New Market Study Published: China Defence & Security Report Q4 2013

China made some diplomatic progress in dealing with some of the territorial disputes in its region. At the most recent ASEAN summit in Brunei in June, China agreed to start talking about the formulation of a new Code of Conduct for the South China Sea, something that is badly needed to mediate future confrontations. There were also reports that President Xi Jinping is preparing to hold a summit with Japanese Prime Minister Shinzo Abe in the near future to prevent any escalation of tensions over the disputed Diaoyu/Senkaku Islands.

Attention has also been paid to two other important relationships; President Xi Jinping visited the US for a summit with President Barack Obama in June, while Premier Li Keqiang visited India following a tense confrontation between Chinese and Indian troops along the disputed border.Yet in spite of these efforts, China's relations with its neighbours are strained on several fronts. Since assuming the leadership, Xi has shown no sign of adopting a softer position on territorial issues, and he has worked hard to refocus the People's Liberation Army (PLA) on its operational duties.

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The territorial dispute with the Philippines, in particular, continues to simmer. Manila has begun reequipping its military, amid accusations that China is attempting to occupy maritime features in addition to Scarborough Shoal, which it occupied in 2012. Meanwhile, the International Tribunal of the Law of the Sea (ITLOS) is preparing to hear the Philippines' case that China's territorial claims according to its 'nine-dashed line' are illegal. China has rejected the move and has refused to take part in the tribunal, but legal experts have pointed out that as a signatory to the United Nations Convention on the Law of the Sea (UNCLOS) China has in effect agreed in advance to abide by any ITLOS proceedings that might be brought against it. China faces a potentially damaging episode: a refusal to take part in ITLOS, and a refusal to accept the tribunal's findings, would both be detrimental to China's regional image.

However, China's defence modernisation path has been unaffected both by the change in senior leadership and by Beijing's territorial disputes. The defence industry continues to pursue a long-term modernisation programme initiated in the 1990s, which aims to make China completely self-sufficient in the defence field. While China has not yet achieved this goal, its domestic defence industry has made, and continues to make, great strides, leading to speculation that China will 'catch up' with the West within the next decade or so. China's position as an arms exporter is also improving, though it still sells relatively little advanced weaponry.

China's uncertain economic outlook presents one possible threat to defence modernisation, especially if Beijing starts to feel that it cannot sustain generous defence budget increases.

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