 When John Lee and I decided to get together to write this 8,000-word article for security challenges, we thought we'd do what, in my experience, academics to rarely do, and that is, John, we would join together the disciplines of economics and strategic studies into a one-discipline approach. When I asked John to join me in this, and I don't often do joint-authored articles, it's generally a difficult process, but with John's case it was seamless and painless as far as I'm concerned, we talked about Paul Kennedy's seminal book, The Rise and Fall of the Great Powers, and Kennedy's clear conclusion that there is a very strong connection in the long run between an individual great power's economic rise and fall and its growth and decline as an important military power. But where we paused was that applying this important judgement to Australia's foreign and defence policies regarding the rise of China has led to strongly opposing views. There are those, as you know, including in this university, including some of our colleagues, who consider that the inevitable rise of China must result in that country becoming the naturally dominant power to which the United States must concede strategic space and acknowledge China's so-called legitimate strategic interests. There are others, including us too, as authors, who believe that China's endless and rapid rise economically is far from inevitable and perhaps even unlikely, and that its military power will continue to lag seriously behind that of America. The argument that China will emerge as Asia's preeminent power is based on assumptions that its economic and military capacities are expanding and improving at such a rate that regional dominance is all but assured. Yet the sustainability of China's rapid economic rise and capacity to embark on the path towards becoming an advanced and resilient political economy, in addition to its ability to become a genuine military superpower wielding proportionate regional influence, is widely assumed, but in our experience rarely analysed in any depth, at least in Australian literature. In examining the factors that go towards the development of Chinese national power and its ability to use it to achieve national objectives, predictions about a Chinese superpower with the ability to dominate Asia would be premature, if not improbable, in our view. John, over to you. Thank you, Paul, and thank you, Andrew, for the introduction. As Andrew mentioned, I've come on as an adjunct at the centre, so it's my privilege to give what I hope will be one of several lectures over time. Thank you all as well for taking the time to be here. I'll speak for about 20 minutes and then I'll hand over to Paul to speak about some of the military and strategic aspects of this issue. Now, we obviously don't know the future, and because we can't accurately forecast the future, we tend to rely on extrapolations of trends or trend lines, especially when it comes to predictions about material power, that is, economic power and military power in a main. Now, extrapolations of trend lines are not completely useless. They can be useful, but they're essentially a window into the past. They do not tell you what will be. They tell you what has been. Trend lines also do not tell you much about causation. In fact, they don't even really talk about causation. They don't talk about or imply, you cannot infer from them why something occurred and whether something is likely to continue into the future or why something may change or why it may not. Now, like all of you, I don't have a crystal ball in my lounge room. So, the approach I'm taking and I think the approach we took in this article was to basically analyse China in unexceptional terms, and that is, you analyse China in the way that you analyse the material power and prospects of any other country. We don't have any belief in things like cultural determinism. We don't think anything is inevitable about a certain country or a certain culture or a certain political system. We merely look at China in the same way we look at any other country. Now, the title of our article, Why China Will Not Become the Dominant Power in Asia, that's the title of that article. Paul, when I hand over, will talk about the military and strategic challenges and limitations faced by the Chinese. I will begin with the economic basis for why we think that this is the case. So, let me begin with the widely accepted, I wouldn't say overwhelmingly accepted, but the widely accepted proposition that when it comes to economic power and the acquisition of national capability at least, time is on China's side. That all China really has to do is wait a couple of decades as long as it doesn't do anything stupid and the 1.37 billion people in their eyes will effectively determine the course of regional history. Now, in some respects, the trend lines say that this is so, but I will rely on economic reasoning to say why I don't think this is so. And while I'm not predicting economic disaster for China like some of us might, the assumption that China will acquire the economic base to dominate Asia short of American withdrawal, which I don't think is likely or conceivable, is pretty unconvincing in my view. So, let me begin with the basics. As any converse will tell you, there's basically three ways you can grow your economy. You can add more labour inputs, you can add more capital inputs, or you can use one of both of these inputs more efficiently what economists refer to as total factor productivity. Now, can China add more labour inputs, significantly drive rapid growth, or even moderate growth in a medium term? Well, I think the simple answer is no, and I say that because of its aging demographics, which for a number of reasons will be pretty much impossible for China to alter. Now, there is one thing we know for certain and that is that China will be the first major country in history to grow old before it grows rich, or before it grows even moderately rich. Now, in the 1980s, during its first decade of reform, the proportion of the working age population that is 15 to 64 years was almost 75%. It will decline to 65% in 2020 and 60% in 2035. Now, this may not sound significant or meaningful to you, so let me put this another way. When China began its reforms in 1979, there was seven working people to every one retiree. To date, a ratio is about 5.5 to 1. By 2035, there will be two working people for every retiree. In fact, 2015 this year is a significant year because this year is the first year that more people are leaving the workforce in China than entering the workforce since reform period began. Now, before I say what I'm about to say, I have to apologise to Paul, who is an exception to the rule. I'm about to articulate that the most productive years of a worker is from their 20s to the late 50s. That is in developing countries. In advanced countries, the older people tend to have it. Now, the problem for China is that by 2035, there will be 1.5 older workers, that is workers from 50 to 65 years, to every worker under the age of 55 years. By 2030, China will have the same demographics, roughly a country like Norway or Amsterdam. Incidentally, if you want a comparison, America is the only great power which has favourable