The recent row over China/US relations

As George Bush once said, the relationship between US and China is complicated. In many ways, I think China is one of the few policy areas that Bush got almost everything right. He started presidency with much anti-China rhetoric, but left the office as one of the most pro-China president in US history. It is my personal view that having a positive, engaging and pragmatic relationship with China is the most beneficial path that any US administration can take. Some people in the China-blue group (like Bill Gertz, John Bolton and Donald Rumsfeld) favoured antagonizing China through more support with Taiwan, labeling China as a threat/competitor and creating an encirclement of China through alliance with Australia, Japan and India. Bush started off in that corner, but he slowly moved to great engagement with China while maintaining strong relationships with regional allies like Australia and Japan. I think he basically did a really good of adapting to the rise of China, the increased role of China as America's creditor and the interconnected economic relationship between the two countries. He started started the strategic dialog with China, which I think really helped the bilateral relationship. I think he was absolutely right in going to the Beijing Olympics when the pressure was on him not to. By the end of his presidency, he had built a really good working relationship with China and a good understanding of the country. He was able to work with China on critical political and economical issues, even though the two sides had vastly different views. I think China really appreciated that.

The Obama administration was definitely very China friendly in the first year. A major reason is America's need for China to continue to buy US treasury bond in the midst of the economic meltdown in America. A lot of people got nervous or angry by the fact that Obama/Hilary put human rights on the back burners, but I think that is overplayed. I always think that it's far more effective to encourage China and explain the importance of human rights privately rather than embarrassing the Politburo in public. I do think that Obama gave in too much to China in some of the early negotiations like his visit to China, because it emboldened China to ask for more and give in less to US in future negotiations. In many ways, this is the expected path. Washington insiders cannot expect America to negotiate from a position of absolute strength like during Clinton years, because China is just so much stronger now economically and politically. I don't really want to put military in there, because China's recent success comes from its status as the world's leading creditor nation. As history as shown, power flows to where money is and that is playing out again in China today. Now that Washington has elevated China to be the other super power of the world in the past world, it would be hard to push back Chinese ambitions. We have a problem now where the Chinese leadership also has to satisfy and listen to the growing middle class that is more nationalistic and confident than ever. So, as Washington is pressing Obama to get more out of China, the Chinese population is also pressuring the Politburo to not give up any of its new found power. With this kind of power struggle between the two countries, it's not surprising that we have run into the current row.

Now, to turn on our attention to the point of contentions of the recent weeks: Taiwan, Tibet, Google and Iran. If we start with Iran, we all know what the issue is here. China has a lot of money invested in the country and relies on Iran for future energy supply. You know we can say a lot about the type of regime in the country, but US is also dealing with a lot of unsavory characters in the Middle East. The question is whether or not it makes sense for China to support tougher sanctions in Iran. I actually think it does, but there is obviously a limit that China can go without risking all of its major contracts in Iran. The reason to support tougher sanctions on Iran are many. Even though Iran may not be as actively developing nuclear weapon or as further along in its development as the Israelis think, it does openly taunt the nuclear non-proliferation treaty. The danger to China is that more countries will seek for nuclear weapon and countries like Japan and South Korea will also develop it. I don't think China is willing to accept that kind of strategical change. The more immediate threat comes from Israel. Now, the Israeli gov't seemed to have given the Obama administration a deadline in harsh sanctions against Iran before it launches strikes against Iran's nuclear targets. If that happens, Iran could cause all sort of problems in the Middle East if it manages to carry out its threat of shutting down oil/gas supplies in that region. Surging energy prices and instability in Middle Easts are definitely things that China would be afraid of. I'm really not sure how this will turn out. I can see that Israel will continue to ask for more from US and US will continue to ask for more support from China/Russia. At the end, I really don't think US will get what it wants from China.

As for Google, I think this is more about China's general cyber espionage effort against US governments and corporations rather than just Google. Let's face it, these "attacks" against Google were attempts to get emails of human right activists rather than bringing down Google's servers. It is not like we don't know that China's human rights record is rather poor. Rather than complaining to the Chinese gov't and the media, the US government should run a similar cyber effort against China. And I think they are doing that, because China also claims to face a lot of cyber attacks. So in the end, I really don't have a lot of sympathies for the US government or Google. Google is making a lot of noises about leaving China, but it is still operating in China with the self imposed censor turned on (despite its public claims otherwise). Like all other big corporations, it's number 1 goal is to make more money. If it thinks that the cost of business outweighs the benefits, then it will leave the country. Clearly, the other 30 target firms are not going anywhere. The US government is in a position to fight fire with fire. If US wants to remain the IT leader of the world, then it should be able to create security and infiltrate other networks better than any other countries in the world. I think this issue will die down as soon as Google finds a solution with the Chinese gov't. I really don't think it will leave the country, because it does not want to totally abandon the search engine and especially the cell phone market for the future.

As a result of not receiving Chinese support on some issues, I think the recent moves are calculated actions by the Obama administration saying that we are not going to play "nice guy" with you anymore. Taiwan and Tibet are certainly the two things that agitate China more than anything else. To much of the Western world, Taiwan is just an Asian nation with a democratic gov't threatened by China and Tibet is a land occupied by the brutal repression of China. Of course, the sympathetic image of Tibet is played up by the non-threatening zen-like image of Dalai Lama. The image of Dalai Lama as this international loved religious leader has basically elevated Tibet freedom ahead of many other larger and more repressed groups. One would really have to study Chinese history to see why the Chinese gov't and its people have such a dislike to Taiwan Independence and Dalai Lama.

To the Chinese people, the 100 years from 1840 to 1949 was its century of humiliation where it had to give up part of its sovereignty and surrender its land to foreigners. It is important to take back all that it was forced to give up during that period. When China was negotiating with UK for the return of Hong Kong, Deng Xiaoping actually told Margaret Thatcher that "China is not Argentina" and that China would take Hong Kong back by force if necessary. So to Chinese people, Taiwan is a reminder that China was forced to give up land to foreign occupiers during that century. To Chinese people, Tibet was a backward, feudal region that was briefly taken away early this century and was liberated of those oppressive Lamas and foreigners in 1950s. Of course, there are strategic element to it. The navy does not think that it can truly operate beyond the first chain until the hostile ROCN is no longer at its door step. The army believes that it needs Tibet as a buffer zone and natural barrier that protects the nation from the Indians. There are obviously more to it. Most Chinese people believe that Han people everywhere are really Chinese and should rejoin China. They find the Dalai Lama request for true autonomy (This Forbes Article contains the key facts) to be more appalling for the following reasons:

• The land requested by Dalai Lama is not just the current Tibet autonomous region, but also includes large parts of surrounding provinces.
  
