the escalation of war toward its total form…access to information through networked communications systems provides a decisive advantage to military forces by allowing for “analyses and synthesis across a variety of domains” that enables rapid and informed decision-making at all echelons. The greater a decision advantage one military force has over another, the less costly military action becomes.

Secondly, the ubiquity of networked information technologies creates an alternative way for actors to affect targets that would otherwise be politically, geographically, or normatively infeasible to target with physical munitions.
Finally, actors can mask their activities in cyberspace, which makes attribution difficult. This added layer of ambiguity enables face-saving measures by opponents, who can opt to not respond to attacks overtly without necessarily appearing weak.

In essence, cyber power has become particularly useful for states as a tool for preventing conflict escalation, as an opponent’s ability to respond to attacks becomes constrained when denied access to communication networks.
Societies’ dependence on information technology and resulting vulnerability to computer network attacks continues to increase, indicating that interstate violence may become much more prevalent in the near term if aggressors can use cyberattacks to decrease the likelihood of escalation by an adversary.”

This article caused me to expand my mental model based on a more detailed understanding of the logic that could guide nations’ use of cyberweapons in future conflicts, and how a cyber advantage could actually lead to an increased probability of kinetic conflict.
How China’s Middle Class Views the Trade War”, by Cheng Li in Foreign Affairs.
Up to now the middle class has quietly criticized Xi; but harsher trade sanctions may shift them to blaming Trump.
National Will to Fight” by McNerney et al from RAND Corporation

The authors “define national will to fight as the determination of a national government to conduct sustained military and other operations for some objective even when the expectation of success decreases or the need for significant political, economic, and military sacrifices increases.” They also note that it is “poorly analyzed and the least understood aspect of war.” This initial study is the beginning of an attempt to change that, and improve our mental models for thinking about this critical issue.
Clash of Civilizations – Or Clash Within Civilizations?” by Cropsey and Halem in The American Interest

On the 25th anniversary of the publication of Samuel Huntington’s classic essay on “The Clash of Civilizations”, the authors analyze how well this concept has stood the test of time, and how it needs to be modified to better understand interstate conflict drivers in today’s world, including conflicts within and not just between civilizations. It should provide a significant improvement to many people’s mental models of international competition and conflict. It also integrates well with RAND’s “National Will to Fight.”