demographics up to 2050, India, if you want to include India as a potential great power. Beryn minus, well, that only one-third of all urban residents, which is about half the population, urban residents are half the population, and less than 5% of rural residents have some form of pension fund, central, provincial or local pension fund. Even then, the state's largely unfunded liability is expected to be around 40% on GDP by 2035, and this assumes quite generously that China will continue to grow at 6% up to 2035, which I think is unlikely. Now, this will obviously increasingly compete with other budget items, such as national security and military spending. Now, even for those with a pension fund, at least half their living expenses will still be picked up by their family. So, whereas up to a quarter of the growth from 1980 to 2005 can be attributed in some way to the so-called demographic dividend, that is a massive increase in productivity of young workers coming into the cities with very little family responsibilities, there will be no such prospect of a demographic dividend for China from now on. Now, let's talk about adding capital inputs, and this is the real problem for China's future economic resilience. Now, speaking in very generalised terms, growth in the first decade of reform, 1979 to 1989, was driven by genuine entrepreneurialism and dynamism. Land reforms allowed not land owners, but land occupiers to use the land in any way they wanted. They were allowed to sell surplus produce at market prices, and this gave birth to a wave of spontaneous and unplanned entrepreneurialism and bottom-up economic activity, and eventually arises smaller-scale industries, which was a real driver of early industrialisation in China. Now, by the mid-1990s, this model was running out of steam, and what was emerging was China as a major export manufacturing country, not just in Asia, but in the world. So, it was from the mid-1990s onwards that made in Korea, or made in Japan, or made in America, or made in Malaysia, was replaced by made in China. So, prior to the global financial crisis, or just a couple of years before that, the major driver of Chinese growth was net exports. Now, there was nothing remarkable about this. This was really just the model that Japan, South Korea, Taiwan, Singapore, amongst others, pursued, but China took it to a much larger scale because of the surplus pool of labour that they had. Now, export-dependent models obviously need growing in consumer markets, and this became a problem for China when the global financial crisis hit the advanced economies and consumption markets ground to a halt. So, China had to find a different way of generating growth, and this is what they did. Now, if you take the period from 2004 to 2014, the Chinese economy expanded a pretty impressive 162%. Labour inputs, additional labour inputs, contributed around 6% of that, but enormous 136% can be attributed to capital inputs, mainly in the form of fixed investment, which is basically building, constructing things. This means that only 20% of growth out of 162% over the last decade was due to using inputs more productively. Now, these are all economic numbers, okay? Why did they matter? Well, the enormous level of capital inputs needed to generate the growth that China has achieved in the last 10 years has met that national corporate debt levels have risen from 147% of GDP from the end of 2008 to over 250% of GDP at the end of 2014. Now, to put these numbers in context, it increased from $9 to $10 trillion US in 2008 to $20 to $25 trillion US in 2014. Now, this increase represents an amount larger than the entire size of the American commercial banking system. Now, it happened, this increase happened because in the government's determination, or some people would say in the government's desperation to achieve rapid growth, the Chinese government ordered state-owned banks to lend predominantly to state-owned enterprises even when there was no commercial justification for doing so. So, from 2008 to 2009, for example, bank loans almost doubled from $750 billion US to $1.4 trillion US. The outstanding bank loan books of China's banks expanded almost 60% in two years. So, this clearly is not due to natural economic demand. It's a result of government-driven policy despite what Australian miners in the treasure at the time were actually telling us. So, the result is what China's own state-backed economists refer to as not just the largest building programme or largest national building programme in world history but also the most wasteful in economic history underutilised roads, underutilised airports, bridges that go nowhere, wholly abandoned newly-built cities and, critically, enough housing to fulfil the urbanisation requirements of the country for the next 20 years at least. Well, it's enough empty housing to fulfil the urbanisation requirements of the next 20 years. So, if you look at just the biggest four provinces in China, there are wholly unoccupied dwellings that could house 200 million people. Now, to result if you ask independent analysts and international banks and accounting firms operating in China is that the concealed bad debt amounts to about 70% to 140% of GDP. As state-owned banks and local government financial entities, ultimately government liabilities, ultimately central government liabilities, these will have to be dealt with by the central government. And once again, consider what this means for the competing demands on the public purse in the next 10 to 20 years. So, basically, China doubled down on Japanese eras and then some. China may still avoid two decades of virtually zero growth, which is what Japan suffered, but China's capital output ratio, the ratio of what you get for each additional input of capital is about three times worse than what it was 10 years ago. Incidentally, it's about 50 times worse than in India, which is generally seen as an extremely inefficient economy in terms of user capital. Now, finally, can China use inputs more efficiently or more productively? And clearly, this is the only way ahead for China to grow its economic base that would be necessary for it to become the dominant power in a region. Now, this is often expressed in different terms. Can China become a much more innovative economy? Can it move to a market-responsive economy rather than a hybrid planned economy? Can it increase consumption? We should drive services and increase productivity. Essentially, all of these characterisations of what China needs to do is to say, can China escape the so-called middle income trap, which, if you look around, only around 30 economies in the world have done that. Now, basically, the future of China being the dominant power in Asia depends on it escaping the middle income trap. It can't do so. It can't become the dominant power if it doesn't achieve that. And so the last question I want to pose is what would China have to do in broad terms to escape the middle income trap? Now, take innovation. China would have to dismantle its state-dominated political economy. It would have to remove privilege from the 150,000 SOEs, state-owned enterprises, in favour of the millions of private domestic firms. The SOEs, the 150,000 of them, currently receive around 70% to 