Column: China’s Dr. Strangelove logic to arms race

By William Pesek / Bloomberg News

Published Mar 9, 2014 at 12:01AM

Let’s congratulate the real winners from China’s latest economic disclosures: Lockheed Martin, BAE Systems, Northrop Grumman and European Aeronautics Defense and Space.

Forget the Potemkin growth target Premier Li Keqiang served up Wednesday at the opening of China’s rubber-stamp parliament, the National People’s Congress. It’s always hard to take Chinese numbers seriously.

Who among you economists really believes Chinese leaders can simultaneously “declare war” on the pollution choking Beijing and Shanghai, reduce debt, rein in shadow banks, reverse engineer the nation away from exports and still grow 7.5 percent in 2014?

No doubt China will come awfully close to meeting that number by the end of the year — even if it doesn’t. The risks of having Warren Buffett, George Soros, executives at Wal-Mart and, of course, 1.3 billion Chinese citizens publicly fretting about a China crisis are too great for Beijing to allow gross domestic product to fall to 6 percent or less.

The number coming out of Beijing that really matters is 12.2 percent. That’s how much the central government is upping its defense spending this year as Li’s boss, President Xi Jinping, works on building the strongest military Asia has ever seen, equipped with an expanding navy as China extends its reach into waters around the region. What better way to flex China’s muscles than spending an amount — about $132 billion — greater than the annual GDP of Hungary.

The trouble is, Chinese spending will reverberate around the region, much to the delight of the above-mentioned giants of the global defense business. It hardly matters that the U.S. military-industrial complex has largely been banned from selling its wares to China since the Tiananmen Square crackdown in 1989. Western defense contractors will get rich selling to all those in China’s orbit — Japan, the Philippines, Singapore, South Korea, Taiwan and others.

At last month’s Singapore airshow, regional rivalries, territorial spats and worries about keeping shipping lanes open had suppliers salivating. North Korea’s provocations have since given an additional boost to demand. On Tuesday, a North Korean rocket missed a China Southern Airlines airplane carrying 220 passengers by all of seven minutes. Suddenly, declining U.S. budgets and the drawdown of conflicts in Iraq and Afghanistan must seem a lot less problematic for weapons makers.

The bump in spending, while higher than last year’s, is generally in line with China’s recent expansion of its defense budgets. National People’s Congress spokeswoman Fu Ying insisted that the added billions haven’t altered China’s path toward “peaceful development.” She went on to say China needs military might to ensure peace in Asia, as a few regional rivals are promoting the idea that China is a threat. Dr. Strangelove would be proud of the logic.

In fact, China’s arms buying is feeding a very dangerous dynamic in Asia. Its military expansion only gives nationalist Prime Minister Shinzo Abe more political ammunition in his fight to boost Japan’s own capabilities and perhaps even rewrite its pacifist constitution. Abe’s new favorite buzzphrase is “collective self-defense,” which is his way of creatively interpreting a document imposed on the country after the war. The concept would allow Japan to engage in military operations to defend its allies.

China boasts the second-biggest military budget in the world after the United States. Officially, its outlays are still around five times less. Many analysts, though, believe China significantly understates its expenditures. Last month, the Defense Intelligence Agency estimated that the true figure in 2013, before this latest boost, was $240 billion, about twice the declared budget.

If China believes that kind of spending will go unanswered in Tokyo, Manila, Seoul and Taipei, where governments have direct access to a U.S. military-industrial complex craving new business, it’s dreaming. It’s all a bit too reminiscent of the movie “Dr. Strangelove” for me. China says it’s trying to reassure the world, only to unnerve it to benefit of arms dealers.

— William Pesek is a Bloomberg columnist.