Dragon Strike -- A Novel of the Coming War with China (Future History Book 1)

by Humphrey Hawksley

  The Foreign Ministry, Tokyo

  Local time: 1200 Sunday 18 February 2001

  GMT: 0300 Sunday 18 February 2001

  Foreign Minister Kimura's official car pulled out of the drive of the Prime Minister's residence and made for the Gaimusho (Foreign Ministry) in Kasumigaseki. The steel gates of the Ministry building parted as Kimura's Nissan President approached. A polite salute from the gate attendant and his limousine was pulling to a dignified halt in front of the main entrance.

  Kimura waited patiently for the arrival of Mr Richard Monroe, the US Ambassador. Kimura did not like Monroe. He was too casual. He did not understand the virtues of silence. Yet he was a man to be taken seriously. Monroe was a close friend of the US President. Monroe had helped get out the Irish vote in Boston, where he was the owner of Boston Analytics Inc., a computer software design company. He was also a major party fund-raiser.

  Monroe walked in to Kimura's office as if he had just walked off a tennis court. Apologizing profusely, he explained that the Gaimusho's request for his attendance at this meeting had reached him at a friend's house where he had been playing rackets. Kimura, with a half-smile on his face, inclined his head towards his guest and motioned him to sit down.

  `Mr Ambassador, we seem to have a . . . little local difficulty in the South China Sea,' the Foreign Minister observed. `My government views the moves by the Chinese government with the utmost concern. We believe that the decision by China to seize the oil assets currently under development in the South China Sea, as well as its unwarranted attack on Vietnam, constitutes a threat to our own vital interests in the region and directly impinges upon the security of this nation. I have been instructed by my government, therefore, to invoke Article 6 of our mutual security treaty. We want a return to the status quo ante; we want China out of the South China Sea; we want you to send a carrier battle group to this region to back up those demands.'

  `Well, I hear what you say, Mr Foreign Minister,' Ambassador Monroe said. `I shall report this immediately to the President.'

  Half an hour later, the Chinese Ambassador walked into the room. Mr Bo Enzhu was a more ascetic diplomat, or at least liked to be seen as such. In reality he was exceedingly irritating. He had the habit of getting physically close, in a manoeuvre that suggested he was about to divulge some great truth, and then just spouting what he had read in that day's People's Daily. His cables to Beijing were colourless but accurate as to what was said to him.

  `Ambassador, how kind of you to come at such short notice,' said Kimura, trying his utmost to sound solicitous.

  `Not at all, Foreign Minister. It is always a pleasure to visit the Gaimusho,' Bo replied.

  `We are . . . puzzled by your country's manoeuvres in the South China Sea. Do you have any explanation for us?' Kimura ventured.

  `This need be nothing to concern your government, Foreign Minister,' Bo began. `China's sovereignty over the South China Sea is inalienable and historic. We have sought simply to make de jure what has been de facto for the past two thousand years. This represents no threat to Japan. China believes in the free passage of shipping through internationally recognized sea lanes such as the South China Sea.'

  `And property rights?' Kimura asked.

  `The sea and all below it and all it contains is ours. That, of course, is a statement about the future. We are not unaware of the existing facilities. I am instructed that there will be no change in ownership.'

  `Tell your government that our concern is with economic security,' Kimura replied. `Virtually all our oil passes through the South China Sea. A threat to that would constitute a threat to Japan.'

  On the way back to the Prime Minister's residence, Kimura noticed a queue of motorists at a service station.

  Briefing

  China's financial war aims

  General Zhao Yi was a man in his late fifties, thin, and true to his southern Chinese origins quite short. He was the Senior General in charge of the General Staff Department (GSD) and he planned to finance Dragonstrike by manipulating the world's financial markets.