80% of all formal finance in the country, with the five or six million firms left to fight for the scraps. To give an example of the state-dominated nature of the Chinese economy, the top three largest SOEs in China, their revenues exceed the combined revenues of the largest 500 private firms in the country. Now, if you dismantle this system, you remove the capacity of the Chinese Communist Party to use SOEs for the advancement of national power and the achievement of national goals, which they are used for periodically. It will also disrupt a key strategy for the Chinese Communist Party to remain in power. That is, by becoming the primary dispenser of business, career, professional, individual, institutional opportunity in the country, you essentially keep your elites on side. Dismantle such a political economy, and suddenly you have some potential existential political problems for the Chinese Communist Party. Now, to move to next stage, China needs to build institutions. If you look at all of the 30 or so countries, with the exception of a couple of oil-rich Middle East countries, look at all of the 30 countries that have escaped the middle-income trap, they have some common institutions. They have ruler law, not ruler party or ruler government. They have intellectual property rights and property rights. They have independent courts and mechanisms for resolving disputes, and they have very low levels of corruption. The bottom line is that for China to escape the middle-income trap, it would need to fundamentally reorganise its political economy, and this is extremely hard to do, and very few countries have done it. Now, even if China succeeds in doing all this to go to the next level, it will then be a very different China to what we see today. It will be very difficult for the Chinese Communist Party, for example, to harness major aspects of national resources to advance national power or to advance the power of the party. Civil society will have its own goals, and it will be hard to harness national tools to achieve national objectives. Now, I'll very shortly hand over to Paul to make some comments about China's strategic and military position, but let me just conclude on a couple of points. Now, first, China currently spends around 15% of its budget on national security. That is, on the People's Liberation Army, the External Army and the People's Armed Police, which is the military train, internal army. Now, these budgets have been rising, the budgets of these two organisations have been rising at a level that's about 50% higher than the increase in GDP growth. Now, this can't happen forever for reasons that I gave. Now, second, on all key indices of non-military power, America, China's primary competitor, is well ahead and will remain so. So think about innovation, age demographics, education science, industrial capability, emerging technologies, social stability, resource security, food security, territorial security, regime or government security and so on, America is ahead on all of these indices and will remain so for the foreseeable future. And third, China might in many respects be a strong state, but it is a strong state overseeing a weak and fragile country. The legitimacy of the Chinese Communist Party and its capacity to remain in power ultimately depends on improving the lives of its citizens. It can't just use more and more of national resources for national power without political domestic consequences. Now, already the CCP is managing a country with, by its own official numbers, 180,000 instances of mass unrest. Mass unrest being defined as 50 or more people protesting against government entities or government officials. It simply cannot pour more and more national resources into the advancement of national goals without focusing somewhat internally. Now finally, China's internal fragility means that it cannot afford a major foreign policy disaster or economic disaster for the CCP to remain in power. The CCP has 1 million military trained people's armed police units solely devoted to controlling domestic unrest. Now, this is a sign of a country that may appear strong from the outside but is significantly vulnerable from the inside. Now, a foreign policy or economic disaster may bring down an American government. That's that's true. It may bring down an administration, but it won't bring down a whole political economy. Such a disaster will bring down the whole Chinese political economy if the CCP fails. Now, if you look at all of these factors, all things considered, this to me does not seem like a power with the economic base, with the domestic base to become the dominant power in a region. Now, I'm now going to hand over to Paul to talk about some of the military and strategic aspects and then I think we'll make some concluding remarks. Thank you. APPLAUSE You can see now why I was attracted to the different approach that John Lee takes to most so-called Chinese experts in this country on the Chinese economy who seem to bend over backwards, John, to excuse all sorts of problems that you've identified. I will now turn to the situation with regard to foreign policy and also the military. And I'd like to begin, and I'm turning to the reference in our document. In my view, China has very few powerful or influential friends in Asia. For a country with such a large population and the world's second largest economy, it does not have many close bilateral relationships. In her book, China, Fragile Superpower, Susan Shirk, a former senior Department of State official, describes China as strong abroad, but fragile at home. This strikes both John and I as being incorrect. In our view, China is certainly fragile domestically, but it is also a lonely power when it comes to acquiring real influence in Asia. A listing of China's friendships in the region reveals that only North Korea and Pakistan can be counted as countries with which it has a strong relationship. But what sort of trust can Beijing have in a Pyongyang, not dragging it into an unwanted war with South Korea? And in any case, we've witnessed of late Beijing cosying up more to South Korea than its traditional ally at North Korea. As for Pakistan, it is constantly teatring on the edge of becoming a failed state, nuclear armed, and risks a conflict with India that certainly would not be in China's interests. For centuries in the past, Imperial China was feared and respected as the dominant power in Asia as Susan Shirk has correctly observed. But that was all a very long time ago when China faced no real competition until the arrival of European colonial powers in the 19th century. China now operates in a highly competitive regional environment against such major powers as the United States, Japan and India. And of late, many Southeast Asian countries have become increasingly concerned about China's assertiveness and several of them, including Vietnam and the Philippines and indeed Singapore, have taken steps to align themselves much closer to the United States. In my view, not even Russia can be counted by Beijing as a long-term friend, let alone an enduring ally, and I say that for all sorts of geopolitical and cultural reasons. When we look at the overall state of the relationships, China's poor relationships with the