Summary:

Last week saw an intense campaign by China to warn anyone who would
listen that it was going to take some sort of military action
against Taiwan.  We tend to believe them.  We do not think that
there will be an invasion, but several other military options
present themselves.  Given the public threats it has made, China
must take some action.  Beijing's credibility is now on the line.
The United States says that it will intervene, while simultaneously
claiming that China will not take action.  On Saturday, a U.S.
State Department official met with the Dalai Lama, China's mortal
enemy.  The U.S. is now committed to defending Taiwan, having said
on record that the Chinese are bluffing and having publicly met
with the Dalai Lama in the middle of all of this.  China believes
that the United States is trying to "Kosovo" it.  Meanwhile, Johnny
Chung is saying that the Democrats Counsel on the Government Reform
and Oversight Committee gave him advice on how to take the Fifth
Amendment.  Things are, as they say, getting interesting.
 

Analysis:

China launched an intense and very public campaign last week
designed to convince the world in general - and Taiwan and the U.S.
in particular - that it intends to take military action against
Taiwan in response to its stance on statehood.  Newspapers
throughout the world were filled with reports of statements made by
Chinese diplomats and journalists to the effect that China was
committed to taking military action against Taiwan in order to
punish it.   The Communist Party newspaper in Hong Kong reported,
for example, that the "military situation was a lot more serious
than what the outside world was aware of," and that China had
identified 200 military targets on Taiwan. Troops were
ostentatiously put on alert. Chinese warnings of inevitable
military action against Taiwan were delivered to the U.S. as well.

We take these warnings seriously.  We are reminded that many years
ago, just prior to China's intervention in the Korean War, Chinese
diplomats and journalists delivered warnings in several venues
about the consequences of UN forces moving close to the Yalu.
Moreover, given the level of public visibility that the Chinese
have given to their warning, it will be difficult for China not to
act.

As we stated last week
[ http://www.stratfor.com/services/giu/080999.ASP ], we do not think
that an invasion of Taiwan itself is possible at the moment.
Therefore, the question is what sort of military options are
available to China?

One option, already discussed by us
[ http://www.stratfor.com/asia/specialreports/special47.htm ] has
apparently been floated by Chinese officials, is the seizure of two
islands, Quemoy and Matsu, that are just off the mainland of China
but are controlled by Taiwan. The islands were frequently shelled
and threatened during the Cold War.  Their seizure would be a high-
profile, low-risk operation within the amphibious capabilities of
China.

A second strategy (or additional dimension to the Quemoy/Matsu
move) is the launching of rockets and missiles against Taiwan.
Such an attack could consist of anything from a symbolic attack
with a small number of missiles against an unpopulated area, to an
all-out attack against Taiwan's air and naval forces designed to
reduce Taiwan's ability to defend itself against a follow-on
amphibious assault.  Now, there are two risks to this strategy.
The first is in its effectiveness.  As the U.S. discovered in
Kosovo, there are limits to the effectiveness of air campaigns.  To
attack and fail is worse then not to attack at all. There is also
the risk of Taiwan or U.S. counterstrikes against Chinese
installations.  If these were effective, the net effect of the
campaign on China's strategic position would be disastrous.  How
confident is China in its aerospace forces?

A third option is a campaign against Taiwan's shipping.  A full
blockade is not possible, but intermittent attacks against merchant
vessels (recall the tanker wars in the Persian Gulf) might be
possible using missiles, as well as  aircraft and submarines to
carry out direct attacks and lay mines.  The problem with this
strategy is that it could strike at the shipping of third powers,
such as Europeans.  In addition, Taiwan and the U.S. could
retaliate by striking at China-bound shipping and mining China's
ports.  In a geographical sense, China is somewhat more vulnerable
in this strategy than Taiwan.  We should add here that If the U.S.
participated in such a blockade of China, the ability of the
Chinese to create problems at the Panama Canal would suddenly
become an important variable.

