We've been telling you for months about the ongoing territory disputes in the South China Sea – and warning that it wouldn't take much to spark a major confrontation.
Now you see why.
Today, the anniversary of Japan's 1931 occupation of parts of mainland China, an already smoldering territorial dispute between China and Japan is threatening to boil over.
Major Japanese firms have ordered shutdowns of their Mainland China operations, and Japanese expatriates living in that country have been ordered to stay indoors as angry protests sparked by the territory disputes have kicked the anti-Japanese sentiment to its highest level in decades.
We've been telling you for months that this was inevitable.
Last week, Beijing dispatched patrol boats to the five East China Sea islands that are escalating the disagreement between the two Asian heavyweights. Beijing sent the boats to the Senkaku island region as an angry response to Tokyo's plan to buy the mostly barren islands from their private owners.
Over the weekend, well-known Japanese firms such as Honda and Toyota were the focus of demonstrations and violent attacks. And yesterday, a flotilla of around 1,000 Chinese fishing boats was sailing for the islands.
All of this was prompted by Japan's announced plan to purchase the five afore-mentioned islands from their private owners.
Chinese Foreign Ministry spokesman Hong Lei said the government would protect Japanese firms and citizens and called for protesters to obey the law.
"The gravely destructive consequences of Japan's illegal purchase of the … islands are steadily emerging, and the responsibility for this should be born by Japan," Chinese Foreign Ministry spokesman Hong Lei told reporters at a daily news briefing.
This follows last week's warning by China's Foreign Ministry that "if Japan insists on going its own way, it will bear all the serious consequences that follow."
Although the hottest part of this dispute currently centers upon China and Japan – which generated two-way trade of $345 billion last year – many more Pacific-Region nations are involved.
And, as we'll show you in a minute, there will also be consequences for this country, and for U.S. investors who take the time to understand what's at stake.
The Story Behind the Brewing Conflict
The Senkaku islands (known as the Diaoyu islands by China), have been claimed by Japan since 1895. They were taken over by the United States after World War II, and were turned over to Japan in 1972. They are also claimed by Taiwan and Mainland China.
This is just one of several disagreements involving a number of countries over disputed territories in the China Sea (click here to see accompanying map). The Senkaku dispute is focused on the East China Sea.
But the bigger disputes are in the South China Sea.
Those disputes are escalating.
And they're also confusing – so consider this your program to help you keep the players straight as this news story evolves.
In an area known as the "cow's tongue," here are the players – and their disputes.
There's the Scarborough Shoal, which is claimed by China, and the Philippines and Taiwan. There's also the Pratas Islands, claimed by China and Taiwan. The Paracel Islands are claimed by China, Taiwan and Vietnam. The Macclesfield Bank is claimed by China, Taiwan, Vietnam and the Philippines. And the Spratly Islands are claimed by China, Taiwan, Vietnam, Malaysia, the Philippines and Brunei, a tiny "sultanate."
This region is flush with resources – as much as 213 billion barrels of oil (10 times the proven U.S. reserves) and 900 trillion cubic feet of natural gas (equal to all the reserves held by Qatar). There's also a rich fishing ground that employs thousands and feeds millions.
Obviously, China wants (actually needs) those resources to continue along its torrid growth path. But Beijing believes that China's emergence as the dominant player in the region means it should have control over the islands, the seaways that surround them, and the rich resources they would bring.
Beijing has rebuffed all attempts to have this morass of claims negotiated in a "multilateral" setting – like with the Association of Southeast Asian Nations (ASEAN). Instead, it wants any negotiations to take place "bilaterally" – between it and one other nation at a time.
And China has become quite irritated with U.S. efforts to bring about a multilateral negotiation – an effort that U.S. Secretary of State Hillary R. Clinton has been working to pull off.
So as Beijing stiff-arms all attempts to broker an agreement, it's also elevated its aggressiveness to a whole new level.
This summer, China effectively cordoned off the horseshoe-shaped Scarborough lagoon, making it off-limits to fisherman from the Philippines, just 120 miles away. (In early July, Philippines President Benigno Aquino said he was thinking of asking the United States to deploy spy planes in the South China Sea to help monitor the disputed waters.)
In late July, China also established a prefecture-level city called "Sansha" on Woody (Yongxing) Island, the largest in the Paracel and Spratly group, through which it will "administer" those islands, as well as the Macclesfield Bank.
Soon after, Beijing said it would install a military garrison on that island. Some observers said it was largely an administrative move – more symbolic than substantive – and dismissed any arguments to the contrary as "saber-rattling."
But American Enterprise Institute (AEI) Scholar Michael Auslin says these were serious, aggressive and carefully considered moves by Beijing.
In fact, in an op-ed piece for The Wall Street Journal, Auslin said that "by unilaterally creating a city government and installing a military garrison on a disputed island in the South China Sea, Beijing has further inflamed tensions and made a negotiated settlement of the Asia-Pacific's territorial disputes less likely. The decision to emphasize military measures in this ongoing diplomatic quarrel should worry those who argued that the growth of China's military power in recent decades was non-threatening and the natural action of a rising power."
We've been writing about this situation for several months now – penning the first Private Briefing columns on the controversy well before the mainstream U.S. media wised up to the fact that this is an important story with huge ramifications for this country (we wrote about it in the July 24, 26 and 31 issues of Private Briefing, and in several subsequent issues of Money Morning, if you'd like to do some additional research click here and here).
Why The South China Sea is Important for America
Make no mistake – this situation can and will affect the United States.
First, if it succeeds in grabbing and holding the China Sea region and all its treasures, China will preclude any chance the U.S. might've had at accessing those resources had they been harvested by the Philippines, Japan or even Vietnam, which seems glad to have the U.S. involved in this fracas right now.
Second, a China-controlled China Sea could impact the navigation paths of both commercial shipping, and the U.S. Navy. That's no small item, especially since it could inhibit the U.S. Navy's ability to move freely in that region. Because that area is halfway around the world, any need for the United States to establish a calming (or not-so-calming) influence on a situation there would be greatly impeded by territorial restrictions.
Lastly, there's a real chance for the United States to come out of this as either a hero – or a zero.
There's been a lot of talk this year about the Obama Administration's policy shift – its so-called "pivot" toward Asia.
Many view this solely as a change in military philosophy: The Pentagon is shifting its focus toward Asia to counter the rising threat from China.
As someone who covered the defense industry for many years, I know that's true (in fact, we'll get into this more in a future Private Briefing). But there's more to it than that.
There's also an economic aspect to this that these overtly hawkish analysts are missing.
You see, the Obama Administration realizes that closer economic ties with Southeast Asia are crucial if this country is to recover from the debt-lined black hole the financial crisis has left us in. We obviously want to maintain our ties with China, the dominant economy there. But we also want to maintain our allegiances with Taiwan and the Philippines, and build an economic bridge to such fast-growing "emergers" as Vietnam.
Those smaller countries are looking to us for both help and leadership. And we're being graded on our performance, AEI's Auslin writes.
"The credibility of the Obama administration's "pivot' to China is also being tested, and Washington must decide how to respond to Beijing's growing assertiveness," he wrote. "To simply leave far weaker neighboring states to face China alone risks surrendering U.S. influence in Asia and making conflict more likely."
With such high odds for the kind of flare-up that can spook markets, you want to make sure hard assets such as gold and silver, natural-resource commodities, and especially energy-related investments are all part of your holdings. Those are the types of investments that can spike in price when the investors panic.
By keeping your head, you'll reap a windfall when that happens.
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.