United States, Japan and India, do not in our view augur well for its ability to shape the future regional order. Moreover, Beijing's increase in aggressiveness and harsh attitudes towards its preemptive territorial claims in the region run the risk of miscalculation and conflict. This risk, coupled with Beijing's inclination to challenge established international norms of behaviour, is a suitable point to turn in a moment to China's military build-up and an examination of its strengths and weaknesses. But before I do that, let me just refer back to the relationships that China has with Japan. They're clearly at a level of high tension, if not poisonous. There are all sorts of historical faults on both sides, but the way in which China is now leaning on a newly reassertive Japan is pushing, as I've said, Japan closer to the United States. And does China really stop and reflect that if it pushes too hard, including the use of military power in places such as the Senkaku Dai Utae Islands, might not that force Japan along a path that's clearly within Japan's very speedy capability towards an independent nuclear weapon? You wouldn't have thought so. With regard to India, it is different, and I'm not arguing that India is about to become an ally of the United States. But of later gain, we've seen in India, by the way, unlike China, a democratic country with rule of the law, with freedom of press, an India that is increasingly having a relationship with Japan, as indeed Australia is, and an India that, as I've said, will not become an ally of the United States, but is historically aligning itself, including with military weapons sources, away from its traditional supplier of military weapons, Russia, towards India. And how is it that a China, a Beijing, in which the most powerful position in the land is not president of the People's Republic, in my view, or general secretary of the party, it's chairman of the Central Military Commission, which is the most powerful position, and when Xi Jinping holds that position, how come when he's in India, the Chinese allegedly, according to some academic commentators in the West, unknown to the central leadership, if you can imagine that, commits military aggression on the disputed border in the Himalayas. I, for one, do not accept that any military action in China is not under the direction of the Central Military Commission. And then we come to the matter I've mentioned of Russia. It is a relationship of convenience, particularly now that Putin has his back against the war with regard to economic sanctions, which is starting to bite, and a Europe, and I've just come back from both Sweden and Finland, which is now seen Russia as the new re-emerging threat. Is it really a relationship under the Shanghai Cooperation Agreement between China and Russia that we see enduring? Well, I've mentioned the geopolitics. Resource-rich, oil and energy-rich, minerals-rich Siberia, a part of a continent more than double the size of Australia, shares a long common border with China. It is an increasingly sparsely populated Russian Far East with bad demographics. And how would Australia react as a large, sparsely populated, resource-rich country to that sort of geopolitical challenge? As a former defence planner, I can tell you. And then we have the relationship with the United States, which we all want to see improve and be a good relationship. But it's not looking brilliant, and the way in which China increasingly was in military power indirectly, unlike directly Russia at the moment, but indirectly as a force of coercion to threaten Japan, to threaten countries in Southeast Asia, and to threaten India, does not augur well for the norms of international behaviour and a stable and peaceful region. With regard to China's military capabilities, again, I think we've had too much straight-line extrapolation in this country with regard to China. It reminds me, when I was in the intelligence game in the 1970s, of the straight-line extrapolations that were made both in the intelligence communities and in many of our academic so-called experts on the Soviet Union, that the Soviet Union was going to grow and grow, that in the period of Western stagflation, the Russian model of central planning, quote, was more successful, that the Soviet Union was on a winning streak with regard to its intervention without any response worth talking about from the West in Afghanistan in 1979, and the proclamation by our experts on the Soviet Union, most of them, that the Soviet Union was about to outstrip the United States in military power. That was the view of Robert Gates, the deputy director of CIA, when I saw him in 1986. In 1989, Dan went the Berlin Wall. In 1991, I can't sing my favorite Beatles song back in the USSR anymore. So, you know, as John has said, whether it's Japan in 1980 or the Soviet Union in the late 70s, early 1980s, beware of those so-called experts who tell you with great authority that it is inevitable that China will be in the present military power in the region, if not globally. The fact is that China, not now and foreseeably, is not a superpower. There's too much casual use of that word. Let me tell you what a superpower is. A superpower has two attributes. Number one, it has the capacity to wreak vast nuclear destruction anywhere on the globe anytime. There's only two countries now capable of doing that. America and, guess what, Russia. China does not have that capability. The second attribute of a superpower is the capacity to decisively project conventional military power anywhere in the world and intervene, just like our American friends are doing time after time after time, whether we agree with that or not. China does not have that capability. Now, China undoubtedly has developed substantial military capabilities in the last 20 years or so. I'm not arguing against that. And China has taken notice of the overwhelming use of American conventional military power in the first Gulf War in 1991. And it's moved into a more sophisticated what it calls informationised military for fighting short notice, high intensity regional wars, and it's moved away from people's army. But the fact remains that as far as China is concerned, even with its main military priority, that is to retake Taiwan at a time of its choosing, according to the Pentagon China still has substantial deficiencies in amphibious assault in order to do that. And in addition the latest Pentagon report on China says that the limited logistical support remains a key obstacle for China in preventing China's navy from operating more extensively than beyond the media de-station surrounds and particularly in the Indian Ocean. In addition, and I quote from the Pentagon report, it is not clear whether China has the capability to collect accurate targeting information and pass it to launch platforms in time for successful strikes against targets at sea beyond the first island chain. That's the island chain Japan Taiwan, the Philippines. I would argue that even within that first island chain, even within that China has substantial deficiencies with regard to anti-submarine warfare, air defence and the so-core capacity to take out American aircraft carriers and I'll come back to that. For those of you who are interested, this