The troubled waters of the South China sea

By Nicholas Consonery and Willis Sparks

For China's top leaders, this is not a good time for confrontations with the neighbors. The country's once-a-decade leadership transition is expected to unfold this fall, and neither outgoing nor incoming officials want uncertainty or ugly international headlines to interfere with the official choreography.

Thus the worry that Asian governments like the Philippines and Vietnam, emboldened by a commitment from Washington to maintain a robust strategic presence in the region, are pushing more aggressively to assert territorial claims in the South China Sea. More worrisome still, China's leaders face patriotic pressures from within for a forceful response.

China and its neighbors could be working together on joint oil and gas exploration in these disputed waters. Proven and undiscovered oil reserves in the South China Sea are estimated to be as high as 213 billion barrels, according to a 2008 report from the U.S. Energy Information Administration. If accurate, that's larger than the proven oil reserves of all but Saudi Arabia and Venezuela. But territorial disputes continue to block efforts to prove these estimates, and the potential for open hostilities in the area is growing, threatening to disrupt trade flows and stoking regional tensions.

The most recent conflict is the impasse between the Philippines and China over the Scarborough Shoal, a small island 100 miles off the coast of the Philippines claimed by both countries. In April, Philippine naval vessels discovered Chinese fishing boats in a lagoon of the Scarborough Shoal, provoking a three-month standoff in which Beijing used trade barriers to pressure Manila, which called on Washington for help. Though the standoff seemed to have been resolved in June, there are still Chinese fishing boats in the shoal.

Manila is pressing the issue both to stoke national pride at home, to justify greater defense spending, and to draw the U.S. deeper into territorial disputes. Vietnam has similar motivations, though Hanoi appears to have less appetite for tension than Manila at the moment. Neither Chinese neighbor wants to punch toe-to-toe with Beijing, and cooler heads are always likely to prevail. But confrontations at sea can spin beyond the control of state officials back on shore.

There is a similar problem in Beijing. When Chinese officials discuss how best to manage territorial claims in the South China Sea, there are lots of negotiators seated around the table. Local leaders, maritime police, customs and border officials, as well as representatives of national oil companies and the Chinese Navy each have their interests to assert. Any of these actors can play to increasingly hawkish public opinion to operate outside the limits set down by senior leaders.

That's why, though the leadership would like to put a lid on territorial tensions, China has been making so much South China Sea news in recent weeks. Two weeks ago, the state-owned China National Offshore Oil Company (CNOOC) opened nine blocks for exploration in waters also claimed by Vietnam. Not long after, a spokesperson for China's Defense Ministry announced that the navy was conducting combat-ready patrols in the area.

In months to come, China's top leaders will do their best to strike a delicate balance-to appease belligerent voices at home and within the government while reassuring outsiders that China is not becoming more aggressive. But each time one of the neighbors makes another provocative move, Beijing's balance becomes a bit harder to maintain.

Nicholas Consonery is an analyst in Eurasia Group's Asia practice. Willis Sparks is an analyst in the firm's Global Macro practice.



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