Inside the Ring

NEWS AND ANALYSIS:

CHINA DEBT THREAT

U.S. intelligence agencies are working on a major strategic assessment of the national security dangers posed by China’s large-scale holdings of U.S. debt, according to people close to the inquiry.

The assessment will include an examination of the impact of what has been called Beijing’s financial “nuclear option” — the calling in of its debt holdings as a way to punish the United States.

That option was discussed last year by Chinese military officials angered by continued U.S. arms sales to Taiwan. The threat was dismissed by a State Department spokesman as hollow because China would be harming its interests by the action.

A spokesman for the office of the director of national intelligence declined to comment.

Word of the assessment comes amid reports that U.S. debt holdings by China are exploding.

Revised Treasury Department figures released earlier this week show that China’s debt holdings are nearly a third larger than originally known.

In June 2010, China’s estimated holdings of security assets were valued at $1.611 trillion. The holdings for June 2009 were $1.464 trillion.

Chinese Maj. Gen. Luo Yuan told state-run media a year ago, in response to U.S. arms sales to Taiwan, that China could attack “by oblique means and stealthy feints,” including “using economic means, such as dumping some U.S. government bonds.”

A State Department cable from Beijing in October 2008 also reveals a subtle Chinese government threat related to China’s U.S. debt holdings.

Liu Jiahua, deputy director of the Chinese State Administration of Foreign Exchange, told a U.S. official that “the recent U.S. announcement of another arms sale to Taiwan made it more difficult for the Chinese Government to explain its policies supportive of the U.S. to the Chinese public.”

Secretary of State Hillary Rodham Clinton, in another cable, was quoted as explaining the difficulty of pressing China’s communist government.

“How do you deal toughly with your banker?” she asked.

The Pentagon, too, is studying the possibility of economic warfare by China. It held a war game in 2009 involving financial weapons such as stocks, bonds, currencies and gold reserves, and reports of the exercise indicated that China won.

Paul Bracken, a Yale University professor who took part in the war game, said it was held because the Pentagon had a sense that “something important was going on that was being looked at in a narrow way by economists.”

“They sought a broader assessment,” Mr. Bracken said. “It was a very important game because for the first time, it pulled together the financial system, military force and politics. The interrelationships were stress-tested and gave some important insights. One of them was this: In a multiplayer game — U.S., China, Russia, Japan - the strongest player, the U.S., doesn’t always win.”

KANDAHAR BLAST AVERTED

In the “underreported news department,” U.S. and Afghan troops in Kandahar successfully thwarted a Taliban car bombing this week after finding an explosives-laden vehicle amid a large cache of weapons.

The car bomb had been rigged with nearly 100 pounds of high explosives intended for a mass-casualty terrorist bombing in the Taliban stronghold, where U.S. and allied troops have made a major stand in efforts to defeat the insurgency.

The cache was discovered during a foot patrol in Kandahar city on Tuesday.

“The caliber and quantity of the weapons makes this a substantial find going into the spring offensive,” said U.S. military spokeswoman Army Maj. Sunset Belinsky.

The key find, she said, was a “fully constructed vehicle-borne IED,” or improvised explosive device, “along with 15 heavy machine guns with ammunition, five rocket-propelled grenade launchers with 200 new rounds, and nearly 20,000 pounds of ammonium nitrate,” a key chemical used in explosives.

Other IED components, assorted weapons and explosives also were recovered.

ARMS-CONTROL FAILURES

China’s government is continuing to reject Obama administration arms-control initiatives while feigning cooperation, according to administration officials close to the issue.

“The arms controllers are embarrassed by China’s lack of cooperation,” one official said.

The problem was on display during a Feb. 23 speech by Rose Gottemoeller, assistant secretary of state for arms control, verification and compliance. She spoke in Las Vegas before a regional forum of the Association of Southeast Asian Nations on disarmament. Ms. Gottemoeller, the Obama administration’s key official on arms control, made no mention of China in her remarks. Instead, she praised the New START with Russia.

The administration continues to strike out in three areas where it has sought agreements with Beijing: space arms control, fissile material limits, and arms-proliferation security.

“In all three areas, the Obama administration naively thought China would reach agreements,” the official said. “Instead, they are now blaming the Bush administration” for the lack of progress.

A draft agreement being worked on for several years by the U.N. Conference on Disarmament on the prevention of an arms race in space has been blocked by China.