month the RAND Corporation are quite conservative American Corporation, John, has come out with a report which I commend to you called China's Incomplete Military Transformation and it quotes extensively from Chinese sources and it gives other information about issues such as anti-submarine warfare and so on. And I draw to your attention that this report says that in China's own journals and literature there is an acknowledgement that the PLA's own weaknesses revolve around a concept alternately referred to as two incompatibles, I don't speak Chinese, or two gaps and these two incompatibles or gaps acknowledged by the PLA are the modernisation levels of China's armed forces, particularly problems in the human area and I'll come back to that in the military capabilities of the armed forces to live up to this concept of fighting high-intensity informationized warfare. So what are the problems identified with the first incompatible that is the modernisation problem, the available literature according to RAND denotes in China, denotes several areas that are broad and endemic to the people's liberation army in the realms of training, organisation, human capital force development and logistics. It is well known that a lot of the training is unrealistic and artificial. It is well known that the amount of time that officers in the PLA have to spend on studying, believe it or not, Marxism Leninism can take 20 to 25% of their time. Good luck, let them do more of that and waste their time. There's problems of the constant interference of the party with the with the military and with the military, unlike our militaries, the role of the people's liberation army in the oath of allegiance to take is not to the people's republic of China, it is to the communist party of China and Bob I'm going to ask you to contradict me even in the Soviet Union the Soviet Red Army did not have the role and influence in the party the way that the people's liberation army has. In the Soviet Union the worst thing you could be accused of was bonapartism. That's why Zhukov, the conqueror of Berlin was sent into exile for boasting about how he won the Second World War. That is not the case in China. When Deng Xiaoping sent the tanks into Tiananmen Square I was in CIA headquarters when that happened and the evidence is impeccable. The evidence is impeccable that it was a direct order from Deng Xiaoping whose position was no longer president no longer general secretary guess what he was, chairman of the Central Military Commission. I rest my case. So I commend the Rand report to you. Time is moving on. I just want to take a couple of examples of some of the military deficiencies. The first one I want to address is anti-submarine warfare and the third one is air defence. I've mentioned both of them earlier. Again, let me commend to you one of the best reports in the public domain is by Aaron Friedberg, professor of politics at Princeton. It came out late last year. Unlike many commentators he's not inclined to exaggerate China's military capabilities. For example, he cites a survey by the United States Office of Naval Intelligence describing China's capabilities in the acquisition of targeting information essential for anti-submarine warfare as, and I quote, marginal. China's navy of course has begun to invest in the underwater sensors, dedicated fixed wing aircraft, helicopters and surface vessels necessary to locate and track enemy submarines. But it has yet to address its shortcomings in ASW. This is an important deficiency given America's big advantage in terms of tracking other submarines and the difficulty of other countries have of detecting American submarines. China's conventional submarines are relatively easy to detect and its nuclear boats possess little ASW capability and are still noisy. Even its latest ballistic missile firing submarine, SSBN, the Jin class, according to one American report makes more noise than a Delta IV submarine in the 1980s. If that is true, they've got a problem. They have a serious problem. China's military would be hard pressed to prevent hostile submarines and unmanned underwater vehicles which are the new thing, as James Goldrick will tell us in anti-submarine warfare. It would be hard pressed to prevent them from operating close to its shores and destroying its surface fleet. It also remains unclear how capable of joint coordination China's different services are in operations over water. Integrated operations between a highly regimented and rigidly structured Chinese Air Force and an immature and sea-based navy would require technological and surface culture innovations as well as exercises less carefully scripted than has been usual to develop the requisite interoperability and inter-service coordination. As I've said earlier in promoting officers and selecting leaders the Chinese prize loyalty to the Communist Party and reliability over independence and innovation. In the meantime the United States is pressing ahead with technological game changers such as unmanned undersea vehicles for reconnaissance, surveillance and strike that could radically change undersea warfare to China's huge strategic disadvantage. There are similar gaping deficiencies in China's air defence capabilities against any technologically advanced enemy. As Friedberg points out China's ability to detect and intercept ballistic missiles or stealthy aircraft and cruise missiles appears to be limited. Moreover, the United States is working on technological advantages that will make China's task of air defence even harder. They include a new, low observable penetrating bomber and long range precision strike with very high speed hypersonic vehicles as well as what's called prompt global conventional strike with conventional warheads on ICBMs. Such developments would greatly increase the expenditure that Beijing would have to devote to both active and passive defence measures and you've heard John Lee say that the trade-offs in future because of demographics and economics the trade-offs in future between endless investment in the military and these other demanding things in the Chinese economy is no longer a free good. None of this is to underrate the potential challenge to regional stability from China's military modernisation but neither is it to succumb to the current fashion of exaggerating China's military capabilities. Despite its many achievements China is still a weak state and as Andrew Shearer points out its transition to exercise in influence as a sea power has provoked region-wide balancing behaviours in other words the reactions of Japan and Vietnam and the Philippines. As time goes on neighbours around China's periphery may also feel compelled to feel similar capabilities to China in order to address the growth in long-term Chinese strike assets and I'm thinking of Japan here. Ongoen requirements of China's naval and air forces to secure Chinese near-seas priorities make it highly unlikely that a force that is still modest in size will be able to sustain a robust top-end footprint in the distant far seas no matter how much its capabilities improve. Finally before I hand over to John for some initial conclusions in our paper I quote a particular academic Robert Ross in America who makes a very good