Each action has the possibility of a dangerous reaction. China must
measure its actions against reactions.  Chinese newspapers were
full of bravado in the past week.  Declaring victory before the war
is dangerous, particularly when China cannot know whether they face
Taiwan alone or the United States as well.  The U.S. did everything
it could last week to convince China that the U.S. was on auto-
pilot in its Taiwan policy.  If Taiwan were attacked, the United
States would respond.  U.S. Naval officers in the region made it
clear that they were prepared, in position and capable of dealing
with any Chinese threat.  At the same time, in a move intended to
infuriate China, a U.S. State Department official met with the
Dalai Lama of Tibet in New York.  Both the Taiwan and U.S.
officials stated that it was their view that China would take no
action.  National Security Council spokesman David Leavy stated,
"It's the United States government's judgment that there aren't any
extraordinary developments or signs that there is a mobilization on
the PRC's [People's Republic of China] part."  The official U.S.
view, publicly stated, is that China is bluffing and that its
carefully circulated reports of mobilization and inevitable action
are untrue.

There are three possible explanations for what is going on:

1:  U.S. intelligence has information that China not only can't
invade Taiwan but that it cannot take any effective military
action.  Alternatively, the U.S. may be reading China as having the
capability but being unwilling to use it.  U.S. intelligence may
have information that this really is a bluff.

2:  The U.S. would welcome Chinese military action as an
opportunity for a devastating counterstroke against China.  It is
engaged in an extensive strategy, going back to the bombing of the
Chinese Embassy in Belgrade, designed to provoke China into a rash
military move for which the U.S. is poised and ready.

3:  There is a massive disconnect between Washington and Beijing
concerning the others' concerns, contentions and capabilities.
This sort of disconnect has happened numerous times before in U.S.-
Chinese relations.  It may be happening again.

We choose number three.  Let's look at the world from China's point
of view.  U.S. action in Kosovo was a critical breaking point for
them. The U.S. had previously worked on a principle established in
Haiti and Somalia that it had the right to intervene militarily in
sovereign nations on humanitarian grounds.  Embedded in that
principle was the idea that it would do so with the support of the
international community, meaning that there would be essential
concurrence or at least neutrality in the members of the Security
Council.  In Kosovo, this was not the case. The U.S. intervened in
the face of open opposition from two Security Council members,
China and Russia. In Kosovo, the U.S. established the new principle
that through NATO, it could intervene unilaterally into the
internal affairs of a sovereign state and partition the country.
Furthermore, should another country, even China, use its facilities
to provide support for the targeted country, the U.S. was prepared
to take direct military action even against their embassy.

This told China two things.  First, that the U.S. now regarded
itself as an independent arbiter of the fate of nations.  Second,
that China would not be treated differently in any way from Serbia
or Somalia.  After Kosovo, China saw itself in the cross-hairs of
U.S. policy, for several reasons:

1:  China has two regional insurrections of varying levels
underway.  One is among the Moslem population of Xinjiang province;
the other is in Tibet.  China sees the U.S. as  encouraging these
insurrections.  Having established the precedent of invading Serbia
on behalf of the rights of the Kosovo Albanians, China sees the
U.S. as having also, logically, asserted the right to intervene in
Tibet and Xinjiang if it chooses.

2:  Directly in the wake of the Kosovo crisis, Taiwan broke with
fifty years of precedent by declaring itself a separate state.
China is convinced that Taiwan would not have done this without
tacit American approval.  They see the U.S. promise to defend
Taiwan after the declaration as proof of this proposition. This
follows from the Kosovo doctrine as well: the U.S. has the right to
redefine the  boundaries of nations for moral or humanitarian
reasons.

 3:  The U.S. harbored the leader of Falun Gong in New York.  In
 Chinese dynastic history, numerous insurrections have originated
 with apparently apolitical sects generating hostility to the
 regime.  In fact, the Chinese are setting up a campaign against a
 new group, Xiang Gong, which is said to have 30 million members.
 The Chinese government does not regard the rise of internal
 opposition as accidental.

4:  China sees the U.S. as taking advantage of China's economic
problems.  This weekend, China's official People's Daily wrote, "An
appropriate adjustment in the exchange rate may after all be a
policy option if imports significantly exceed exports and push up a
trade deficit." China is still in economic trouble.

