The Iron Lady

Taiwan’s president pledges stronger defense to counter China
By Ralph Jennings 

Taiwan’s President Tsai Ing-wen delivers a speech during the year-end media event at the National Chung-Shan Institute of Science & Technology in Taoyuan county, Taiwan, Friday, Dec. 29, 2017. Tsai pledged Friday to step up military spending to defend the self-ruled island’s sovereignty in the face of China’s growing assertiveness in the region. 

TAOYUAN CITY, Taiwan — Taiwanese President Tsai Ing-wen pledged Friday to step up military spending to defend the self-ruled island’s sovereignty in the face of China’s growing assertiveness in the region.
Beijing has rattled its neighbors including Taiwan, which communist mainland leaders claim as their territory, as well as Japan and South Korea by sending military aircraft close to their airspace in recent months.
“China’s attempt to expand militarily in the region is more and more obvious,” Tsai said at a news conference at a military research center.

“Taiwan needs to stand up for its sovereignty, and it wants to protect regional peace, stability and prosperity.”
China and Taiwan split in 1949 after Chiang Kai-shek’s Nationalists fled the mainland following a civil war. Beijing insists the two sides must unite, but surveys show most Taiwanese oppose that.
The mainland is expanding its regional reach by developing aircraft carriers and building artificial islands to enforce Beijing’s claim to large swaths of the South China Sea.
“This situation is, put simply, not just a problem facing Taiwan,” Tsai said at the National Chung-Shan Institute of Science and Technology. 

“It’s one that countries are facing around the whole region.”
Tsai gave no details of possible military spending increases, but a national security official said in October that the government would seek at least 2 percent each year.
Beijing increased military spending by 7 percent this year compared with 2016. 

For much of the past two decades, the People’s Liberation Army has been awarded increases of at least 10 percent each year.
Tsai has emphasized domestic development and production of weapons. 

The U.S. government approved a $1.4 billion arms sale to Taiwan in June but, in an effort to mollify Beijing, has been reluctant to supply everything the island’s leadership wants.
“We can’t rely on others,” said Tsai. 

“As the president, I have the responsibility to protect our sovereignty and the responsibility to maintain peace and stability in the region.”
Tsai, a 61-year-old law scholar who took office in May 2016, has irritated Beijing by rejecting its idea that both sides belong to “one China” as a condition for formal dialogue.
China has tried to punish the island by scaling back tourist travel to Taiwan, according to travel agents in Taipei. 

The island’s government also suspects that Beijing has persuaded two foreign governments to end diplomatic recognition of Taiwan since 2016.
The institute where Tsai spoke has developed missile and radar systems and was picked by the defense ministry this year to develop trainer jets. 

The ministry also has signed up Taiwanese manufacturers to develop a $3.3 billion submarine.
“Don’t for a minute underestimate Taiwan’s domestic ability” to develop weaponry, the president said.
Tsai suggested that countries in East Asia “with similar ideas” communicate about China’s military movements. 

But she expects officials in Beijing to shun the use of force.
“I believe any reasonable policymaker — and I believe the current Chinese leader is a reasonable policymaker — would not want to use military force at this time or at any time to resolve the Taiwan issue and that this wouldn’t be his current strategy,” she said.
Over the past two years, Chinese warplanes have flown near Taiwan’s military defense zone some 10 times, according to a former Taiwanese defense minister, Andrew Yang.
In November, bombers and other aircraft were spotted in the Miyako Strait north of Taiwan and in the Luzon Strait separating the island from the Philippines, the defense ministry said. 

It said Chinese aircraft flew through the two straits again on Dec. 11.
“Psychologically and politically, it certainly sends a message,” Yang said.
China’s aircraft are testing Taiwan’s resolve to defend itself, said Shane Lee, a political scientist at Chang Jung Christian University.
After President Trump signed a law this month that opened the way for U.S. Navy ships to visit Taiwan, a Chinese diplomat quoted by state media said the mainland would attack the day that happened.

Chinese Aggressions

The Arms Race In East Asia
By Peter Pham

A South Korean soldier stands behind a machine gun aboard a tank during a military exercise near the border in Paju, South Korea, on Wednesday, Nov. 29, 2017.
China’s increasingly assertive attitude in the South China Sea has its neighbors worried.
Vietnam, Japan and other countries that claim parts of the region are all expanding their defense spending in an attempt to keep up with, what they perceive as, an increased threat from the regional superpower.
As a result, U.S. defense and aerospace companies have done very well recently, with record international sales in 2016. Asia-Pacific was the second largest destination of U.S. weapons, just after Europe.
The trend has continued into 2017, with South Korea announcing last September that it would spend an extra 4% on defense, hitting a record US$36.5 billion.
December then saw Japan’s Prime Minister Shinzo Abe signing an unprecedented defense budget of US$43.6 billion, indicating that his government was not going to continue its normally modest military stance in the face of a more aggressive China and North Korea.
Taiwan is taking things even further, increasing its defense spending by 50% in 2018.
The cash windfall to the U.S. defense industry is not only coming from foreign governments. 

The U.S. State Department itself asked for US$1.5 billion for the “Pivot to Asia” we covered last week, spending the money on securing U.S. partnerships and maintaining access to important trade routes.

2016 also saw Obama announcing the end of the embargo on U.S. arms sales to Vietnam. 

Along with effectively creating a new market for the U.S. defense industry, it also sent the message that the U.S. is strongly committed to countering China’s increased assertiveness in the South China Sea by providing arms to the nations that it has territorial disputes with.
While Vietnam spends relatively less on defense than other nations in the area, it still accounts for 8% of its GDP (US$4.4 billion) and is growing. 