• These lands are requested despite the fact that Han population have long been the majority in some of those areas.
  
• The so called autonomy actually sounds more like sovereignty, because Chinese troops is no longer allowed on the land. There is no way that PLA can accept this due to the strategic implications against India.
  
• Dalai Lama requested China to stop transferring Han population to Tibet, but that has never actually happened. How can the 3 million Tibetans remain in majority if PRC actually tried to relocate Han people there?
  
• Dalai Lama, the former feudal ruler of Tibet with many slaves, is insincere when it comes to democracy for Tibetans.
  

Therefore, the divergence of opinion on the military sale to Taiwan stems from how the West and China sees Taiwan. Most Westerners believe that Taiwan is a separate sovereign entity that should only rejoin China if it wishes to do so. Therefore, Americans see these military sales as fulfilling the Taiwan Relation Act by providing Taiwan with additional defensive deterrent. The weapons themselves are very advanced, but they are defensive in nature and are not going to change the military balance across the straits. The best hope for Taiwan is still to make peace with China and maintaining strong relationship with America. So, what is the problem? Well, most Chinese people believe that Taiwan is an inalienable part of China that no other country should interfere with. Therefore, any sales to Taiwan is looked as containing Chinese power, violating its sovereignty and interfering with its internal affairs. While this might have been acceptable in the past, the increasingly confident Chinese public are no longer willing to keep quiet to such snobs. The meeting with Dalai Lama stokes anger in China for similar reasons. The Politburo has to make a lot of noise and take what appears to be strong actions to satisfy the public. In the past, we have often heard cases where the government publicly criticizes another head of state meeting Dalai Lama, but then telling them privately that things will be business as usual. I tend to think that will happen again here. They will make a lot of noise and suspend military contacts, but those things will be re-established sometimes next year. I don't think the Obama administration needs to meet Dalai Lama again or sell weapons to Taiwan again for a few years, so things should smooth out by later this year. At the end of the day, it is in China's interest to have strong working relationship and military exchanges with America. The PRC leadership is too pragmatic to let this drag on. On the other hand, I think the sanctions against US companies could happen. Since US has been sanctioning Chinese companies for years for doing business with Iran, I think punishing American companies for helping Taiwan is pretty logical. They really don't do much business with Lockheed and Raytheon, so any kind of sanctions against them would be quite symbolic. They do a lot of business with Boeing, but Boeing is selling very minimal to Taiwan. The trickiest case here is Sikorsky and its parent company UTC. They do a ton of business with UTC. In fact, PLA even operates some blackhawk helicopters, some unmanned version of S-300C and PWC engines on some helicopters/air planes. Can they really sanction a company that they sort of depends on for some secondary defense project? Especially now that Eurocopter announced recently that they are also selling to Taiwan. Can China sanction Eurocopter when it is partners with Eurocopter on so many projects? We will see. I tend to think that any sanctions against US/EU companies over weapons sale to Taiwan at the moment would not be more symbolic than anything else. Maybe they will warn these companies that any future sales would be met with harsher sanctions.

In general, I think we have entered a phase where the Politburo has to be more vocal against US government and companies for support toward Taiwan and Tibet, because the public and the military demand it. Politburo can no longer accept explanations like "the previous administration did it" or "these weapons are only defensive" or "we have to do it for political reasons" and remain quiet, because it has to satisfy the local population and the military too. At the moment, the retaliatory actions will remain mostly air like in previous occasions, but they will be a lot stronger in the future if US decides to sell an offensive platform like F-16 to Taiwan. Basically, the balance of power between the two nations is shifting and the Chinese responses against perceived US snubs are only going to get stronger.

Latest from PLAN

First, we have some updated photos of Varyag. You can see that they are getting ready to install the AESA radar panels that you see on 052C. You can also see that they are setting up a mast to install the Sea Eagle Volume Search radar that you see on 054A.






Here are some other photos we see from a recent magazine.









We also got some news recently. It was said that 998, China's only 071 LPD, will be in the next flotilla sent to Gulf of Aden. It looks like PLAN is intent on testing out all of its new goodies in an extended deployment.

We also got some news regarding to HQ-16 SAM that is found on 054A. The original article is as follows:

中国海军某新型舰空导弹－－绝对新型。
-
1999年7月，某新型舰空导弹项目正式立项，明确采用新的发射技术。有趣的是，新型导弹的命名，是把当年 周总理命名的那型导弹后面的两个阿拉伯数字颠倒了。
2007年底，某试验海区。该新型舰空导弹首次进行舰上实导射击试验。2008年某月，定型试验，7天打7 发，全部命中。创造了中国海军舰空导弹第一次成功拦掠海飞行小目标，第一次成功拦截多目标，第一次成功拦截 超音速火箭靶弹的记录。
2009年10月－11月，570舰搭载该型导弹到海上靶场，发射多枚导弹。这是该型导弹首次在海军作战舰 艇由舰员操作进行实弹射击。

If we ignore some of the exaggerations about first, we can get the following:

• Project started in July of 1999
• Started conducting shipborne live firing testing for the first time at end of 2007
• In 2008, they conducted 7 tests in 7 days and hit all the targets
• Successfully intercepted small sea-skimming target. Successfully intercepted multiple targets at the same time and intercepted supersonic target
• From October to November of 2009, 570 carrying HQ-16 returned to the test ground to fire off more missiles.
  

New J-10 regiments

Today, I saw on Scramble's plaaf orbat that a new J-10 regiment is getting formed in the 7th division replacing an old J-7 unit. A while ago, we saw this comment left by a "big shrimp" type of poster on Chinese forums.
1，2，3，18，29堪称五虎猛将
9，14，19，33，44算是一品带刀侍卫
6，7，12，21，24可谓卧虎藏龙
15，30，37即将东山再起……
Basically, he listed 4 groups of plaaf divisions. the first group of 1,2,3,18,29 are considered to be the elite divisions. It's a little confusing, because I've never considered 29th to be that way. The second group of 9,14,19,33,44 are considered to be the second level of plaaf division and they all already have a 3rd generation fighter jet of flanker or J-10s. The third group of 6, 7, 12, 21, 24 can be described as "crouching tiger, hidden dragon". They are starting to equip 3rd generation fighters. The final group of 15, 30, 37 may also get 3rd generation fighters.