Regimes cannot afford to appear to be weak, particularly when they
are.  The issue here is how Beijing appears to the Chinese masses.
That means that quiet diplomacy that wouldn't give Beijing a public
victory is not going to happen. China sees the U.S. as having put
into place policies that, if followed logically, would result in
U.S. participation in the fragmentation of China.  The one legacy
of Mao that all Chinese value is that he eliminated the foreign
domination and fragmentation of China that had existed for a
century.  Deng's promise was that he could retain Chinese
sovereignty while easing China back into the international economic
system.  China is undergoing the great test of Deng's doctrine: can
China retain its unity, territorial integrity and sovereignty while
in economic decline, or will that decline generate disunity,
fragmentation and a loss of sovereignty?

The central problem is this.  The U.S. did far more than save the
Albanians.  It redefined the region's geopolitics.  This affected
not only Serbia, but all countries surrounding Serbia.  It drew
countries like Bulgaria deep into the U.S. orbit at severe
geopolitical cost to the Russians.  The intention of Kosovo might
have been limited.  The outcome of Kosovo was a profound shift in
regional alignments.  Further, China has come to see U.S.
peacekeeping operations as covers for expanding U.S. power.  It
also sees Kosovo as a blueprint for such operations elsewhere in
the world, including China.  It sees the bombing of the Chinese
Embassy as a clear signal that the U.S. no longer distinguishes
China from Haiti, Somalia or Serbia.

Whether or not the U.S. intends to expand the Kosovo doctrine to
China is immaterial.  The Chinese view is that every U.S. move
signals that the U.S. has a national interest in influencing human
rights issues within China's boundaries.  China must assume that
the U.S. intends to carry that policy to its logical conclusion.
If Taiwan is prepared to assert state sovereignty and the U.S. is
prepared to defend that assertion militarily, then the U.S. is now
prepared to redraw the map of China as it did the map of Serbia.

China cannot permit that. It cannot now invade Taiwan, but it can
take other measures.  It must do something to retain its
credibility.  A man in Jiang Zemin's position cannot afford to be
made to look ridiculous.

Now, there is a complicating issue.  Johnny Chung, fund raiser for
the Clinton campaign, has just stated  that he received advice from
the Counsel for the Democratic minority on the Government Reform
and Oversight Committee prior to his testimony.  The advice was
about taking the Fifth Amendment prior to congressional testimony.
One does not have to be Woodward and Bernstein to know that
something stinks here.  Clinton has a major China problem.  That
problem will drive him to be rigid and inflexible in order to
protect himself from the charge of being a pawn of China.

Now, are the military options for the U.S? The U.S. is far from
helpless against China, but there are clear limits to its ability
to engage China on its own terrain. China is not Serbia. Its
ability to project forces is limited; its ability to operate
defensively is not.  Moreover, U.S. forces are scattered around the
world.  They are still carrying out air strikes in Iraq under some
policy no one can quite remember.  Aircraft and crews are being
overhauled and rested from Kosovo.  Korea is perennially unstable.
Draw downs in budgets are showing themselves in countless ways.

Neither China nor the U.S. is ready for an extended and indecisive
encounter over Taiwan.  It is not clear, however, that the Chinese
are in a position to avoid some action.  It seems to us that Bill
Clinton cannot avoid responding.  The danger here is not a short
series of unimportant counterstrokes, rapidly passing into history.
The danger is that both sides will get tangled in an extended,
inconclusive and bloody confrontation.  We cannot help but think of
the air crews patrolling Iraqi airspace this weekend, eight years
after Desert Storm.  Decoupling from foreign adventures is not the
American strong point.  Ignoring challenges to national sovereignty
is not the Chinese strong point.

China thinks the U.S. wants to "Kosovo" it, to coin a term.  The
U.S. knows this is ridiculous.  The meeting with the Dalai Lama was
a courtesy.  The Falun Gong leader's presence in New York was a
coincidence.  Taiwan never consulted the U.S. on its sovereignty
statement.   The U.S. has nothing to do with shipping arms into
Xinjiang. Bombing the Chinese Embassy was an accident.  It has
occurred to no one in Washington to take advantage of China's
economic problems.

We're convinced.  Now, somebody better tell the Chinese.