South China Sea Tensions Rise
In the South China Sea, the geopolitical game is becoming more dangerous. Tensions are higher since China has been constructing more artificial islands around the Spratly chain, which is oil rich and claimed by numerous countries.
The militarisation, claims and construction activity pit the Chinese against the US and other navies. For example, the Chinese navy squared off against the Philippine navy. This resulted in China taking control of the Scarbough Schoal reef. This along with claims of sovereignty over the South China Sea pit China against most countries in the region.
Tensions have escalated recently with the US challenging the 12-nautical mile zone. US navy ships are now entering this zone.
What does all this mean?
The US is still the premier naval power in the Pacific. Therefore, expect the smaller countries in the Pacific (Philippines, Malaysia, Vietnam, Singapore, etc.) to rely more and more on the US for defence. In addition, Japan and Australia are already cooperating closely with the US to counter the perceived threat from China.
For the US, this is all part of that is called the Asian ‘Pivot’ in which more and more military resources are redirected towards Asia.
My take on the situation is that the US navy is still 20 to 30 years ahead of the Chinese navy. Thus, in the short to medium term, standoffs in the South China Sea will be utilized for domestic Chinese political reasons. In the longer term, it could escalate into a war.
Investment Thesis: Buy in the short term to medium term.