Before we go on, I think it's important to point out several important facts:

• J-6s are retired from PLAAF
• The J-7 production finished in 2008 and the final batch was delivered to PLAAF in early 2009
• J-10s have been replacing J-7 regiments and J-11s have mostly been replacing J-8 regiments and older J-11 regiments
• J-7s don't have long service life, so a lot of J-7 regiments will be retired in the next 10 years. I think the last of J-7s will pretty much be retired from PLAAF by 2025.
• As J-7s continue to retire in the next 10 years, their old regiments will either be replaced by J-10s or disbanded.
• The story may change if another fighter type like JF-17 comes into picture
  

Let's look at which regiments are currently J-10:
1st division, 2nd regiment replaced J7E 12x2x
24th division, 70th regiment replaced J7E 30x5x
7th division, 18/19th regiment replaced J7 11x8x
3rd division, 8th regiment replaced J7II 10x4x
9th division, 25th regiment replaced J7H 21x0x
2nd division, 5th regiment replaced 10x3x
44th division, 131st regiment replaced 50x5x
From the first group, 1,2,3 have already received J-10s. From the second group, 9 and 44 have received J-10s. From the third group, 7 and 24 have received J-10s.

Now, let's look at the regiments that are currently J-7 as taken from Scramble's plaaf orbat. Remember, these are not followed as closely, so their numbers and regiments numbers may not be accurate. These J-7 regiments may or may not still be there. I also saw some J-7 regiments on that orbat that look to no longer exist, so I didn't list them here.
30th division, 88th regiment J7E 40x1x
21st division, 63rd regiment J7 3xx2x
15th division, 43rd regiment J7C/D 20x6x
17th division, J7II 20x8x
15th division, J7 2xx6x
12th division, 34th regiment J7G 20x3x
31st division, 91th regiment J7II 40x2x
19th division, 56th regiment J7II 31x0x
3rd division, 7th regiment J7E 11x4x
14th division, 40th regiment J7E 21x5x
18th division, 52nd regiment J7II 21x9x
9th division, 24th regiment J7E 20x0x
42nd division, 125th regiment J7 55x3x
27th division, J7 3xx8x
33rd division, J7II 40x4x
44th division, 130th regiment J7 50x5x
6th division, 16th regiment J7 10x7x
37th division, 111th regiment J7I 4xx8x

According to Huitong, here are the regiments still using J-7C/D. 20x6x, 41x1x (so basically 15th and 30th division). We can ignore the second digit in the number, because that could represent the importance of these regiment in the division. Therefore, that digit could easily change upon new conversions.

These are the regiments that received J-7E. 10x2x, 10x4x, 10x5x, 20x0x, 20x5x, 21x5x, 30x2x, 40x1x, 41x8x. (1st, 3rd, 4th, 9th, 14th, 21st, 30th, 37th division) Now, some of these regiments have already been replaced with J-10s. I think J-7Es then get transferred to regiments that are even lower in the pecking order.

These are the regiments that received J-7G. 10x8x, 20x3x, 40x8x, 7th regiment, 12th regiment, 37th regiment. Again, if these regiments get J-10s, their J-7s will likely be transferred to regiments that are lower in the pecking order.

So, who are likely to get the next J-10 regiments?
We've already seen pictures from 18th division air base showing J-10s. Now, that most likely implies J-10s were there to exercise with Su-30s. At the same time, we've also noticed J-10s arriving at the 9th division base early last year, before the first official transfer of the first batch of 4 J-10s to that division. I read that at least one 9th division pilot actually flew and got trained with J-10 throughout 2009. What that could indicate is that a regiment preparing to receiving J-10s will first get some J-10s from another J-10 regiment so that the top pilots can start training. And then, they can take the lessons from those classes to the rest of the pilots in the regiments. At least that is my assessment from reading some of the official articles and posts from big shrimps regarding J-10 conversion process. If that's the case then, I think 18th division is close to getting J-10s, because those J-10s are possibly there for that reason. It would also follow the path of other elite plaaf divisions of having both a flanker and J-10 regiment (with the J-10 regiment replacing the old J-7 regiment).

14th, 19th, 33rd all have J-7 regiments that could be converted to J-10 regiments over the next few years. We can say the same about 6th, 12th and 21st division. 15th, 30th and 37th all have J-7 regiments too.

A while ago, I think Rick Kramer had satellite photos indicating 30th division is about to receive a J-10 regiment, so I think that's high up the list. It's hard to say exactly which regiments with get J-10s next. PLAAF would probably spread out the assignments so that each military region get their share of 3rd generation fighters. Currently, Shenyang MR has 1 J-10 regiment, Beijing MR will have 2 J-10 regiments (3 if we also include FTTC regiment), Jinan MR has none, Nanjing MR has 1 J-10 regiment, Guangzhou MR has 2 J-10 regiments, Chengdu MR has one and Lanzhou MR has none.

My guess is that since Beijing MR will not get a J-10 regiment for a bit since it just got J-10s for 24th and 7th regiment + August 1st flight demonstration team. That would probably eliminate 15th regiment for now. In Shenyang, 30th and 21st division are both possibility, but I think 30th might have better chance due to Rick's photos. I think Jinan MR will get a J-10 regiment soon, so that would suggest either 12th or 19th division is getting J-10. Due to their proximity to Taiwan, Guangzhou and Nanjing will probably get quite a few J-10 regiments. Since Guangzhou is in the process of getting its second with 9th division, I think Nanjing is next. That would bring in the possibility of 14th division. Chengdu MR might get more J-10s to counter threats from Vietnam and India. 33rd division already have flanker, so it's unlikely to get J-10s. That means 6th will be the next division to get it from Chengdu MR. If they follow what they did with 44th division and J-10A, it's possible that the first J-10B regiments will also be placed in Chengdu MR. Which means, the first J-10B regiment will be in 6th division or 44th division. Finally, Lanzhou MR may or may not get one due to its geographic insignificance. If it does get one, I think it's more likely to get the longer ranged flanker because of the area that Lanzhou MR covers.

To sum up, we've seen three new regiments converted to or in the middle of converting to J-10 recently. I think this is partly due to the order for 122 AL-31FN signed early last year and partly due to FWS-10A's improved reliability. I think that J-10s will be used to replace most of the J-7 regiments in PLAAF in the next 10 years (unless PLAAF finally decides to purchase JF-17s). These are the regiments I think we need to focus on in the next few years that will receive J-10s.
18th division, 52nd regiment J7II 21x9x
30th division, 88th regiment J7E 40x1x
12th division, 34th regiment J7G 20x3x
14th division, 40th regiment J7E 21x5x
6th division, 16th regiment J7 10x7x

China Tests Midcourse Missile Interception

Well, the Chinese military bbs is abuzz today with the news that China has tested mid-course missile interception system. It was conducted within China's borders and achieved expected objectives. This test is ground based and the Chinese military fans are now waiting for the sea-based system.