point that China is a continental power it is not a natural maritime power. Continental powers often have insecure borders China has the longest and most diverse borders in the world in addition to the potential that John Lee has pointed out for internal instability. Maritime countries including the United States Britain, Australia, New Zealand don't have those internal security problems. When you look at the history of continental countries that have aspired to being great maritime powers they failed. France, Germany, the Soviet Union and it remains to be seen whether China can make that transition. I'm of the view that China is not capable of challenging US dominance on sea lanes or the security of America's strategic partners in maritime south east Asia and further we point out in our article that in our view China is 20 years behind the United States in high technology weapons and sensor development. It is not a military superpower and it will not become one until it develops a capability to project decisive military power anywhere in the globe. Presently China is only a regional military power entirely without any modern combat experience whatsoever and with major deficiencies in doctrine human capital and training. Particularly the complexity and realism of joint operations. China's ability to develop a powerful military is also seriously constrained by the fact that its own technological defence industry levels remain relatively low and its only source of foreign arms is Russia. China, to give you one example has been trying for 35 years to develop a high performance military jet engine not an easy technology and it has not succeeded and where does it get them from? Are they highly reliable jet engines? I leave you with that example. It may seem unoriginal but I'm just going to read a couple of paragraphs from the article because I think it provides a very good summary particularly of my contribution to the article and the talk itself. Now in our view China may be approaching the zenith of its power as its economy encounters serious structural impediments and demographic barriers to growth. This will also have important implications for the opportunity costs for going of ever increasing defence expenditure in a technological arms race with the United States as a region cannot hope to win. Our analysis portrays a China in which worsening domestic problems will remain the leadership's highest priority and addressing such concerns will take up an increasing share of economic resources and national wealth. Just by the way as China has got richer as a country domestic problems have got worse not better so economic growth per se is not solving these domestic problems but actually worsening them. The Communist Party leadership will struggle to keep a lid on growing popular discontent which may have implications for its very survival under circumstances. We have also described a lonely power that has very few friends in Asia. Although China's world view of itself is shaped by strong historical impulses of a hierarchic order with itself at the apex very few countries in the region appear willing to concede to China the status of the dominant power. Indeed it is much more likely that countries such as United States, Japan and India will concert together either directly or indirectly against an increasingly assertive China. In military terms Chinese Achilles heel is that it lags at least 20 years behind the United States in key technology areas. The fact that China has no experience whatsoever of modern warfare and its military hierarchy depends crucially on loyalty to the party means that China's actual war fighting capability must be in serious doubt. Moreover China's military build up is causing a classical response in kind as countries such as Japan, India and many Southeast Asian countries acquire advanced maritime military forces in order to check China. They may not be able to balance against China to Southeast Asian countries but they can complicate matters significantly for the Chinese military. In summary, as the economist observes China needs western markets its neighbours are unwilling to accept its regional writ and for many more years the United States will be strong enough militarily and diplomatically to block it. And over to Paul to make some final comments. What does all this mean for Australia's national security planning and the forthcoming defence white paper? First the most important point to make is that any suggestion the United States should move to one side in Asia to make strategic space for China should be rejected. China is not now or foreseeably a strategic peer of America's and any move by Washington to concede China's so-called legitimate strategic interests would smack of appeasement and offered unnecessarily and for little conceivable gain. So when Beijing proclaims that the entire south China sea is a core strategic interest a term traditionally reserved for Chinese claims over Taiwan and Tibet China's maritime expansionist ambitions should be firmly resisted. Second Australia does not need to structure its defence force for war with China. Beijing is not developing the conventional forces which to invade or directly attack Australia. But we should develop the high technology naval and air assets including submarines necessary to contribute to any allied conflict in the region including in North East Asia where we might need to make a contribution or where Australia needs to help resist Chinese military adventurism. Developing these capabilities will further complicate the strategic and operational environment for a still isolated China which in turn will place further constraints on and likely encourage greater caution from Beijing. In North East Asia this would suggest for Australia niche contributions from us in such areas as submarines and air power. Our army cannot make a difference to conflict outcomes in North East Asia. Closer to home however we could make a much more substantial contribution by having the capability to block the straits of South East Asia in the event of a serious war in North East Asia involving the United States. Third short of military conflict Australia must be able to resist Chinese coercion whether by military or other pressures with regard to our own direct security interests including if necessary our economic security. We also need to be capable of countering coercion in our region of primary strategic interest particularly South East Asia. It is in Australia's crucial strategic interests for South East Asia to avoid being dominated by China geopolitically or becoming a Chinese security domain. South East Asia forms a strategic shield to Australia's vulnerable northern approaches and Canberra needs to place high priority on strengthening its relations with South East Asian countries particularly in the defence arena and to help them resist Chinese coercion. Thank you. We have a voucher. Please introduce yourself and speak loudly so that the cameras can pick you up. Thank you for a really informative lecture. My name is Tom Murphy. I'm with the SDAC here at the annual studio. The topic tonight was why China is becoming the dominant power in Asia and tonight we've heard about the contemporary capabilities of the Chinese