  He had had a remarkable career in the PLA. In an institution noted for its conservatism, his rise to eminence, after entering the services at the unusually late age of thirty-three, marked him as a special man. Like many of his generation, including President Wang Feng, he was born in Yan'an, although following Chinese tradition his official native place, his ancestral home, was given as Shunde, in the Pearl River delta of Guangdong province. His father Zhao Ping had survived the Long March and worked closely with Mao Zedong. In Beijing after the Revolution the family prospered. He was made a Marshal of the PLA; the family lived in a villa in Zhongnanhai. Zhao grew up playing and going to school with the sons and daughters of Liu Shaoqi, Peng Zhen, and Deng Xiaoping. His life of privilege came to a sudden end in 1967 as the Great Proletarian Cultural Revolution turned the world upside-down for China's 800 million subjects. Red Guard publications denounced Zhao for living a privileged life. He learned horse riding and motorcycling — past-times beyond the reach of average people. At the time of his denunciation he was studying at Beijing University. At the beginning of 1967 he lost touch with his father and mother and two younger brothers. He was not to see his mother until 1971, three years after his father's death. During these `lost years' Zhao lived the life of a fugitive. He made his way to Guangdong and, under an assumed name, worked on a ship sailing the Pearl River. His family in Shunde lent him some protection, but he was eventually caught and confined in a youth detention centre. And there he might have languished for many years but for the efforts of Zhou Enlai, the Chinese Premier and Mao's Lord Chamberlain. Zhou sought out Zhao and lent him his protection. That was in 1973.

  Zhao's General Staff Department oversaw the PLA's sprawling industrial and financial enterprises, located within the GSD's Equipment Department. Since ancient Imperial times the military in China had been required to feed and clothe itself. But the PLA under late Communism had taken this tradition to extraordinary lengths. The military was in every form of industrial and financial enterprise known to man --engineering, pharmaceuticals, ship building, aviation, satellite launches, vehicle manufacture, stock broking, and banking. Profits from these companies were meant to supplement the budget of the PLA. And they did. They had proved vital in buying many of the military's most prized assets, such as the Russian Sovremenny class frigate Vazhny, and in funding the ongoing cooperation between China and Russia in military aviation. The General Staff Department was Zhao's home. He had spent all his career with it and had a reputation as being one of the cleverest financiers in the military e result, his colleagues noted, of natural Cantonese cleverness with money, honed by having to live his early life on the run.

  From the outset of inner circle discussions about Dragonstrike Zhao had determined that his role would be to make money for the PLA. He knew that knowing in advance when China would strike Vietnam and seize the South China Sea gave him an enormous advantage in global financial markets. It was an operation that would need clearance from the highest level because it was not without risk. It would also need meticulous planning which would have to be kept totally secret. General Zhao's first meeting with the President took place six weeks before Dragonstrike was launched. Then he had explained to the President how financial markets were driven by information and how investors were like herds of cattle on stampede — dashing this way then that, but always staying close together. Information was the key. A correct buy or sell order placed before news of Dragonstrike broke could net an investor many millions in overnight profits.

  `Your idea is an excellent one, General,' the President said. `How much do you need? $50 billion?'

  `No, sir, that would be far too much. To make the money I think we are able to make we need to keep our counterparts solvent. $50 billion runs the risk of ruining too many securities companies. Remember Barings?'

  `Barings?' The President frowned.

  `Nearly ten years ago a pillar of the British financial establishmen
t collapsed, after losing nearly £1 billion. There was someone else, or a group of institutions, on the other side of those transactions who made £1 billion. Financial markets are zero sum, Mr President. Someone wins, someone loses. When we win, someone will lose. But the global financial system could not survive the loss of thirty Barings. It is not part of our war aim to bring down the world's financial system. It would not be good for China. So, we have to be more modest in our aims. We also have to invest in markets where governments are most active principally the foreign exchange market. The British government lost billions -- and traders made it – in 1992 when it tried to keep sterling within the European Monetary System. The amount of profit we could make is still unclear, but I think we could finance a large portion of the cost of the war through some carefully planned deals.'