I don't know what missile was used to conduct the test or what the target is. We do know that China had conducted some anti-ballistic missile tests earlier and that ASAT test in 2007. This test seems to be another milestone in establishing a national missile defense system.

Here is an article on this:

BEIJING — China has successfully intercepted a missile in mid-flight, state media said on Tuesday, in a test of its advanced air defence capabilities amid tensions over US arms sales to Taiwan.

"China conducted a test on ground-based midcourse missile interception technology within its territory. The test has achieved the expected objective," Xinhua news agency said of Monday's test.

"The test is defensive in nature and is not targeted at any country," it added.

The news comes shortly after a US official in Taipei said the Pentagon had approved the sale of Patriot missile equipment to Taiwan as part of a package passed by Congress more than a year ago.

Beijing -- which considers Taiwan part of its territory and has vowed to take the island back, by force if necessary -- has repeatedly voiced its protest over the sales and urged Washington to cancel the deal.

China's defence ministry had warned at the weekend that it reserved the right to take unspecified action if Washington followed through with the sale, which it called a "severe obstacle" to China-US military ties.

The United States is the leading arms supplier to Taiwan, even though it switched diplomatic recognition from Taipei to Beijing in 1979.

The Chinese government has poured money into its military in recent years as part of a major modernisation drive.

China's military spending rose 15.3 percent in 2009 to 69 billion dollars, according to a budget submitted to parliament in March, the latest in a string of double-digit increases.

Amid growing concern overseas about China's military intentions, Beijing stresses the defensive nature of its armed forces.

The Global Times quoted senior military strategist Yang Chengjun as saying that the test had "ushered China into a new phase in terms of missile interception technologies".

"China needs an improved capability and more means of military defence as the country faces increasing security threats," Yang was quoted as saying.

Review of Chinese aviation industry in 2009

In my 3rd review, we are going to look at the progress of Chinese aviation industry in 2009. In many ways, this year has been the most eventful year in the recent history. I'm going to look at what happened this year in civilian aviation, helicopter industry and military aviation.

This was a huge year for Chinese civilian aviation, because it was the year in which C-919 (aka the big plane project) was officially started by COMAC. In this past year, they have launched the project, chosen Leap-X1C as the engine for it, started work on domestic engine SF-A for C-919, picked other suppliers (like Shenyang, Hongdu, Xi'an, Chengdu, Baosteel and Alcoa), shown its basic dimensions, started construction of the nose section of the plane and started building of final assembly plants in Shanghai. The ARJ-21 project is continuing with the first flight of the 2nd + 3rd prototype, completion of the long distance test flight from Shanghai to Xi'an and will start delivery to domestic airlines in late 2010. AVIC1 firms have also been doing really as suppliers for international aviation firms. The first production Cessna 162 Skycatcher made its first flight in Shenyang this year after final assembly by SAC. SAC also became a tier-one supplier for the C-Series project and delivered a fuselage test barrell to Bombardier this July. SAC is also continuing it's work for Bombardier in the Q400 program. A big milestone was also achieved this year in Tianjin's A320 final assembly line. The first A320 assembled there was delivered in June and 11 were delivered in total (meeting Airbus's target for 2009).

The helicopter industry also had a lot of encouraging news this year. The Z-11 project's civilian version had its first flight recently. The Z-15/EC-175 recently had its first flight and seems to be on schedule to be in service by 2011. I would think that China is actively working on ways to develop naval version of the helicopter for PLAN. The Z-10 project has hit the road blocks recently due to delays in WZ-9 turboshaft project, but I think the improved Z-10A variant using WZ-9 gives PLA watchers a lot of hope. We have not seen much movement on the 10-ton helo project. In the 13-ton class, Z-8 looks to be finally proliferating in different arms of PLA from the photos we've seen in the 60th anniversary air show. We saw anywhere from 20 to 30 Z-8K/KAs in some photos. We've also seen an order for 18 Z-8FA for firefighting. We saw many new Z-8J/JHs for large warships like 071 LPD and 866 hospital ship. We've also seen pictures of Z-8 AEW variant in preparation for the carrier project. If Z-8s were not so large, they'd probably be used on 054As and 052B/Cs. Finally, AC-313, a new civilian variant of Z-8, made its first flight and had already accumulated a large order in last year's Zhuhai airshow. Regardless, it looks like all of the production bottleneck for Z-8 have finally been resolved. I find it puzzling that they are not building more transport variants of Z-8s for the army, but it looks like PLA favours Mi-17 series. Recently, we have finally seen Mi-171s assembled in China undergoing flight testing. I think that we will see more Mi-171s assembled by Sichuan Lantian factory joining PLA next year. Finally, we have seen the first set of photos for the heavy lift project that China is co-developing with Russia. That project might take a few more years to complete, but that will finally give China a heavy lift equivalent to CH-53E. I think that the news above shows some improvements but also gaps that still exist in China's civilian helo industry. All the major new developments like Z-15 and the heavy lift project still require cooperation with foreign companies. All of the new domestic developments are done on platforms that were developed by or based upon Eurocopter designs. The only new domestic design without foreign help has unknown development status. Once China completes all of these projects, they will finally have a helicopter each all the relevant weight class. Due to the dual use nature of helicopters, they've managed to cooperate with advanced helicopter companies around the world on critical projects (bypassing arms embargo). However, the Chinese helicopter industry still has quite a bit to go before catching the likes of Sikorsky, Eurocopter and Agustawestland.

