50 per cent of the public thought more should be spent on defence, compared to between 20 and 35 per cent who thought spending should drop. 45 per cent believed France's national security was better preserved with the North Atlantic Treaty Organisation (NATO) than with either neutrality (16 per cent) or a European alliance (30 per cent).
90 per cent of French people believed troops should be sent to free French hostages. 84 per cent said they should go to protect French lives. Whatever other political nightmares he was facing, French military action against China would be the one which could be carried out without dispute. Vietnam belonged to France, not to the European Union.
Rebuilding Vietnam, its roads, ports, telecommunications, and armed forces, would more than compensate for the irritating and difficult business of getting contracts in China.
The Foreign Ministry, Moscow
Local time: 1530 Monday 19 February 2001
GMT: 1330 Monday 19 February 2001
Light was fading over Moscow when the American Ambassador was shown into the suite of offices at the Russian Foreign Ministry. Even during the few metres from the Ambassador's limousine to the majestic front doors, the chill wind of the Moscow winter cut through his overcoat and numbed the exposed skin on his face. The Foreign Minister was sitting in a comfortable chair in the corner of the vast room. His manner was informal. The two men had worked with and against each other for nearly twenty years as the Soviet Union and then Russia lurched through its changing political face. The Foreign Minister had always regarded the Ambassador as a democratic ideologue who was short on pragmatism. Today he was preparing to give America a sharp jolt of reality. But he let the Ambassador speak first.
`Yergor, I will begin as a humble man always does, by quoting the words of one of my predecessors, Charles Bohlen, a far greater Ambassador to your country than I will ever be. He said: "There are two ways you can tell when a man is lying. One is when he says he can drink champagne all night and not get drunk. The other is when he says he understands Russians." Well, I can do neither, so can you help me?'
`You want to know what we are doing with China,' responded the Foreign Minister, without acknowledging the humour of the opening gambit.
`Perhaps we could start at the beginning. Did you know about Dragonstrike?'
`Is that what they're calling it? No, I didn't, Andrew. Nor I think did the President. Our generals, as you know, are a rule to themselves. But as it is difficult for anyone to know what the Chinese are thinking I wouldn't be surprised if they had been kept in the dark with the rest of us.'
`What, then, are you supplying to them in the way of military equipment and personnel?'
`Only what we are obliged to do under our contractual arrangements. I'm sure the CIA has as many details as I have. But there are the Su-27 attack aircraft, Kilo class submarines. They even keep talking about buying an aircraft carrier from us. For years our air force is flying men and equipment to China on Beijing's request. It is obliged to under the deal we signed with the People's Liberation Army.'
`We want you to stop.' `It is out of my hands,' said the Foreign Minister. `Why don't you call Rosvoorouzhenie, the state corporation for export and import of armaments and military equipment? They're handling it.'
`Yergor, don't get involved in this one. The world's getting dangerous enough with China going crazy. If Russia goes in . . .'
There was a silence of thirty-three seconds. The Foreign Minister then replied.
`Andrew, if I wanted to stop those airlifts, I couldn't. The generals would put the phone down on me. They would do the same to the President. And, frankly, during our negotiations over the past couple of years, America has been too blind to see what's going on. The dangerous world has been created by your policies, not by flying some aircraft spare parts to China.'
`I cannot agree to...'
`Then stop thinking about agreeing and listen for once.' The Foreign Minister got up and walked around the room as he spoke. `What were you fighting against during the years of the Cold War. Communism? Or an expansionist Russia whose Marxist banner provided the excuse to plot her containment? Tell me, what do your analysts conclude is the character of my country? Are the Russian roots stained only with Bolshevism? Or will they always be at odds with what you call the Free World and the West because the Russian Bear will for ever be a threat?
`If you were fighting Communism, then you saved the Russian people and are now helping them recover, creating lasting democratic and economic institutions, and joining the global community as an strong and equal partner. But perhaps not. If Communism was the enemy, then why has your government been so friendly towards China? You have given us no evidence that America's campaign of containment was not against Russia herself; that America does not intend to weaken her and divide her. Many people think that America believes the long-term security of Europe lies with a feeble Russia, surrounded by an isolating cordon through which we cannot expand d this is the view fuelling the constituencies of your enemies, the Communists and the Nationalists.'
