 Decapitation
Strategy
Dan Denning
The Daily
Reckoning
Aug 1, 2005
The Daily Reckoning PRESENTS:
Two weeks ago, a Chinese general stated that if the U.S. intervenes
in any conflict with Taiwan, they would be forced to retaliate
with nukes. Dan Denning looks at the factors surrounding the
situation and wonders if this threat could become a reality...
The biggest risk I see in China
right now is not economic, but political. And what's more, China's
biggest risk is itself and how it might act if Taiwan pushes
for a two-state relationship.
Personally, I don't think the
United States is willing to go to war over Taiwan. American interests
in the region are more economic than military. For their part,
though, the Chinese seem deadly serious about Taiwan. In fact,
everyone I talked to in China was unanimous that China would
not and could not allow Taiwan independence. China will go to
war over Taiwan if it has to. How might that war play out? Dr.
Marc Faber sets the stage:
"Wendell Minnick, who
is the Jane's Defense Weekly correspondent for Taiwan, sets a
likely scenario. According to Minnick, should China ever decide
to invade Taiwan, it would unlikely be a large-scale, Normandy-type
of amphibious assault, but be by means of a 'decapitation strategy.'
Minnick explains that 'Decapitation strategies short-circuit
command and control systems, wipe out nationwide nerve centers,
and leave the opponent hopelessly lost. As the old saying goes,
'Kill the head and the body dies.' "
If this assessment is accurate,
China's Taiwan strategy is not at all different from the U.S.
strategy of "shock and awe" in Iraq. It's a variation
on the idea of getting inside your adversary's decision cycle.
In military terms, it means attacking in unexpected ways and
in unexpected places (not strictly military targets). By doing
so, you get your opponent off balance. By the time they react
to what you've done, you're doing another thing, eventually collapsing
their will to resist by the speed and ubiquity of your assault.
The Chinese have played their
Taiwan hand beautifully. With the United States engaged in Iraq
and dependent on China and Russia to disarm North Korea, it looks
to me like a reuniting of Taiwan and the mainland may simply
be a matter of time. Whether it's by peaceful means or not remains
to be seen.
It also remains to be seen
whether the United States considers it more important to support
Taiwan's ambitions rather than to make nice with mainland China
and its growing economy and huge holdings of U.S. bonds. In his
2005 inaugural address, President George W. Bush said, "It
is the policy of the United States to seek and support the growth
of democratic governments and institutions in every nation and
culture, with the ultimate goal of ending tyranny in our world."
An ambitious goal, to say the least, and one that must include
Taiwan.
It's hard to imagine, with
$124 billion in trade between them and their economic futures
now intimately intertwined, that America and China would go to
war over Taiwan. But both appear determined to do just that if
they feel they have to. Let's hope they don't have to.
There's also the possibility
- which would be even more shocking - that the mainland Chinese
communist leadership will collapse before China ever attacks
Taiwan. How could this happen? In late January 2005, Zhao Ziyang
died. Zhao was the leader of the Communist Party in 1989 during
the student uprisings in Tiananmen Square. He spent the last
15 years of his life under house arrest for having refused to
order a crackdown on the pro-democracy demonstrators. He was
mourned by thousands in Hong Kong, where it is still legal to
gather in public and support democracy.
In mainland China, nothing
of the sort could happen. When I strolled through Tiananmen Square,
it was not too hard to notice the plainclothes police who still
follow Westerners, in addition to uniformed police. My guide
in Beijing made sure to remind me not to bring up the subject
in public. Despite outward appearances of prosperity, China is
not democratic.
Yet there is a chance that
the mainland could become more like Taiwan, and not the other
way around. It has to do with the connection between economic
prosperity and liberty, but for now, let me quote a friend of
mine who currently lives in Taiwan and describes himself as a
pro-free-market libertarian:
"Taiwan cannot be free
and secure, if China is not free and democratic. And, as China
goes, so goes Asia. Whether China becomes a superpower or descends
into another period of warlordism, things will not stay as they
are (although I have not yet been to the mainland), and the rest
of Asia and the world will be impacted, to say the least. It
would be difficult for anyone to convince me that China's transition
will occur in as sweet a fashion as did the Soviet Union's...