After a rather uneventful 2008, 2009 was quite the banner year for PLAAF. J-10B had it's first flight in December of 2008, but we did not see pictures of it until March of this year. We also saw the first photo of J-11BS and hear that J-15, the naval flanker, had its first flight. On top of that, we saw KJ-200 finally joining service after its Category III platform fixed the problems that caused the crash. Production for J-10 finally started up again in late 2008 after China and Russia signed a deal for an additional 122 AL-31FNs. We saw new regiments at 9th division, 24th division and possibly at 18th division. On top of that, some of the figures for J-10 were finally released after it replaced J-7 in the August First flight demonstration team. Just recently, we've finally seen a batch of J-11Bs using FWS-10 engine. It looks like Taihang's mass production problems have finally been fixed and J-11B is ready to join service. JF-17 has finally joined PAF, but we do not know when or if it will join PLAAF. Overall, it looks like PLAAF is continuing the trend of replacing J-7 regiments with J-10s. As more and more J-7s retire, PLAAF would have to either increase the number of J-10s it orders, order some JF-17s or decrease in number. With Taihang's production problems fixed, maybe we will finally see J-10s equipped with FWS-10A engines in the future. One of the major questions is which engine will equip J-10B. It looks to be a competition between FWS-10A and AL-31FN-M2/3. One of the themes to follow in 2010 is the progression of J-10B as CAC will probably switch the production from J-10A to J-10B by 2011. As J-10s are replacing J-7 regiments, J-11B and following variants should be replacing J-8 or older flanker regiments, although J-11B production rate still remains low. JH-7A, the final part of China's 3rd generation fleet, had one new regiment this year in the 11th division. JH-7As have been replacing mostly Q-5 regiments to the tune of 4 regiments in PLANAF and 3 regiments in PLAAF. Of course, The deputy commander of PLAAF shocked a lot of people in an interview by stating that 4th generation plane will fly soon and join service in 2017 to 2019. I do not think we will see anything concret regarding to the 4th gen fighter in 2010, but I'm expecting to see more transparent revelations like that around the Zhuhai air show. Over all, several new variants made their first appearances in 2009, while the existing variants joined PLAAF in great numbers. In 2010, I'd expect to see the maturation of these new variants and more conversion from 2nd to 3rd generation fighters. Aside from fighter jets, we found a lot about PLAAF's C4ISR fleet around the time of 60th anniversary parade. We found out that 10 Y-8 Category II and III platforms are produced each year for the high new series. As a result of that, I would expect to continue to see more KJ-200 and other High New series aircrafts joining service in 2010. Although KJ-2000 has now matured with PLAAF, we are probably not going to see any new units in a while due to the lack of platforms. They have restarted the discussions with Russians for IL-76s, but the Russians have raised the asking price of the new IL-476 variant to $50 million from $18 million, so I'm not sure if a deal is ever going to get worked out. In the mean time, SAC/XAC is working hard at developing the new large transport project and a new medium turbofan powered transport. A lot of their successes will depend on the success of the WS-18 project and the WS-10-118 project. Either way, PLAAF has a huge shortage in air lift capability. It has in fact placed its largest ever order for Y-8C transport to alleviate some of these shortage problems. It looks like SAC will be busy building a lot of Y-8s next year for both the high new series and the airlift fleet in 2010. Finally, we have also seen other new entrance into PLAAF like the JJ-9 trainer, BZK-005 UAV and BZK-006 UAV.

In conclusion, 2009 was a great year in China's civilian and military aviation sector. In fact, 2009 may have been the most eventful year since I have started to cover the Chinese aviation industry. We have seen a lot of new toys and will see them inch closer into joining service in 2010. I'm really excited about seeing the progression of J-10B, J-15, C-919, the large transport, Z-15 and numerous new UAV projects.

Top PLA stories of the decade

As this extremely eventful decade winds down, I'd like to give a list of the top PLA related stories from the past 10 years in no particular order. I started off by wanting to create an order but it simply became to difficult for me to justify some of them over other ones.

1. Heated relationship with US military (Taiwan, naval confrontations and PLA growth)
I put this as number 1, because I really do think that this is the most relevant story for us. US military obviously lacked an adversary at the end of the cold war. Early this decade, some people like Richard Fisher and Bill Gertz started to really track PLA advancements as the most obvious adversary to US. In the last couple of years, China was classified by as such by the Pentagon in the Quadcentennial report. Obviously, there are many points of contention. Before KMT took power last year, China and US were always a stupid action away from fighting in the Taiwan Strait. More recently, China's quest for greatness and securing shipping lanes for its natural resources has resulted in a military build-up that puts it directly in conflict with US. There are many in America who fear the rise of China and what that will mean for US's standing in this world. There are many in China who feel that US is unfairly trying to contain the rise of China. Similar to Japan's rise in the 80s, America's rise after world war I and Germany's rise prior to world war I, the rise of China has caused conflicts with the existing super power. In the first two cases, the mutual values and trade relationships between the existing super power and the ascending nation eventually faded. Obviously, we fear for a Germany/Britain scenario playing out if China continues to grow economically and the 2 countries get provoked into a war by Taiwan or something in South China Sea. I think the relationship between China and US is clearly different from any of those 3 cases. The two countries are so closely linked economically that they could cause each other tremendous harm without ever having to fire a shot. Fundamentally speaking, I think China and US can develop a even more cooperative relationship than now. In the long run, China is probably far more likely to have conflicts with neigbhours like India or Russia. Until then, we will see more nervousness by DoD over PLAN's shipbuilding program and PLAAF's next generation fighter program. We will likely see more incidents like Song surfacing next to Kitty Hawk or fish trawlers tangling with SURTASS ship in South China Sea, but I think both sides are calm enough to get by those.

China and Taiwan
Until KMT got voted into power last year, the Taiwan strait was one of the most combustible points in the world. With Taiwan's DPP constantly pushing for greater recognition of its independence and PRC's resistant efforts, the two sides were always a couple of moves away from getting into a major war. This hot point obviously brings a whole new level of risk, because of the probably involvement of the US military. The Anti-Secession Law passed in 2005 only affirmed that China would attack Taiwan if Taiwan ever declares formal independence. In the early past of the century, Taiwan was in the upper hand, because George Bush gave approval for a major weapons package. As time went on, this package was watered down due Taiwan's domestic bickering and the more pragamatic dealings by Bush toward China. To counter the possible sales to Taiwan, China put in some orders to Russians in 2002 to improve the navy and air force. As time went on, China developed more accurate ballistic missiles, LACM, ground attack munitions, surface to surface missiles, amphibious armoured vehicles, amphibious ships and increased airlift to prepare for a possible invasion. After a decade of building up in all services, the power balance across the strait has shifted permanently in PRC's favour. The gap between the 2 parties will only increase over time. Just as concerning to Taiwan, China has continue to build up more missiles facing them. KMT has put removing missiles as a prelude to peace talks, but PLA has the ability to aim them back at Taiwan at anytime. Realistically speaking, most of the damage against important targets in any conflict would be caused by ground strikes with PGMs and cruise missiles rather than those short ranged ballistic missiles. As we speak, tension along the strait is at a 10-year low. In the long run, PLAN would have a problem with its blue water dreams if it has a hostile naval opposition that close to its borders, so the current status quo is not really acceptable for China. By that time, I hope that some kind of agreement would have been worked out between the two parties.