`Which do you adhere to, Yergor?'
`I am not entering an academic debate, Ambassador. I am giving you a message for your President.
`The policeman to this cordon is the North Atlantic Treaty Organisation. This is a military and not a political organization. And far from leaving it as it was, an effective weapon for Western Europe, you are now allying yourself with Poland, Hungary, and the Czech Republic. You are parking your tanks on our front lawn. Poland says it is willing to host NATO nuclear weapons. It is an act of hostility.'
`But all this is being negotiated. It has been for years. What is the point of bringing it up now?'
`Because, Andrew, this is the reason I cannot call off the military airlifts to China. This is the reason that the nationalists and Communists are winning support daily among our electorate. Your policy and I quote from Clinton at the 1994 NATO summit, "It's not a question of whether NATO will take on new members, but when and how" creating a Russian monster again. If you expand, you will transform millions of allies of democracy into allies of radicals and madmen. Russians will realize that they had been wrong to trust you. An embittered, defeatist complex would be cast over the country, of the sort that once brought Hitler and Mussolini to power and pushed the world into war.
`We are too weak to expand west. So if you expand east we have no choice but to go east as well. There's only one place to end up there and that's in Beijing. If I am not making myself clear, I will spell it out. You are bankrolling our former East European satellite states. This is only to be expected with shared white faces and civilization. But you are not bankrolling our former eastern states, filled with slant-eyed, brown-skinned Muslims. The Presidents of Kazakhstan, Kyrgyzstan, and Tajikistan, Ambassador, have been bought by China. Why don't you take a plane there and walk through the hotel lobbies in Dushanbe and tell me who you think runs the place? The tectonic plates of global power are scraping together this month. They have been activated by Dragonstrike and only your government is powerful enough to control the dangers it has released.'
Briefing
The first repercussions in the world's markets
Of all the American companies affected by China's strike against Vietnam and its blockade of the South China Sea, Boeing had the most to lose. The company had become deeply enmeshed in China and its rapidly growing aviation market. A Chinese engineer, Wang Tsu, helped design the new 314 Clipper seaplane, which made its first transpacific flight to Hong Kong in 1939. A Boeing 707 carried Richard Nixon to China in 1972 in a historic visit which rewrote global power alignments. Shortly after that the Civil Aviation Administration of China (CAAC) ordered ten Boeing 707s to establish itself as an international airline. Deng Xiaoping visited the Boeing headquarters in Seattle when he went to America in 1979. When Jiang Zemin, the President of China when Deng died, went to America in 1994 he met an `average' American worker and his family. That was in Seattle. The worker was an employee of Boeing. So far Chin
a had bought or ordered 224 Boeing airliners in contracts worth $9 billion. The company had field representatives in sixteen cities throughout China. A thousand pilots and engineers were trained by Boeing every year. It had installed flight simulators free of charge at China's Civil Aviation Flying College. There were joint-venture factories in Xian making Boeing 737 vertical fins, horizontal stabilizers, forwards access doors, and 747 trailing edge ribs alongside the construction of the H-6 bombers for the Chinese air force, and in Shenyang making Boeing 757 Cargo doors; a plant in Chongqing made aluminium and titanium forgings.
This was why Reece Overhalt Jr., Chief Executive Officer and leading proponent within Boeing senior management of its `China push', was in his office at the company's Seattle headquarters at 6.00 on Monday morning. His office was sparsely decorated. Someone who liked the style might call it spare. Aside from a large desk, a Reuters monitor, computer, and scale models of Boeing aircraft, the only decorative feature was an example of calligraphy hanging on the wall opposite his desk. It featured a single Chinese character, itself made up of two separate characters: the character for knife and the character for heart. The former was on top of the latter and in combination they meant endurance.