I believe that Taiwan is correct to push forward the controversial
name changes to state-run industries... Taiwan's only chance
is to continually let the world know the true nature of the Chinese
beast. It is simply inconceivable how anybody could object to
Taiwan's right to self-determination. However, there is a danger
in accelerating the Taiwanization of the ROC, namely that there
are still very powerful elements within Taiwan that are attached
to the idea of a China one and indivisible. More needs to be
done to make the emerging pro-independence government broadly
representative. Not only because it is right, but because it
will make Taiwan stronger internally, it will give China fewer
excuses to interfere in Taiwanese affairs, and it will set an
example not only for China, but an example to the rest of Asia,
how democracy can be reconciled with order... [T]his is perhaps
overly kind to the Chinese view, there is some reason for them
to fear democracy."
Needless to say, a Chinese
invasion of Taiwan would be a shock to financial markets. But
given the ways in which the Chinese might accomplish such an
invasion, and making the large assumption that the United States
will offer only diplomatic resistance, I think the shock would
be short-lived and not substantial. In the meantime, the best
way to invest in China is to buy the companies doing business
with China but that have Western listings.
It's a huge paradox. China
has all the artifacts of a modern capitalist economy. And its
people and entrepreneurs are a lot more opportunistic than many
Americans I know. Yet little is known of the millions Mao killed.
And while not as visible, the military is a constant reminder
of the coercive nature of the Chinese state. For all its remarkable
progress toward free markets, there has been a lot less progress
toward freely expressed political thought. Can the government
maintain its grip on information? Can it privatize nearly every
other sector but keep a tight rein on what people say and publish?
I doubt it.
The Chinese I met on my trip
were bright, talented, ambitious people. They are also very proud
of China. It will be their job to clean up the heinous mistakes
of the state over the last 50 years. The Chinese government's
war on the family has left hundreds of millions without a traditional
support network as they get older. There are no institutions
to fill the void. Not the state, which can't afford it. Not the
church, which doesn't exist in large enough numbers. And not
the family, which was systematically eliminated by the one-child
policy.
Then again, Chinese culture
is 5,000 years old. Communists can ruin a lot in a short time.
Nothing is more destructive than the conceit that you can dispose
of hundreds of years of tradition and evolution and replace it
with a crackpot, egoistic, planned economy. But Buddhist, Taoist,
and Confucian thought and beliefs are still at the heart of China.
Not even an all-powerful state could eradicate that. How else
to explain that Sun Yat-sen, the father of the Chinese nation,
is more popular than Mao? His mausoleum in Nanjing is a shrine
of sorts. I went there myself and discussed his legacy with several
of the Chinese I traveled with. Mao was feared, but he made China
great. Sun Yat-sen is revered, and he makes the Chinese proud.
My prediction: As China moves
into center stage in the world economy, its traditional culture
and its emerging free-market culture will replace the statist
culture. It will be better for China and the world. The state
may be planning otherwise, but it can't control what it's unleashed.
And for that, we should all be grateful. China is a beautiful
place with kind, hardworking people. The real moneymaking there
has just begun, and it's spreading throughout Asia like fire
in a crowded theater.
Regards,
Dan Denning,
 for the Daily Reckoning
Editor's Note: Dan Denning,
editor of Strategic Investments, is one of America's most respected
"big picture" analysts working today.
The above essay was adapted
from his new book, The Bull Hunter. In The Bull Hunter,
Dan lays out all the details of how to profit in ways most investors
never imagined just five years ago. What's more, he'll show you
why it's never been more dangerous to put all your investment
eggs in the basket of the U.S. economy. It's a timely warning,
along with an exceptional opportunity.
You can buy The
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