Moving from relying on Russians for military hardware to becoming self sustaining
At the start of this decade, China was basically relying exclusively on Russia for all of its main weapons. J-10 was still in testing stage, so PLAAF relied on buying Su-30s from Russia and building Su-27s locally for air defense. After the nervousness over the proposed sale to Taiwan in 2002, PLAN ordered 2 additional Sovs and 8 improved Kilo submarines from Russia. The air defense still relied on importing different versions of S-300 to protect critical areas like Beijing, Shanghai, Three Gorges Dam and Pearl River Delta. I think all of that pretty much changed by 2006. negotiations for new purchases stopped in the wake of the IL-76 fiasco, but China pretty much ordered all it needed from the Russians by then. Even after that freeze was over, the large orders of Russian hardware of early 2000s never restarted. The truth is that Russia simply did not have anything to offer to China that was better than what China could produce. The Sovs and Kilo submarines have pretty much become white elephants with the commissioning of 052C, 054A and 039A class. The need for Su-30s and S-300 have also disappeared with the induction of J-10, J-11B and HQ-9. As this decade concludes, China is capable of pretty much producing and developing everything that it needs, so its military industrail complex has reached the self-sustainig level.

Varyag and China's carrier program
Ever since that holding company from Macau bought Varyag in 1999, China watchers have wondered when China will get its first aircraft carrier. I think by now, we have all seen the works done to Varyag recently and the Carrier replica in Wuhan. I have writtne in the past on this blog about why China needs a carrier and will not repeat myself again. However, I think it's important to look at how methodical China have been in this process. In the past 10 years, it studied Varyag thoroughly, developed partnerships with other countries to train its pilots, built larger warships like 071 LPD, invested in developing naval fighter and in developing an escort fleet. The interesting part is that current ships like 052C, 054A and 093 are not meant for the future carrier group even though they would do well in that rule, because China has newer destroyers, frigates, supply ships and submarines designed for the escort fleet. I think they were probably ready to start building a carrier 5 years ago, but they waited until everything is ready (which took an entire decade) before starting work on it. Once China's first domestically built carrier is ready, it will be part of a true carrier group rather than a white elephant like the one for Thailand.

Advances in China's space program and ASAT
By nature, space technology had dual use, so the advances in China's space program is also a major story for PLA. The successful ASAT test in January 2007 caused many people to panic over what that might mean for US space dominance in the event of a war. I think this threat was overblown due to the great redundancy in US space netowrk and possible retaliatory strikes. However, other advancements in China's space program have far more profound effects on PLA. The deployment of Beidou network is probably the most important contributor. Even though Beidou 1 is not that accurate, Beidou 2 will be just as accurate for PLA as GPS is for the US military. We have already seen from many pictures that Beidou is pretty much deployed on all PLA assets. Since Beidou guidance was also incorporated on all of China's missiles and satellite guided bombs, it has significantly improved the ground strike capability of PLA. For strategic missiles like CJ-10, Beidou allows them to be as accurate over long range as equivalent US weapons. In addition, the launching of recon satellites like the Yaogan series and Ziyuan series are all extremely important in identifying incoming carrier groups for the ASBM program. The launching of data relay satellites like the Tianlian, ShenTong 1 and FengHuo are important in secured digital communication of data and voice for a theatre-level C3I network. We can see SatCom antennas on the new PLAAF aircrafts and all of the recently launched naval ships for PLAN. Clearly, there were many satellites launched this decade which could help different weapon platforms of PLA. In addition, non-military projects like the moon mission and Shenzhou missions have yielded technologies that could be used on future military satellites.

The emerging submarine threat
This was a much bigger story back in 2005. Back then, China had just launched Yuan, was in the midst of a massive buildup of Song class (3 per year) and also getting those 8 Kilo submarines ordered in 2002. The much vaunted "Sizzler" missiles were mentioned on every article to highlight the threats posed by PLAN. The surfacing of Song submarine next to Kitty Hawk in 2006 only raised the level of alarm over the danger of these quiet diesel submarines. I think some of that fervour has died down in the last couple of years. We have seen Kilo submarines spending most of its time either in one of the Shanghai shipyards (getting repairs or upgraded, not sure which) or resting peacefully beside the dock. They were only able to successfully fire Club missiles in the past year, but it's definitely still not used operationally as much as the Song series. In the recent years, the nuclear submarine threat of 093 and 094 were raised due to the latter's second strike capability. Just looking at the numbers published in open sources, I don't think USN has a good handle on the quantiy and quality of this second generation of PLAN nuclear submarine, but their classified setion is probably far more accurate. One of the most important development recently is that PLAN submarines are making more patrols. That number is released every year and we've covered how this number has risen in the recent years. This increase coincides with the increased number of PLAN deployments in port calls and their anti-piracy missions. I think this threat was overhyped back in its day, because Kilo submarines really never turned out to be as lethal as the China threat group made them out to be. The Yuan submarine was also not generationally better than Song as Westerners originally thought, because it really was still considered by PLAN as part of the Song series. Even so, I think that this is becoming more of a threat now that these platforms have matured in PLAN through more patrols and training exercises.

ASBM
In many ways, ASBM has replaced submarine threat as the main PLAN assymetric, anti-access threat topic listed by Western China watchers. I'm proud to say that this blog helped bring the ASBM threat into forefront. The Annual DoD report, Bloomberg, China Maritime Studies Institute and others have weighed in on this issue in the past year, because it could be a "game-changer" as Admiral Roughead stated. We've certainly had our share of entries on this issue throughout 2009. From following this issue on Western and Chinese sources in the last couple of years, I think that the Chinese military establishment believes this system is ready for action. Certainly, many parts in the system like tracking and identifying the carrier group will be improved and perfected in the next decade, but they believe ASBM can be used right now.

Lifting European Arms Embargo
This was another story that really peaked in early 2005. At that time, China was still dependent on Russia for most of its military hardware. Just as it was about to be lifted, American and Japanese pressure on Europe + initial reluctance by several EU countries over the embargo thwarted the process. The American argument was that imports from Europe would significantly improve the capabilities of PLA and be harmful to US interests in a possible conflict with Taiwan. At this point, I don't think lifting the arms embargo would really mean that much, because PLA is unlikely to have access to too many systems that it needs and can't already obtain. That's probably why this issue has not been at the top of China's requests in its recent discussions with Europe. Even with the arms embargo on, China was still able to get key systems like Spey engine for JH-7 fighter bomber, key subsystems for Z-10 project, co-development of Z-15 helicopter, engines for Z-9G helicopter, Sky master surveillance radar, diesel engines for different ships, LR7 rescue submarine and key subsystems for diesel submarines. I think that lifting EU arms embargo at this point can still help China in different areas. I've always listed NH-90 helicopter, A330 tanker, advanced quiet technology for submarines, aerospace engines, Aster missiles and naval radar as things that PLA would be interested in from Europe that they can't already get. However, I'm not sure how eager European firms would be at supplying these systems. So I think that even if the EU embargo gets dropped, it's really not going to be a game changer. US and Japan will still protest this move, but it really isn't that significant militarily. There are obviously still certain subsystems that China would be interested, but they would be able to develop a less capable but still adequate version of that on their own. I think the most important gains from Europeans are from the civilian sector. China gained a lot from cooperating in hi-tech industry through joint ventures with Western companies. They gained quality control, production method and management skills that are just as important as the technology themselves.