  The President accepted the General's explanation and instructed him to proceed with detailed preparations. He also made sure that Zhao was kept informed of all developments relating to Dragonstrike. With approval obtained Zhao moved quickly. Foremost was a visit to Mr Damian Phillips, Chairman of First China Securities, a Hong Kong investment bank. First China had come to prominence at the fag end of Britain's rule. It was founded by the son of a City of London financier and the son of a rice farmer e very model of Anglo-Chinese cooperation. Phillips had seen the likely shape of the future well before most. He cultivated the local Chinese tycoons; they liked the attentions of an upper-class Englishman. When it came time to found First China he had a supportive group of local and mainland Chinese businessmen willing to stump up the necessary capital to get the business going. That was in the late 1980s and First China had never looked back. Phillips moved deeper into the Chinese community on both sides of the border. It was on one of his many trips to Beijing before the formal 1997 handover of Hong Kong to China that he met Zhao. Phillips was making a pitch hated the term, preferring presentation Multitechnologies, the PLA's leading arms trader and emerging domestic conglomerate; Zhao was its president. Phillips was explaining how, with the judicious use of offshore business structures, efficient, and anonymous, trading of currencies could be executed. The General had been impressed enough to risk some of Multitechnologies' hard-earned money playing the markets. Phillips' stratagems proved in practice as good as they had sounded. A relationship germinated. In the ensuing years Phillips saw to it that the relationship blossomed. He paid regular calls on the General, gave lavish parties for him in Hong Kong, and was always careful to leave him with a sure-fire investment tip for himself, or his company whenever they met. Slowly business grew. When Multitechnologies decided it wanted to base its international activities in Hong Kong, First China found a Hong Kong Stock Exchange quoted company it could buy. When Multi-Tech (Hong Kong) Holdings wanted to raise capital it was First China that drew up the prospectus and introduced the company to the big pension funds, mutual funds, and unit trusts. And First China wrote research on the company for foreign investors. Soon Multi-Tech (Hong Kong) had a modest following among US and European investors.

  General Zhao arrived in Hong Kong five and a half weeks before Dragonstrike was launched. He entered as a civilian. Phillips sent his car to meet him at the airport. Instead of a meeting at First China's downtown headquarters in Central district on Hong Kong island, the General was driven to Phillips' house on the Peak. It was set well back from the road and was overlooked by no one. Phillips was there to welcome the General personally.

  `I'm sorry I couldn't be at the airport to meet you,' Phillips said with ritualistic politeness, `but you said in your fax that you did not want attention drawn to your visit. Anyway, welcome and how are things in Beijing?'

  `Cold,' General Zhao said, somewhat stiffly. `I don't have much time. As you know I'm returning to Beijing tonight. Shall we get down to business? We at Multitechnologies have decided to broaden our involvement in financial markets. We have decided that we want to trade currencies and oil and that we want you to be our agent. It is vital, Damian, that we and indeed China are in no way connected to the activities I am about to commission you to execute on our behalf. Do you understand?'

  `Completely.'

  `Good, well, let's move on, then,' he said.

  General Zhao proceeded to outline to Phillips Multitechnologies' plan to play the foreign exchange and oil futures markets. He gave him a list of international banks — mostly second and third-line institutions keen to increase their involvement in foreign exchange — with whom he would parcel out his currency trades. His purpose was to accumulate US dollars and sell the Japanese yen. To buy dollars he had to sell another currency, and he wanted First China to borrow yen and sell them for dollars. Phillips thought that although the yen had not been particularly strong lately it would have to fall a considerable amount: for an investor to make much money out of selling it he would have to expect the yen to fall sharply so that when the time came to pay back the loans in yen — either prematurely or at maturity — the price of yen would have fallen to well below the initial purchase price. This is precisely what the General appeared to believe. However, he could not be seen doing it. Therefore if on any given day he bought $100 million through one bank, he should sell $20 million through another. His net accumulation would be $80 million, but the market would see him as trader, as a buyer and seller. When Phillips questioned the investment strategy all the General said was that First China would be indemnified. In all he wanted First China to have accumulated by mid-February debts own as `yen-shorts' — between $1.5 billion and $2 billion in yen-short positions. With the yen trading around to the dollar, these debts should amount to about bn.

