New Defense research report from Business Monitor International is now available from Fast Market Research
[ClickPress, Fri Dec 20 2013] China has embarked on a major diplomatic push to improve relations with its neighbours in Southeast Asia - with the pointed exception of the Philippines. Beijing is furious with Manila's decision to refer their territorial dispute over Scarborough Shoal to a UN tribunal, and is working to isolate and punish the Philippines for going against its wishes. To improve its regional image, Beijing has agreed to begin talks about the formulation of a new Code of Conduct for the South China Sea, although there has not yet been any substantive progress. Tensions over the disputed Diaoyu/Senkaku Islands with Japan also remain a concern.
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China's military modernisation programme is continuing unabated. A likely order for Russian Sukhoi Su-35 fighter jets aside, the Chinese defence industry is becoming increasingly self-sufficient, and new structural reforms within the aerospace and shipbuilding sectors should drive further improvements.
The Chinese defence industry was certainly buoyed when it secured its most important export contract to date, as Turkey confirmed in October that it had selected the Chinese HQ-9 system to fulfil an air defence requirement. The win signalled that Chinese companies are becoming competitive in the world market for advanced military systems (they have previously only dominated in the low end of the market). However, the fact that China offered the HQ-9 for US$3.5bn, compared with around US$4.5-5bn for the competing European, Russian and US options, suggested that China's advantage is still very much based on cost, rather than on capability.
The territorial dispute with the Philippines continues to simmer. The ITLOS tribunal process could yet prove a major international embarrassment for China, but the hearings now look set to continue well into 2014. This gives China a window of opportunity to improve its image in Southeast Asia ahead of a possibly damaging verdict, especially if it drives meaningful progress towards the establishment of a new Code of Conduct for the South China Sea.
Relations with Japan have been more stable than they were in 2012, although Beijing and Tokyo have continued to trade barbs over the disputed Diaoyu/Senkaku islands. Japanese Prime Minister Shinzo Abe has repeatedly hinted that he will visit the controversial Yasukuni shrine; should he choose to do so, Sino-Japanese relations will inevitably take another dive. As both countries bolster their capabilities in the East China Sea, that becomes an increasingly worrying prospect. On the other hand, if Abe is judicious in steering clear of Yasukuni, the likely reward will be a summit with President Xi Jinping, something the two sides have been discussing for some time.
China's uncertain economic outlook presents one possible threat to defence modernisation, especially if Beijing starts to feel that it cannot sustain generous defence budget increases
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