Phalcon + KJ-2000
This was a huge story back in 2000. At that time, Israel and China negotiated a deal for 4 Phalcon AWACS on A-50 platform. The US goverment forced Israel to renege on the deal with the argument that Phalcon is comparable in performance to E-3C. Jiang Zemin was humiliated, because he was told that China would get those AWACS. In 2004, Israel was also forced by US to back out of doing upgrades on Chinese Harpy drones. Those two incidents pretty much stopped the China-Israeli military cooperation that dated back to license production of Python-3 missiles. As the story goes, KJ-2000 AWACS based on A-50 platform made its first flight in 2003 and the first regiment of KJ-2000s were formed in 2005 or 2006. A lot of people were shocked by the pace at which China developed its own AWACS. At the time, people speculated that Israel had provided China with a lot of assistance on the project. As revealed in 2009, China had cooperated extensively with Israel in the Phalcon project. It provided Israel with much of the solutions in fitting the Phalcon system on A-50. In some ways, India reaped the reward of that project in its Phalcon contract. At the same time, Israel really taught China on how to produce and QC the modules for the AESA radar. It also taught China the command & control part of AEWC&C. As such, even though the Phalcon project did not work out, China received the necessary know-hows to produce KJ-2000. China put in extra resource into the KJ-2000 project and accelerated its development. Similar to the entire European Arms Embargo story, this is another case where US intervention really did not help anyone but China.

Third Generation fighter jets
China designates Su-27, F-16 and other Western 4th generation fighter jets as third generation. This decade saw China changing from a nation that imported the production line and know-how of a 3rd generation fighter jet to a nation that exports the production line and know-how of a 3rd generation fighter jet. Two decades after USAF converted much of its fleet with F-15s and F-16s, PLAAF did the same with J-10s and Flankers. By 2006, J-6s (Chinese version of Mig-19) were finally phased out of PLAAF. A year later, production for J-7s finally stopped at CAC, which means J-7s will probably also be phased out in 10 years (they have rather short service lives). Of course, J-10 project was the most important part of this movement. Although it received a lot of help from the Israelis and the Russians, but J-10 project led to the development of many subsystems that would be used in other fighter jets. People have called J-10 the Apollo project of China and I would agree to that in many ways. At this moment, China have pushed out J-10B and J-11B as the improved variants of J-10 and flanker series. CAC has also successfully finished the development of JF-17 and have helped PAC to set up local production. JF-17 will probably allow China to be competitive in the export market against used F-16s/M2Ks/Mig-29s. J-11B will not be exported. Once J-10 is allowed to be exported, it will probably be thrown in foreign fighter jet competitions against other late 4th generation fighters like super hornets, the eurocanards and su-35. Either way, this was the decade that PLAAF moved from a 2nd generation air force to a 3rd generation air force.

PLAN surface shipbuilding program
Before this decade started, China's best ships were 2 Sovs, 1 051B, 2 052 and a few Jiangweis. We've talked about it many times before, but it's pretty amazing how much PLAN surface fleet has improved in the past decade. I've written several entries on this before, so I will keep this short. The improved quality and quantity of PLAN shipbuilding program can attribute to the improvements in the civilian shipbuilding industry and development of a entire generation of naval subsystems (some of which were copied off Russians). As seen recently with submarine tender, hospital ship, ELINT ship and replenishment ships, the building program is taking care of the entire fleet rather than just destroyers and frigates. Not only are the new ships more capable, they are also designed to operate further away from the shores. Basically, this decade represents the start of China's effort to move from a brown water navy to a blue water navy.

China in 2009

As we look back on everything that happened this year, I decided to look at more than just naval shipbuilding and military/civilian aviation, but also the financial and economical engine that is China. Many people waited for the Beijing Olympics to be China's crowing moment or coming out party. In many ways, 2008 was a milestone year when one considers the major snow storm that crippled the country, the Tibet riot, the Sichuan Earthquake and the Beijing Olympics. However, this year has turned out to be the true coming out party for China. Due to the fall of Western financial institutions (especially in New York and London) and our current economic downturn, the world has been increasingly relying on China to be the knight in shining armour. In many ways, the increased power and expectations have come way too much and way too fast for China.

The Obama administration has basically annointed China as its equal this past year and the idea of G-2 have been raised everywhere. China has been asked to be a responsible stakeholder in issues like climate change, fighting global imbalances, Iran, North Korea and currency manipulation. In many of these cases, China has reacted and handled itself in ways that counter the views of Western countries. For years, China had followed the strategy laid out by Deng Xiaoping in growing quietly and minding its own business. There were a few bumps along the way, but China basically stayed out of major international affairs all the way through Jiang Zemin's run as the paramount leader. Their foreign and domestic policy could be summed up as: make a lot of money for Chinese people, being ambivalent about everyone else, advance the country scientifically/technologically and do this with as little noise as possible. By the time, Hu came to power, China had just joined WTO and started to run large trading surplus against USA. Hu moved away from a US-centric foreign policy and started this process of securing natural resources all around the developing world (even in the Americas). By 2005-2006, it was clear that China had expanded (and was on such a trajectory) so much in political influence that it could no longer hide in international affairs as just another developing nation. Starting from George Bush's second term, you really started to see US engagement in trying to make China into a "responsible stakeholder". Armed with this new attention and expectations, China really was unprepared for the extra responsibility. It was still trying to just remain in the background and become stronger economically. Even though China has opened up a little bit in the recent year and tried to take on more responsibility, it still values its own priorities above all else. In one sense, it still wants to be treated with the same leniency that other developing countries are treated with. At the same time, it also wants to be respected as a country with long history, rich culture and prospering society. But more than anything, China still does not look at itself as a superpower (it ranked itself 7th in national strength in a recent study), even though most people around the world think that way. I think that most Chinese people still do not comprehend the kind of impact that their country and its growth is having on the rest of the world. I will just try to go through some points on how this year has really seen the emergence of China.

