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China’s New Defense Budget, Energy Security in Asia, and the Potential for Miscalculation

Paracel and Spratly Islands; Source:

The Chinese government unveiled its defense budget for 2012 ahead of its annual full session of the National People’s Congress (China’s legislature), detailing an increase in military spending to 670.3 billion yuan (about $106 billion). This boost to military spending is the most recent in a “near-unbroken string of double-digit rises across two decades” and comes after last year’s 12.7% increase, as Reuters reported on Sunday.

There are some caveats to keep in mind in evaluating those figures. First, it is widely believed that those official numbers understate the real spending on China’s military modernization given the obvious lack of transparency in a non-democratic state and the availability of China’s vast foreign currency reserves of roughly $3.18 trillion, according to the latest figures from the People’s Bank of China. Second, those figures have to be viewed in context and need to be compared to U.S. military spending. Such a comparison would show that China has the second-largest figure after that of the United States with the Chinese economy being roughly only one-third of the U.S. economy. According to Bloomberg News, the DoD (Department of Defense) is asking for “$613.9 billion [for 2013 including] $88.5 billion in supplemental spending for wars, [what] is $31.8 billion less than the amount enacted by Congress for 2012.” Obviously, the Chinese try to build up their military from a much lower base. This is not a direct reaction to the Obama administration’s strategic refocus on the Asia-Pacific region.

Nevertheless, this raises the question of China’s intentions. Beijing seems to remain committed to its “peaceful rise” policy – basically focusing on improving the standard of living of its about 1.4 billion people – or as Li, a former foreign minister, was quoted last Sunday: “China’s limited military power is for the sake of preserving national sovereignty, security, and territorial integrity… Fundamentally, it constitutes no threat to other countries.”

Well here, it seems to me, lies the crux. An overall improvement in the standard of living of a population begets eventually growing demand for energy supplies. Thus, Li’s words will not be especially reassuring to China’s maritime neighbors situated on the East China Sea and South China Seam where in the former case Japan and China each lay claim to the so-called Senkaku, or Diaoyu islands.  In the latter case, Vietnam, the Philippines and Japan are in a constant contest with Beijing over control of swaths of the South China Sea that presumably are rich in oil and natural gas. Given that these aforementioned contentious territorial disputes are unresolved, it is only reasonable to assume that any spats between the involved countries over control of presumably oil- and natural gas-rich waters would actually constitute an infringement on China’s “national sovereignty, security, and territorial integrity.” In short, China’s foreign policy becomes less benign once energy security is at stake.

The linkages between energy demand and security policy are especially strong in the case of China and Japan – the two most powerful states in the Asia-Pacific region and the two leading energy consumers. Even though Japan depends on nuclear power for about a third of its electricity needs and has as resource-starved nation an almost pathological angst of being cut off from essential supplies in a dangerous and competitive world, in the wake of the Fukushima Daii-chi nuclear crisis, Japan lost 9,700 megawatts of nuclear capacity due to shutdowns. This only pushed Japan to intensify its search for alternative secure supplies of crude oil, thermal coal and LNG (seaborne liquefied natural gas) as replacements in the long run. In order to keep, as well as attain, high levels of economic growth, both countries need to secure additional supplies of energy in the future. Thus, the tensions between China and Japan may only increase over the possession of the Diaoyu / Senkaku islands or in respect to the Paracel and Spratly islands. Both groups of islands in the East China Sea as well as South China Sea are of interest only insofar as they establish ownership over a large stretch of water that is believed to sit on top of valuable oil and natural gas deposits.

In this regard, BP has recently won approval from China’s Ministry of Commerce to explore for natural gas in the South China Sea, in a field known as block 43/11, according to the Wall Street Journal. This clearly illustrates Beijing’s aggressive stance on this unresolved maritime dispute about boundaries in the South China Sea with the clear intent to establish a fait accompli in a certain area of the disputed waters that are not as politically sensitive.

Furthermore, China’s latest five-year plan (to cover the period of 2011 through 2015) can be viewed as an economic blueprint that will dictate future demand in natural gas and LNG. China’s National Energy Administration’s established targets to import 90 billion cubic meters of gas per year by 2015 and produce 170 billion cubic meters domestically – the latter, as the Chinese like to see it, could include the island groups discussed above.

In conclusion, if Asia’s two biggest economies are not able to put aside disagreements over territory, defense, and history to benefit both populations, the risk will prevail; in a supposedly zero-sum economic world, patriotism will be chosen over mutual profit. Miscalculation could become the operative word and escalate into a full-blown conflict.



Roman Kilisek
Roman Kilisek

Roman Kilisek is a Global Energy & Natural Resources Analyst.
His research focuses on global energy politics, mining, infrastructure and trade, global political risk and macroeconomics. He is fond of using scenario development and analysis.

He has lived on three continents and traveled to over 40 countries around the world. He now lives and works in New York City.