military. But isn't it true that in order to become the dominant regional power all the China needs to do is to make costs so high to the US that the US won't interfere in what China perceives as its region of influence which can be done through the asymmetrical development of capabilities and not necessarily have to bridge the gap between the US and China. Do you want to have a go? Yes, but the same rule applies to China. Clearly China is pursuing an asymmetric strategy that is to impose as you say prohibitive costs to lower the political will of Washington to intervene and it does that as I think you're inferring it, implying it lowers the credibility of the alliance system and so on. But the same thing applies to China. In a sense when I say all you have to do is impose prohibitive costs on a Chinese of assertive behaviour that is unacceptable now it's pretty clear that America has that capability in a sense the political tolerance or threshold of what the Chinese Communist Party can accept is much lower than I think for Washington. I mean we have to look at history when Washington enters wars they enter wars to win. You know I do fear the Chinese are making a huge political and strategic miscalculation here. I agree for you that that is the prime strategy to inflict prohibitive costs but think about what is prohibitive for the Chinese Communist Party if you consider both the military vulnerabilities and the domestic weaknesses they have less room to move I think than most people realise. Taiwan has come up several times and of course you have a situation where Taiwan and China's economies have become integrated in many ways and you have the one China policy which the Communist Party adheres to when the woman done favour because they want to be the one ruling China but in Taiwan I understand that there's growing sentiment for independence from China now if you get in a situation where there's an independence movement and say a referendum is one to say to what's the one China policy in Taiwan's independent country this leaves quite a quandary I would think for the Chinese because they do have the economic integrations which they would lose in a conflict a conflict would be very costly in terms of getting massive proofs across the process states what is likely to the effect on China Taiwan does move towards independence yeah we've got Taiwanese representative actually here I was in Taiwan for the first time with an ANU group in September and I'd never been there before because when I was an official I was not allowed to be there although I was allowed to go to Communist China what is impressive about Taiwan and I say this very seriously it is a vibrant democracy a vibrant democracy and I think it was last May when under the sunflower movement the students occupied the parliament over allegations that President Maher and that government was moving economically too close to China isn't it interesting that students would do that over that issue it is true as you say the economic relationship and the tourism relationship is very profound my memory is will you correct me there's 800 flights a week between China and Taiwan it is good for the mainlanders to go to Taiwan and switch on the TV in their hotels and watch parliament watch talk back TV go to a bookshop where you can buy any book so you know there is that creeping sort of culturalization of the mainland I think on the issue of independence movement I'm not an expert on Taiwan I doubt very much and the Americans would not want a declaration of independence and as long as China faces very substantial military costs which it still does I mean amphibious assault as some of the military here know is amongst the most difficult and challenging of any capability to develop particularly if you've got a plane and capable enemy so you know the issue of Taiwan is one of those hypothetical contingencies that when foreign ministers of Australia ask the question they should but don't always say it's a hypothetical I won't answer it I can have my answer about the Office of National Assessments Paul when you gave your last and started talking about policy issues it seemed a bit disconnected from everything you said before you could almost have begun by saying okay we've covered all that whether China will become the dominant power there's actually a straw man and I've read hearing China United is a problem and we've got to do a lot to counter it do you agree yes but I mean that doesn't mean to say that because I think China is a problem it's got weaknesses that if China is stupid enough and provocative enough the other Senkaku Daiwtai islands to do something that we could afford to sit there and say we're going to do nothing and we have no military capability I'm under no illusions that projecting power up into North East Asia is extremely difficult and challenging and we won't be able to make a difference it would be a niche contribution but I think closer to home as I've said the capacity to blockade the straits of south east Asia we're talking about high level conflict war here is within our capacity and I think our American friends would expect us to have that sort of capability and I think in any case by the way as Rich Armitage a friend of yours and mine would say if he was here if American Marines are dying on the Senkaku Daiwtai islands we expect your Australians to bleed for us China is one of China's issues it's a difficult matter of isolation especially after a fellow goes a few years if you kind of start seeing China taking a different path now but we kind of see it with the formation of the Shanghai Cooperation Organization but now the formation of the Asian Infrastructure Investment Bank do you kind of see China taking a different path to do more of a conciliatory role in Asia and what difficulties do you think that they might have with that You mean what difficulties will they have in trying to take a much more conciliatory role you know put in simple terms I think they've blown the trust I mean there were certain pockets within various countries in the region who were always suspicious of China but on the whole there was a wide degree of good faith I think and desire to want to see a responsible stakeholder if you want to use that term emerge Now for whatever reason you can speculate about as you say China has become more assertive even if China successfully implements all of these initiatives and some of them are quite good for example Infrastructure Bank are quite supportive of the strategic viewpoint of China won't change I mean will China give up its claims to much of a South China Sea? No Will China wind down military spending or acquire capabilities that may help it seize those claims? No Will China have a different policy to the Senkaku Diwetai Islands a fundamental strategic policy? No So it can do all these other things but I think that trust that was there maybe 5-10 years ago I think is broken Bob Lowly my interest is Indonesia but my question is not related to that Have you factored in at all the environmental costs of the massive degradation of the environment in China and what impact that might have on both the economic capability to develop the economy and to fund the military and the political factors Well there are political