Politically, this was a huge breakout year for China. Hilary Clinton made a visit to China in February and basically pleaded to the Chinese gov't to buy more treasury bonds. When they had the strategic dialog in the middle of the year, Obama stated clearly that all of the issues that we are facing need both countries to work together to resolve. And finally when he visited last month, it also appeared that he was bowing down to the Chinese. Because Obama has somewhat of a reputation of being soft amongst foreign policy hawks, I'd like to say that he gave the elevated status due to the practical situation rather than "the left being weak to the commies". During Bush's second term, he grew to become more and more friendly toward the Chinese administration. In many ways, George Bush was possibly the most China-friendly president in the US history and Obama has carried on that trend. I think both presidents did the most pragmatic approach possible. They realized that China was influential in way too many places around the world (especially pariah nations) to not cooperate over the major geopolitical issues. They also realized that China is America's banker and believe that America needs China's savings to get out of this financial mess. They have lamented that China has not acted to its responsibility on issues like Iran, Sudan and North Korea. I think they would be find it hard to get cooperation from China. When China was still clear the weaker partner in the relationship, it could claim that it was not influential enough and did not have the luxury as a developing country to influence other developing countries. Now that China is more of an equal in the relationship, it could afford to resist US pressure to press further on these troubled states. China still does not feel like enough of a world leader to take positions that are more positive for all of humanity. It would like to continue policies that will help feed natural resources to its rapidly growing economy. By now, everyone can see the kind of influence that China has over African countries, several South American countries, ASEAN countries and the countries along the String of Pearls. G-7 is no longer the policy making organization that it used to be, because China is not in there. Even so, China is trying really hard to stop the idea of G-2 while promoting G-20 + BRIC, because it really does not want the responsibility/pressure of being a super power.

This was the year that China really became the financial power of the world. Jim Rogers has repeatedly said in the past that power moves to where money is. If that's the case, then the growing accumulation of China's foreign reserve point to a lot of good days ahead. We have seen USA asking China to continue to buy Treasury Bonds. We have seen IMF selling bonds to China. We have seen countries all around the world asking China for money. G-20 replaced G-8 in determining policies to get out of this worldwide economic downturn, because it needed China's deep pockets. For its domestic economy, China was able to put in a more effective stimulus program without adding much public sector debts (although some would argue for the hidden bank debts). We have seen China buying up resources around the world. After all, why would anyone want to sit on fiat currencies when the central bankers around the world cannot control themselves from printing more money? China dramatically expanded its holding of gold bullion and will probably continue to buy. It continued to acquire mines across the world including the much talked about attempt by Chinalco to increase its stakes in Rio Tinto. When the prices of oil, iron ore, copper, silver and other natural resources dropped, China moved in to buy them at rock bottom prices to creater larger strategic reserves. Australia basically avoided a major recession due to the continued China demand for its iron ore and other resources. Perhaps the most interesting part of China's buying spree is that it has moved beyond foreign debts and natural resources. As companies around the world started to collapse under the tough economic conditions, Chinese companies have started to acquire foreign companies, their branding and their production process. In this past year, the successful bids by Chinese companies for Hummer, Volvo and Saab made headlines. However, there are also many other stories of Chinese companies acquiring Western know-hows + branding at rock bottom prices. More than anything, this economic downturn has shown the importantce of being financially sound. As this downturn continues in the next couple of years, I think Jim Rogers' prediction will show to be really accurate.

For the past 25 years, people have talked about the potential of 1.4 billion people and the huge market created by the growing middle class in the country. Due to the increased savings and declining purchasing power around the world, consumption was down in most other countries causing a collapse in world trade. After a slow 4th quarter in 2008 and early 2009, consumption in China really took off this year with the help of some stimulus policies by the government. The Chinese market finally exceeded the US market in several industry and somewhat feeled the void left by export markets for domestic manufacturers. 2009 could also be remembered as the first year that China's auto market exceeded that of US. While most automakers around the world were suffering due to declining sales in most countries, Chinese automakers were really thriving. BYD, Chery and Geely all had massive growth in sales due in large part to the lower tax for small cars. As a result of this, these automakers now have the capital to really acquire oversea assets, expand capacity, develop newer models and produce higher quality cars for the more mature EU and US markets. In a sign of times, SAIC became the majority stakeholder in its joint venture with GM and will also be producing their joint venture car Wuling for export in India. BYD has made a lot of news for its plans to bring affordable hybrid/electric car models to America and also supplying batteries for Volkswagon. The improved fortune for domestic automakers is part of China's progression of moving up in value chain and becoming an even stronger manufacturing engine. 2009 was a terrible year for shipbuilders around the world, but China managed to move past South Korea for the first time in terms of orders taken and order backlog. In a few years, China will officially become the world's largest shipbuilder. Green industry is another area that recent government policy has really helped. The Chinese solar module industry have became the largest in the world (accounting for 1/3 of photovoltaic cells production). It is now exporting 99% of its production and is causing huge fall in solar module prices by basically swamping the market. China's wind turbine industry is also now the largest producer in the world thanks to the huge wind power expansion in the country + exporting to foreign markets (like the recent A-Power deal in Texas). Even in fields like civilian aviation, trains and nuclear power, you can see that China is slowly entering these markets and moving up the value chain. Due to the fact that China is the only country in the world that is actually having this massive nuclear power expansio and high speed rail expansion, advanced multi-national corporations are forced to provide more know-hows + local manufacturing in order to win those contracts. In the long run, China will probably end up becoming a competitor to them in this area. In the mean time, Airbus, Westinghouse, Alstom and Bombardier can remain highly profitable despite the declining orders around the world. In some ways, you can already see that China is moving up in this field with their nuclear power, airliner and railway exports to developing countries while still buying the latest technology from the west. And really, we can go through a bunch of other domestic industries, but I see a very methodical approach in using domestic market to extract technology and developing local industries. China is getting wealthier, so it can no longer rely on selling cheap clothing, toys and furnitures to walmart to expand. It is moving up in the value chain in manufacturing for both its domestic market and export markets.

I will have a separate ntry on the military growth, since that is the area that I follow the most. Needless to say, there were a lot of headlines this year with the carrier program, the next generation fighter program, the large transport program and the ASBM program.

As I review all that has happened in this past year, I can say for certainty that this was one of the most significant years since the market reforms started. After a revision of its 2008 GDP numbers, it looks like China became the 2nd largest economy in the world this past year. In terms of purchasing power, it reached the position quite a while ago. The financial crisis has only shown the world how influential China has become in the recent years. If 2009 was any indication, China has officially risen to super power status on the world stage. There are a lot of anger toward China around the world, because it's manufacturing strength has crippled many economies around the world. At the same time, it also remains important, because it has now become the largest market in the world for many industries. Regardless, China's emergence has changed the dynamics of the world. Policies are no longer determined by 7 large Western economies, but need the inclusion of the other countries in G-20. The question is how will China react in the coming years as it is expected to do more for the international community.