The Rise of China’s War Machine

War is obviously bad, and we should avoid it at all costs. Anybody who has lived through conflict will tell you this.

However, despite this, wars continue to happen.

There must be a reason right? Sure. But I won’t pretend to know why. Everyone has a different view on this.

But I know that there is a group of people who thrive on war.

It’s the firms and countries that produce and sell weapons. Like it or not, many of these companies trade on the world’s stock exchanges.

Now, I won’t go into specific detail on China’s military today.

However, I’ll show you why one of China’s primary fighter jet producers has seen a 285% surge in its stock price in three months…

Don’t mention the war

I get a lot of questions about Chinese military culture. I also get questions about China’s view on Japan.

This is an interesting topic because Japan is currently seeing a resurgence in power.

I normally try to avoid talking about the relationship between China and Japan, or Korea and Japan.

The pacific war is almost a ‘no-no’ topic for Asians to talk about.

I used to play in a band. We had a Japanese drummer, a Korean guitarist, an Australian bassist and me on the keyboard.

It was a great mix. It’s hard to get more international than that.

Our Japanese drummer, Minoru San, is one of my best friends. He’s working in Shanghai now. We keep in close contact and visit each other from time to time.

But we never talk about the past.

When Chinese, Japanese and Koreans get together, we have cultural exchanges on language, travel and history. We have so much in common. Those things bring us together.

But we don’t talk about the war.

The Germans can relate to this. Just remember that episode in Fawlty Towers: ‘Don’t mention the war’. Although from what Kris Sayce tells me, the same isn’t true for the English. He says they love to talk about the war.

How do the Chinese feel?

But let’s get down to business.

How do Chinese people feel about a rise in Japanese military power?

Well, they’re nervous. In fact, Koreans should feel the same. It’s not because Japan is an ‘evil’ country that scares Asian people.

It’s because Japan is so good at whatever it puts its collective mind to. There, I said it.

Japan has proven itself as a strong power.

Add the history on top of that, and you get very nervous Chinese. It’s really quite understandable.

Do the Chinese want to see a stronger Japanese economy? Yes, that’s a good thing for everybody. We can all benefit from more and better Japanese products.

Do the Chinese want to see a more powerful Japanese military? Absolutely not.

The Chinese know how easy it is for Japan to become powerful again. They have the technology. They have the industries. And they have the ability.

And the last time they did that, things didn’t end up too well for the Chinese.

Love-hate relationship

China has a love-hate perception of Japan.

Most Chinese kids grow up with Japanese animes (a specific type of animated drawing or film) and Japanese culture. Taiwan and Korea get more of an influence. However, Japanese culture also heavily influences mainland China.

In Hong Kong, British cultural influence is much stronger than any other.

In China, there have been many protests against Japan over the years. Most of these protests involve rallies near the Japanese embassy in Beijing.

Across China, people tell each other to stop using Japanese goods. In some instances, there have been acts of vandalism on Japanese cars.

These protests had a meaningful impact on Japanese goods sales in China.

But the funny thing is most Chinese drive Japanese cars. So it’s really innocent drivers who end up suffering.

So there is a love-hate perception of Japan.

The Chinese know that Japan is brilliant. But years of propaganda make it difficult for Chinese to back down from their political outrage.

It’s almost like protesting against Japan makes the Chinese feel more Chinese.

That’s truly ludicrous! But it’s how people feel.

On the other side, the Japanese don’t feel the same. There was an absence of anti-Chinese propaganda in their education system.

So many Japanese don’t know what the Chinese are on about.

But after the rage is gone, most Chinese think rationally.

They still don’t like to see a rise in Japan’s military power. But they know China’s military power outweighs Japan’s by a large amount.

The surge

China is the second largest economy in the world. Its defense budget is just 2% of GDP. The US, being the biggest economy in the world, has a defense budget four times bigger than the Chinese. The US defense budget is 3.8% of its GDP.

There is no doubt that China will increase its military spending. This means defense suppliers are an interesting sector to watch.

There has been a reorganisation in money and the facilities of the Chinese military.

In October 2010, the State Council issued a report.

The report started the reorganisation. It involves partially listing companies to attract investment. But ultimately, these companies will remain under the control of the Chinese military.

It hopes that this will create more efficiency among defense companies.

The report sets out a 3–5 year timeline for the reform. The report also wants more focus and money in R&D activities.

China’s top ship maker and the top plane maker will lead the restructuring.

Sichuan Chengfei [SHE:002190] is the latest leading seller in the area.

The company recently received AU$2.64 billion for building fighter jets and AU$879 million for air-to-surface missiles.

Sichuan Chengfei is one of China’s two main producers of fighter jet technology.

Sichuan Chengfei’s stock soared 285% in the last three months!

I’m sure this is precisely the type of company Sam would like to recommend in Revolutionary Tech Investor. I know it’s the type of stock I’m interested in watching in my New Frontier Investor service.

Unfortunately, for now, only Chinese residents can buy Sichuan Chengfei as it trades on the Shenzhen Stock Exchange. But as China’s economy begins to open up further, stocks like this will become available to international investors.

This is a market and sector to watch.

Ken Wangdong+
Emerging Markets Analyst, New Frontier Investor

Ed note: The above article was originally published in Tech Insider.

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