Overhalt had seen the rise of Asia coming at the beginning of the 1980s. As Executive Vice-President of Overseas Business Development he had forged links with Japanese engineering groups like Mitsubishi Heavy Industries, who would provide the `local content' needed to secure aircraft orders from Japan's international carriers. But he hadn't taken his eye off China, which was destined to become the single biggest aviation market in the world. Overhalt had spent three years in China in the early 1980s and he knew the country and its people from the ground up.
It had not been an easy time for a Western executive who had grown soft on the creature comforts of suburban Seattle. Overhalt liked to remind people how he spent three years cooped up in an ageing hotel where eager hall attendants constantly found reasons to enter his room without ever managing to replenish the soap or toilet paper. And how he worked in an unheated office in winter, and tried to monitor the work of mechanics who refused to read the manuals that explained how to maintain and repair million-dollar aircraft. Such experiences would have turned off many, but not Overhalt. He knew he was observing the first, halting steps of a giant that had been kept in the dark for so long that it was afraid of the light.
He was not starry-eyed about China. Chinese managers were chronically poor at planning; they had no concept of preventative maintenance, which they regarded as a waste of money; they were appalling communicators; and they had a `petty cash' mentality. Overhalt never tired of telling the story of how the authorities refused to fly a damaged $4 million engine to the US for repairs, preferring instead to send it by sea because it was cheaper. The repairs took thirty days but the engine was out of commission for thirteen months. Yet he admired their tenacity. His other favourite story told of how in Shanghai he saw a disassembled Boeing 707. The Chinese had bought it in the early 1970s and, by his reckoning, spent $300 million trying to copy the design and technology of the aircraft. They couldn't do it.
The years in China stood him in good stead. As an adviser to the Civil Aviation Authority of China (CAAC), which at that time operated and regulated all non-military airlines in China, Overhalt got to make friends with many officials who, like him, would rise to prominent positions in China's deregulated airline industry years later. His time in China allowed him to renew his friendship with the man who became the Chinese Foreign Minister. They had been at Harvard together. Song had responded cautiously at first to the relaxation of Communist Party rule in the early 1980s, but by the time Overhalt left in 1985 Song was the proud owner of one of the only seven Cadillacs in Beijing. Song had also cultivated powerful political connections deep within the Beijing bureaucracy. Overhalt remembered vividly the afternoon Song took him to Zhongnanhai to meet the Politburo member with responsibility for aviation. It was late winter and bitterly cold but after the meeting they had walked around the partially frozen lake e dominant feature of Zhongnanhai d talked about China and its future.
That all seemed so long ago. As Overhalt looked at his Reuters screen he saw that Boeing's share price was beginning to sag — the company's share price was $5 and three-eighths lower than Friday's close. The New York Stock Exchange had just opened and of all the high-profile US companies with business in China, Boeing was seen as a prime loser. This was mirrored in other markets by other companies in Boeing's position. In Frankfurt, Siemens' share price was off; in London, GEC was also performing worse than the market as a whole. Both companies had made strategic bets on China in the 1990s and profited: GEC sold turbines for power stations, high-speed telephone switches to local telecommunications companies, and defence communications systems. Indeed, outside the NATO countries, China was the single most important market bar none.
The impact of China's actions was most keenly felt in the oil market, and in the Lloyd's insurance market. Brent Crude, the bell-wether crude traded in London, rose $1.40 per barrel to $26.40. When New York opened West Texas Intermediate, which historically always traded around $1.50 higher than Brent, rose to nearly $28 in sympathy with European trading. The world oil market was delicately poised. The big companies had been trying to achieve a `just in time' delivery of oil to their refineries. They had taken the idea from Toyota, the Japanese car manufacturer, which organized the production of a vehicle so that the components for its manufacture arrived at the factory gate just in time for assembly. This cut the cost to Toyota of holding stocks of parts. So to the oil majors. They were trying to manage their refineries so that stocks (and attendant costs) were held to the minimum. But the winter of 2000/2001 was one of the fiercest experienced in northern Europe and the US. Demand for oil — especially heating oil — rose up sharply. This weather-induced tightness in the market was exacerbated by the change in business practice to just in time delivery added to upward price pressures. World oil stocks were at a five-year low; the South China Sea oilfields were viewed as some of the most promising of any in the world. Oil futures rose strongly. The April contract, which was the most actively traded near-term contract and the one which First China had bought most aggressively, rose sharply. It closed at $35, up $10.
