THE WORLD KNOWS TODAY BEIJING IS THE PROBLEM IN THE SOUTH CHINA SEA

To The Point has been predicting this for years.  The prescience of that prediction became quite clear today.

This morning (7/12), the International Court of Justice in The Hague has ruled against China, that it has no “historic title” to areas of this sea stretching all the way to the ‘nine dash line’ – deep into the territorial waters of a ring of South East Asian states.

Beijing has as expected dismissed the verdict with scorn, accusing the tribunal of “shamelessly abusing its authority.” The state media said the country “must be prepared for any military confrontation” with the US, and must not flinch from war if provoked.

It is the latest in a series ominous developments in Asia and Europe that are rapidly subverting the Western international system and setting off a global rearmament race with strong echoes of the late-1930s.

Tensions are flaring up across so many spots in East Asia that global investment funds are actively betting on defense stocks and technology companies linked to military expansion. Nomura has launched an “Asian Arms Race Basket” as a hedge against potential conflicts in the East China Sea, the Straits of Taiwan, and the South China Sea.

Among the companies listed are Mitsubishi Heavy Industry and Sumitomo Precision in Japan, China Shipbuilding and AVIC Aircraft in China, Korea Aerospace and the explosives group Hanwha, as well as Reliance Defense and Bharat Electronics in India.

Banks are designing ‘arms race’ baskets of Asian stocks Credit: Nomura

The Stockholm International Peace Research Institute says China spent $215bn on defense last year, a fivefold increase since 2000, and more than the whole of the European Union combined. It is developing indigenous aircraft carriers. US experts say its “Two-Ocean Strategy” implies a fleet of five or six aircraft carrier battle groups to project global power.

Japan has upgraded its once invisible Self-Defense Force to a full-fledged fighting machine with a humming new headquarters and an air of determined alertness.

The country has been increasing military spending for the last four years, especially under its nationalist leader Shinzo Abe, commissioning its largest warship since the Second World War, an 800-ft DDH-class helicopter carrier.

Rearmament has paradoxical effects. It acts as a form of Keynesian stimulus, as it did in the late 1930s. The spending might absorb some of the Asian savings glut and eat into excess industrial capacity, lifting the world out of secular stagnation, but it is a lethal way to do it.

A parallel process is underway in Europe where defense spending has been shooting up since the Russian invasion of Crimea, ending years of neglect and austerity budgets. Outlays are expected to rise by 20% in Central and Eastern Europe this year, and 9.2% in South-Eastern Europe, according to the French think-tank IRIS.

The ruling in The Hague is a harsh rebuke for Beijing. It concludes that China is muscling into the “exclusive economic zone” of the Philippines, and that its drive to create a forward chain of heavily-armed posts on artificial islands breaches the UN Convention on the Law of the Sea.

Beijing never accepted the legitimacy of the case brought by the Philippines and stated from the outset that any ruling would be “waste paper”.

China claims 90% of the South China Sea, deep into the waters of other states

Flash points are now legion. China’s dispute with Japan over the control of the Diaoyu/Senkaku islands in the East China Sea continues to erupt in spasms, with alarmingly close brushes by air and sea. There is still no hotline mechanism in place to stop skirmishes spinning out of control.

But the South China Sea is where matters are coming to a head. The Pentagon has made it clear that any move by Beijing to weaponize the Scarborough Shoal off the Philippines would be a step too far, leading to military response.

The great worry is that parallel dramas in East Asia and in Europe could feed on each other. Washington’s ‘Asian Pivot’ is diverting US focus and power from Nato to the Far East, creating an opening for Russia’s Vladimir Putin.

Mr. Putin’s arms build-up has equipped him with a formidable military machine. He has a window of opportunity to press his advantage, perhaps by testing Nato solidarity in the Baltics with his hallmark form of hybrid warfare.

“I am convinced that Europe stands on the edge of several strategic and political precipices and could well see more change in the next five years than in the preceding fifty,” says Julian Lindley-French, vice-president of the Atlantic Treaty Association.

“What if a conflict breaks out in Asia-Pacific in parallel? Would an over-stretched America be able to continue to fill the gaps in Europe’s defenses?”

Nobody knows the answer. The world has not been in such peril since the Cuban Missile Crisis.

Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.