  Similarly, though on a smaller scale, First China was to build up a large position in the oil futures markets in London and New York. In the jargon of the financial markets, the General wanted First China to go `long' of the dollar and oil and `short' of the yen. The oil trade would, however, have to be for much smaller amounts. Though the markets were large they were purely private markets with little overt government interference. Zhao said he did not want to get involved in problems of counterpart risk. `The whole operation would be blown apart if we try to collect on a deal and find we have bankrupted Morgan Stanley,' he said, adding with a rare note of levity, `as pleasurable as such an outcome might be.'

  Having explained the purpose of the transactions Zhao then told him how he wanted First China to account for the trades. This entailed parking the proceeds of all transactions in companies registered in the British Virgin Islands (BVI). There were seven banks he was authorized to deal with, but there were fourteen BVI companies for the currency trades. This was to enable the segregation of purchases and sales of foreign currency with each bank, and meant that transactions could be ring-fenced if the prying eyes of regulators should spot something unusual. If one of the banks asked First China who its client was First China could truthfully answer that it was acting for a private investor operating out of the BVI with a company called Bright Future, or the like. If a regulator got wind of something and wanted to freeze assets the fallout would be limited to one company. The oil futures trades would be held in one BVI company, although First China would trade in its own name on the International Petroleum Exchange in London.

  As General Zhao sat down on the first morning of Dragonstrike he was in expansive mood. He explained to the President in meticulous detail his contacts with First China and the trades they had been making with the banks over the previous four weeks. He opened the satchel that was resting on his lap and produced a small stack of spreadsheets. These showed each British Virgin Islands company and the size of its position against the yen. Over the period First China had been able to build up for Multitechnologies a short position in the yen of some billion. Multitechnologies would make big money if the yen weakened to around to ¥160 to the dollar. Phillips had accumulated yen at an average cost to Multi-technologies of . It was currently trading around to the dollar.

  `Did anyone detect us?' the President asked.

  `No, we don't think
so,' said Zhao. `There was a speculative report over the Bloomberg financial wire about First China. Their activity in the foreign exchange market in London had been noted. But Phillips handled it well. The overall operation went without incident. Sir, it is worth remembering that average daily turnover of foreign exchange is $1.2 trillion. In Tokyo alone the dollar/yen and dollar/euro trades are nearly $20 billion. So our activity, especially as we're buyer and seller, largely went unnoticed.'

  `Profits?' the President murmured.

  `We think the yen could fall by 20 per cent or more during the course of this conflict,' Zhao said. `That's a billion profit when we close the short position. But it's a conservative estimate; the yen could go a lot further, given the Japanese hypersensitivity about oil. The beauty of the deal for us is that when the yen begins to fall we will be one of the only buyers of yen in the market. It won't be at all difficult for us to cover our positions.

  `Similarly in the oil market. We have nearly 20 per cent of the April futures contract. When the oil price begins to rise I think it will stand to do very well indeed.'

  The South China Sea

  Local time: 1130 Sunday 18 February 2001

  GMT: 0330 Sunday 18 February 2001

  At 1130 the Xinhua (New China) News Agency released a curt statement. `In regard to the situation in the South China Sea, President Wang Feng drew attention to the Territorial Waters Act promulgated in 1992. Non-military shipping has right of passage in our sovereign territory. Military shipping and nuclear-powered ships must receive Chinese permission to pass through our waters. The sovereign territory is being patrolled by the submarines of the PLA-N.'

  The Chinese were not bluffing. They had deployed twenty Romeo and Ming class submarines. The Romeos were functional but ageing Soviet vessels whose design dated back to the 1960s. The Ming was a Chinese-built version. The submarines were loosely positioned in packs of five, organized in semicircles to guard the shipping routes of the South China Sea. Other Romeo submarines were in the shallower waters around the Spratly Islands, which although more dangerous were ideal places for the quiet diesel-electric engines. They could only wreak enough destruction to sink a modern warship if the crews of the antiquated submarines could outwit their high-tech enemies. In many modern navies the old diesel-electric design was being wound down for nuclear-powered submarines. China aspired to having a modern military, but knew that for Dragonstrike to succeed the PLA would have to revert to the tactics of barefoot warfare with which it won the civil war in 1949. The men would be familiar with their equipment and know the area of battle. Then with a World War Two wolf-pack style of operations the naval commanders believed they could safeguard China's sovereignty.