economic factors as you are suggesting the political factors are that those instances of mass unrest that I mentioned a large proportion not a dominant proportion but a large number of them are protests against things like polluted rivers and not necessarily polluted air but instances of party corruption SOE corruption where their own regulations have been broken for corrupt reasons and where these have a spurn protest so there's a political dimension there and hence the last meeting of the CCP National People's Council environmental factors was one of the major things that President Xi actually mentioned for that reason the economic factors much of it feeds into things like water I can't remember the statistic in my head but something like half of all of the drinking water in China is polluted the agricultural water the bore water is getting worse and worse I mean China in a sense has had from a growth perspective because China has ignored every other consideration that most countries take into account is being able to achieve to some degree the growth that's been able to achieve now suddenly it has to deal with the opportunity cost that every other country has to deal with domestically and these will grow greater obviously it's difficult to quantify but it is a significant inhibitor of the increase of national war from capability model that they've had for the last 20-25 years Thank you John Murray I've been writing items on the South Pacific Islands for the last 12-15 years many have heard the 16 of them all together many of whom have been the recipients of increasing Chinese economic aid and soft loans some of their spokesman have expressed concern that the loans will be eventually called in by China requesting fourth facilities and that they will add to China's so-called string of pearls for an increasing navy but for what you've said of the defense facilities and capacities of China it could not even become a dominant power in the South Pacific, the Middle Asia No, but it could like the former Soviet Union when it was messing around in the South Pacific with its so-called hydrographic and fishing vessels as cover for intelligence and other operations it can cause severe concern and consternation but these are very, as you know better than me very vulnerable and potentially unstable small countries we would be seriously concerned any Australian government would be seriously concerned if China was looking to develop port facilities that were a cover for military facilities there is no evidence of that so far unless Doug Keane contradicts me and China traditionally at this stage has not sought to develop significant military facilities overseas although in places like Sri Lanka and so on it is sniffing around I was two years ago in Timo Leste to observe the democratic elections there and I couldn't help but notice that the following buildings are built by the Chinese the foreign ministry, the defense ministry and the presidential palace every country has the right to do that sort of thing but it's something we need to scrutinise extremely closely it's quickly addressed that the foreign reserves, yes everyone talks about these treasure chests of these weapons that China has what people don't realise that most of foreign reserves that it has really resulted from the surplices that China has had with America or Europe and it has to keep the money outside China because of its currency policy why that's important is because there are actually liabilities against those foreign reserves that is what is owed to the export manufacturers inside the country I mean in short China can't just deploy those foreign reserves because there are actually liabilities against that and will completely ruin their financial system just on other economic potential economic weapons that China has I think there is a misunderstanding that China is a driver of global growth if you look at the interactions China has with advanced economies most of the interaction is making things for the advanced economies to consume so ultimately what that means is that the western consumer or the advanced economy consumer is still much much more important to not just China but Asia than the Chinese domestic consumption market just to give you one more indication the Chinese domestic consumption market is about $3 trillion US and about half of that you can't actually access the American and European domestic consumption markets are about $12 trillion US each and if you want evidence during a global financial crisis trade between China and the rest of the region actually declined when the western economies went into recession what that tells you is that the trade is being driven by the western consumer all that's happening in East Asia mainly is that it's a vast production chain to make products for American and European consumers so I'm not saying China is completely impotent but it doesn't have those economic weapons that people assume it has and I think John unlike the former Soviet Union which was an autarkic, self-sufficient investing country China is fundamentally involved in the western world global trading system and by the way and that gives it certain vulnerabilities it's not just the west sea lines of communication that are vulnerable I mean China currently imports 80% of its oil through the Straits of Malacca and south east Asia and that means it too is vulnerable and as John is saying when it comes to global supply chains China is intricately involved in that so if global supply chains get cut off because of war the impact on the Chinese economy is going to be very substantial there's one thing that we haven't raised that I'll just mention and I'll get John to talk about it there was quite recently while I've been away in Scandinavia an article understand by David Shambo who you know very well a very prominent American expert on China who as I read it in the press overseas is talking about the vulnerability and fragility of the Communist Party rule in China do you have a view on that John? David Shambo's article was essentially saying that the CCP it's just the beginning of the end for the CCP because of various things like slowing economic growth lack of morale, lack of ideological conviction etc I agree with David's analysis of the problems I don't agree with his end point the reason why I don't think that the Chinese Communist Party under David's line of reasoning is at its end is because if you look at modern industrialising societies regimes fall because of revolutions in cities they don't fall because of revolutions in the countryside now the basic strategy of the Chinese Communist Party has been for one for better term to try to co-opt urban elites and it's done that by as I mentioned being the primary dispenser of career opportunity, wealth etc if you look at the middle classes in China and the upper classes in China they're fairly closely tied to the Chinese Communist Party so it's actually not in the interests of urban elites right now in China to want a different political setup now of course if there's some economic disaster in the rules change but assuming no economic disaster I think David's pointing out if the problems are correct but I don't necessarily agree with what he says about where it's heading to