According to the Stockholm International Peace Research Institute, it has expanded by more than 400% since 2005, when the nation spent just US$1 billion on its military.
We’re now going to take a look at what these increases in state defense budgets mean for investors and the companies that are set to benefit from this increased geopolitical tension.

China
As we explored in a previous post, six countries claim part or practically all of the South China Sea. Each of these countries, bar Brunei, has placed troops or military installations on a minimum of one of the disputed landmasses. 

With diplomacy seemingly reaching a stalemate, defense and arms spending has boomed.
China is a clear leader in this arms race, with a stunning expansion in military spending witnessed since the turn of millennium. 

The regional giant will have doubled its defense budget in only a decade, hitting an enormous US$233 billion by 2020.

To grasp just how much money that is, it’s more than the whole GDP of Vietnam, and nearly the same as the US$250 billion the entire Asia Pacific region combined will spend on arms in 2020. 

That being said, it is also still three times less than the U.S. defense budget.
There is a simple reason China is spending so much on its military: it has serious aspirations to be a global superpower that can counter U.S. influence and curb its ability to affect regional politics and conflicts. 

The main arena where this contest will be either won or lost is the South China Sea.

Taiwan
Taiwan has plenty of reasons to fear the rising power of China. 

The biggest threat for the island nation is not China projecting its power in the region, but the prospect of a blockade that could severely hurt its heavily trade-dependent economy.
Taiwan is also not recognized as a sovereign country by China, which essentially views it as part of its own territory.
This situation was thrust into the spotlight in late 2016 when Taiwanese president Tsai Ing-wen made a congratulatory phone call to Donald Trump after his election. 

It was a clear snub to China, which was enraged at the sudden breach of a decades-old protocol, and added to the tension that has led Taiwan to increase its defense spending to 3% of its GDP (or US$11.6 billion) in 2018.
As we’ve written before, war (or at least the threat of it) can be good for growth, and this increase will likely boost Taiwan’s economy, which has been predicted to expand by 1.9 percent in 2017).
It’s even better news for Taiwan’s defense industry, with a few local companies well placed to profit from the boost. 

Aerospace Industrial Development (Taiwan Stock Exchange; ticker: 2634) builds aircraft for the Taiwanese Air Force, and CSBC Corp (Taiwan Stock Exchange; ticker: 2208) develops the submarines the country will need for countering an aggressive Chinese Navy.

Japan
Japan has recently made the headlines for having North Korean test missiles fired over its airspace. The rogue nation’s acquisition of nuclear weapons – and unpredictability of leader Kim Jong Un -- has forced Japan to revise its normally reserved approach to its military.
Defense Minister Tomomi Inada asked the state for US$44 billion in 2017 with the aim of strengthening Japan’s defensive capabilities, both in the face of an increasingly volatile North Korea and to match the huge increases in China’s spending. 

That was Japan’s biggest-ever defense budget and it looks to be expanding further in 2018.

The majority of that budget will be channeled to realizing two objectives: shoring up defenses on the Senkaku islands – which China also claims – and buying the latest U.S.-developed ballistic missile interceptors to counter North Korea’s growing threat.
Japan’s domestic arms industry has been reliant on its own state budget for decades, as its pacifist constitution prevented companies from selling weapons to foreign countries. 

That’s now changed, and Japanese companies can now sell to the country’s allies, presenting a huge potential for growth in that sector.

North and South Korea
If any country should be really worried about a nuclear North Korea, it’s South Korea. 

Even though open hostilities ended with the Armistice Agreement of 1953, the war between the two sides is still officially active. Both sides have since been engaged in a never-ending arms race to keep up with one another.
North Korea has been largely reliant on China – and previously the Soviet Union – for its conventional weapons, which are mostly outdated. However, it has counterbalanced this disadvantage with a massive amount of troops and an obsessive focus on building a nuclear arsenal.
The ‘hermit kingdom’ expends over 20% of its GDP on its offensive capabilities, which it views as imperative for its survival. 

And even though millions of its citizens living in abject poverty, it has ten times more troops per capita than the U.S.
Its southern neighbor has meanwhile attempted to counter this threat with a focus on cutting-edge technologies. 

At US$38.7 billion, the 2018 defense budget announced by President Moon Jae-in is the biggest ever.
The lion’s share of this will be spent on the ambitious and controversial “Kill Chain” strike and Korean Air and Missile Defense (KAMAD), which are intended to incapacitate North Korean attack capabilities and leadership, and to intercept any missiles it fires.
The North’s nuclear tests have also spurred the South to put in an order for advanced THAAD missile defense systems from the U.S.

ASEAN
The Association of South East Asian Nations (ASEAN) is an organization of countries that includes Vietnam, Indonesia, Cambodia and Thailand. Nations of this size typically don’t possess the capital or ability to run their own military industrial complex, and therefore need to import their military hardware.
Many ASEAN countries are also on the frontline of China’s recent push into the South China Sea, and their spending amongst foreign arms manufacturers has unsurprisingly gone up as a result.

While foreign defense companies have been having a bonanza from ASEAN country purchases, Japan and China have focused on increasing their ability to build their own arms at home.
Make the Most of War
Rising tensions in the South China Sea have led to a massive increase in defense spending. 

As old treaties and alliances that have safeguarded peace in the past become more fragile, profits at defense companies will continue to rise. 

While the situation may lead to war, it also presents big opportunities for investors who take the time to comprehend the complex politics of the region, and where governments are going to spend their cash.