China wants to define weapons in space in the agreement so that key sensors used by U.S. missile defenses — the Space Based Infrared Radar — will be banned, something that would nullify multibillion-dollar U.S. strategic missile defenses. Beijing also opposes on-site verification, making any agreement a trust-but-don’t-verify accord.

China, alone among the U.N. Security Council permanent members, is believed to be continuing to produce fissile material for nuclear weapons, while the United States, Russia, Britain and France are not.

The cutoff of fissile material is one of the administration’s highest priorities because it is thought to be a prerequisite for President Obama’s ultimate vision of eliminating all nuclear arms.

China instead is in the midst of a major strategic nuclear-warhead buildup that has been largely ignored by the arms-control community, both in and out of government.

“Here, the Chinese are saying ’no’ to verification, and Obama administration officials are timid in pressing them on it,” the official said.

China also continues to reject joining the U.S.-led Proliferation Security Initiative, a program developed under the George W. Bush administration to thwart transfers of nuclear and other weapons of mass destruction, mainly at sea.

China rejected numerous invitations to join meetings of the initiative, which has been backed by 90 nations concerned about arms proliferation.

Recently disclosed State Department cables have shown China, in fact, has assisted arms proliferation, specifically allowing North Korean missile-related air-transport shipments to transit China.

“This is another example, like climate change, where China has refused to cooperate,” the official said.

Asked about the problem, Ms. Gottemoeller declined to be interviewed. But State Department spokesman P.J. Crowley said the administration has not given up engaging China on arms control.

“We have a regular dialogue with China on nonproliferation and international security issues,” he said in an e-mail to Inside the Ring.

The next forum will be a French-hosted conference later this year to “focus on nuclear verification, transparency, and confidence-building,” Mr. Crowley said.

In January, President Obama and Chinese President Hu Jintao “reaffirmed the commitment to pursue a Fissile Material Cutoff Treaty, as well as early entry into force of the Comprehensive Test Ban Treaty and further cooperation on nuclear security,” he said.

NAVY NOT FOCUSED ON CHINA

Navy officials this week declined to tell Congress what the service is doing, if anything, to directly counter the emergence of China’s new aircraft-carrier-killing anti-ship ballistic missile and other advanced weapons.

Adm. Gary Roughead, chief of naval operations, told the House Armed Services Committee on Tuesday that the Navy is continuing its years-old plan to add 20 new Aegis-equipped missile-defense ships to its current fleet of 21 anti-missile destroyers and cruisers by 2016.

However, he insisted the increase was not meant to counter the new Chinese DF-21D missile, a weapon Pacific Command chief Adm. Robert F. Willard and other leaders said recently is ready for use and threatens U.S. ships in the Western Pacific.

Adm. Roughead, instead, said the threat of such missiles is “global” even though no other nation has a conventionally armed ballistic missile that can maneuver at ultra-high speed and hit a moving target the size of a ship at sea.

“We have made significant investments in ballistic-missile defense, increasing the number of ships in our inventory, up to 41 by the end of this defense plan,” Adm. Roughead said, referring to the five-year plan that ends in 2016.

The comments came in response to questions posed during a hearing on the Navy budget by Rep. Roscoe G. Bartlett, Maryland Republican.

Mr. Bartlett asked what the Navy was doing to counter China’s sophisticated anti-ship missile, noting that “we’re struggling to develop defenses against that.” He also asked about China’s new stealth jet, the J-20, which appears designed to “release wave-skimming, supersonic anti-ship cruise missiles.”

“What do you make of [this] confluence of events? And what contingency plans are you pursuing?” he asked.

Navy Secretary Ray Mabus ducked the question and instead commented on the lawmaker’s question about the strategic problem of China’s purchases of oil reserves by noting that the Navy is shifting to the use of non-fossil fuels to reduce oil dependency.

Adm. Roughead also avoided focusing on countering Chinese weapons, claiming sophisticated weapons proliferation is a global problem and “not just about China.”

To increase anti-submarine warfare capabilities that could be used against China’s rapidly growing submarine force, the Navy is buying two Virginia-class submarines a year. “There is no better anti-submarine warfare weapon than the Virginia-class submarine,” Adm. Roughead said.

A defense official who is critical of the current policy of not responding to China’s military buildup with more weapons and faster deployments said Defense Secretary Robert M. Gates is behind the effort to prevent the military services, specifically the Air Force and Navy, from taking steps needed to counter Chinese advanced-weapons deployments.