Trading was hectic on the International Petroleum Exchange in London. This was the home of the Brent Crude futures contract. More than 70 per cent of the world's oil was priced off this contract (that is, the prices of all other sorts of oil traded could be related to this price, as a margin either above or below it). The IPE was the world's biggest international oil exchange. It was that size average the exchange traded oil with a value of $2.4 billion every day at offered oil companies, investors, and traders unrivalled opportunities to protect themselves and make money. First China had a seat on the IPE. In the month before Dragonstrike it had built up a position in the futures market of $600 million. This position consisted of 200,000 futures contracts, which themselves represented 200,000,000 barrels of oil. If First China could unwind its position in the futures market instantly General Zhao and Multitechnologies would reap $1 billion in profit. But getting out of 200,000 futures contracts was harder than acquiring them. As the price of oil began to rise, Damian Phillips told his traders to unwind their positions slowly. By the end of London trading they had liquidated 40,000 April contracts at various prices, and pocketed for General Zhao a $400 million profit.
The strife in the South China Sea reverberated throughout London and New York. There was an immediate impact at Lloyd's e centre of the world insurance market. That Monday morning the War Risks Rating Committee had met to assess the significance of the conflict and to decide whether extraordinary premiums should be set on ships and their cargoes, as well as commercial aircraft. It set a new schedule of rates that ranged up to 3.5 per cent for Vietnamese ports. Rates for Singapore and Hong Kong bound cargoes were set somewhat lower with a minimum level of 2.5 per cent. For ships themselves, the Lloyd's mar
ket applied a rate of 5 per cent rate not seen since the Gulf War and one which drew howls of protest from ship owners. The supertankers transiting the South China Sea had a capital cost of some $60 million and more; $3 million in premiums for a single voyage was crippling. Similarly with aviation. British Airways was quoted a war risk premium of $162,000 for each Airbus 320 flight into Hanoi and $60,000 for a Boeing 747 to Hong Kong. An airline spokesman said that a war risk surcharge of nearly $845 was imposed on each passenger to Vietnam and almost half that to Hong Kong. The airline said it would continue to offer services for as long as it was safe to do so; others stopped operating altogether.
The drama in the oil market unsettled all others. In Europe and America financial markets have a way of taking regional conflicts in their stride, but the massive wave of selling that hit East Asian stock exchanges could not have come at a worse time. European and US bourses, after five years of virtually uninterrupted gains, were looking vulnerable to a setback. Some of the older traders drew parallels with 1987: the proximate cause of the October stock market crash was the disagreement that September between the US and Germany over interest rates. The Americans wanted the Germans to lower interest rates; the Bundesbank refused. Analysts in the City and on Wall Street reasoned that the Gulf War of the 1990s — the last big regional conflict — had had very little effect on the stock markets of Britain, Germany, and the United States because oil stocks were high, the world was coming out of recession, and Saddam did not have a chance against the military might of the US and its allies. The West's response to Kuwait had been relatively simple: Saddam was a tyrant who garnered no support in the West. But China's foray into the South China Sea was perceived as more than just an East Asian version of the Gulf War grab for territory by the regional bully who, in time, would be put back in his place. Distance diminished the impact of what the Chinese were up to: Asia was a long way away and few really cared about the Vietnamese, or about the stretch of water between them and the Philippines known as the South China Sea. But the markets cared. The world economy was differently placed now. Stocks of oil were low, world output, especially in Europe and the US, was growing strongly, indeed too strongly, and China was manifestly not Iraq. China might be a tyranny, but it was also a commercial opportunity in ways which Iraq never was and never could be.
Dragon Strike -- A Novel of the Coming War with China (Future History Book 1) Page 10
