China Announces Defense Budget: Beijing Sets 7.5 Per Cent GDP Target

China has announced it will increase defense spending by 11.2 per cent in 2012, for the first time taking its annual military expenditure beyond $100 billion as it puts in place plans to modernize its Army against the backdrop of an uncertain regional environment.
The planned defense budget was announced in Beijing on Sunday as 670.274 billion yuan ($106.39 billion), an increase of 67.604 billion yuan over the expenditure in 2011 and an 11.2 per cent year-on-year rise.
The present hike will bring official outlays on the People's Liberation Army (PLA) to 670.3 billion yuan ($110 billion) for 2012, after a 12.7 per cent increase in 2011 and a near-unbroken string of double-digit rises across two decades.
The rise in military spending was in keeping with the growth in the Gross Domestic Product (GDP) and fiscal expenditure. The spending as a share of GDP was only 1.28 per cent, lower than many countries including the United States and the United Kingdom. “where it exceeds 2 per cent.”
Double-Digit Percentage Rise
It, however, remains unclear how China's neighbors will perceive the double-digit percentage rise, with several countries, from Japan to those involved in disputes over the South China Sea, having expressed concerns in recent months over the rise in military spending.
The defense budget grew by 12.7 per cent last year to $91 billion, though spending grew by a lower than expected 7.5 per cent in 2010, the first time in two decades that the increase was a single-digit figure on account of the global financial crisis.
China's spending in 2012 will exceed what India spent last year by three times — India's defense expenditure was reported at $36 billion in the 2011-12 budget.
In addition, the specified military spending, which many western analysts say is far higher than the official version, China in 2011 spent over $100 billion on internal security. The hike in China's defense budget, which is now almost triple of the Indian defense spending, may impact New Delhi's military expenditure.
India had allocated $ 36.04 billion for defense in 2011, which represented an 11.59 per cent growth over the 2010 budget.
US President Barack Obama has sought to reassure Asian allies that the United States will stay a key player in the area, and the Pentagon has said it will "rebalance toward the Asia-Pacific region".
Obama's proposed budget for the fiscal year of 2013 calls for a Pentagon base budget of $525.4 billion, about $5.1 billion less than approved for 2012.
Beijing has sought to balance long-standing wariness about US intentions with steady relations with Washington, especially as both governments focus on domestic politics this year, when Obama faces a re-election fight and China's ruling Communist Party undergoes a leadership handover.
But the US "pivot" has fanned unease in China, with some PLA officers calling it an effort to fence in their country and frustrate Beijing's territorial claims.
GDP Growth
China has set its growth target for 2012 at a lower-than-expected 7.5 per cent, in an indication that its focus during a crucial transition year would be on maintaining stability and achieving more balanced growth.
The 7.5 per cent target is the first in eight years that has fallen below 8 per cent, long seen by Chinese officials as the minimum level of growth needed to maintain internal stability. The Chinese economy does, usually, exceed the annual targets set by the government, and is expected to surpass the 8 per cent figure this year as well. The economy grew by 9.2 per cent in 2011, down from 10.4 per cent in 2010.
Assessment
Asian neighbors, however, have been nervous about Beijing's expanding military, and this latest double-digit rise could reinforce disquiet in Japan, India, Southeast Asia and self-ruled Taiwan, which China considers part of its territory. Japan and China have locked horns over islands each claims in the East China Sea; Vietnam, the Philippines and other nations have challenged Beijing over claims to swathes of the South China Sea that could be rich in oil and gas.
It was understood that China has been constructing an aircraft carrier, although the timing of its deployment is not known. It was believed that China was also developing stealth fighters, all these programs made people wonder what the assumption behind such military modernization was about.
The growth trajectory of China's military modernization, as evident from the country's latest defense budget, has attracted much attention across the Asia Pacific region. This followed the expression of concern, in some regional circles, over some of China's recent “military manoeuvres.”

ASEAN To Play Intermediary Role in China-US Relations

The relations between China and the United States are one of the most critical concerns for both policymakers and scholars because of their importance as the deciding factor in the stability of the new world. Although it has been relatively weakened, the superpower position of the United States still continues to have an impact on the economy, politics, and military affairs of the world.

Meanwhile, the recent rise of China had and will continue to have a significant impact on other countries, particularly those in the region, including Association of South East Asian Nations (ASEAN) member countries.

Cooperation and Competition
The relations between China and the United States have always have both cooperation and competition characteristics. However, the recent progress in the relationship has indicated that the two competing power centers for the world's order in the 21st century have had the tendency to trespass each other.

The competition has been manifested via a series of problems yet to be solved. For example, economically, the United States has protested against China for maintaining the exchange rate of the yuan so low that the trade balance is now leaned toward China, and the United States has also criticized China on copyright protection issues and quality control of goods products.

Politics and Military Affairs
In areas of politics and military affairs there are problems such as nuclear issues in North Korea and Iran, the aircraft crash on Hainan Island in 2001, the encounter between Chinese ships and the US Navy Impeccable on the South China Sea, and China's enhanced military capability. There are also other problems in the areas of human rights and freedom of speech, including Internet websites censorship.

The questions faced by ASEAN member countries are what should they do and how should they react in the current context, so that they can secure their maximum benefits.
First, it needs to be affirmed that ASEAN is not yet the power center of the world. It is only a "player" on the political map of the world and region. The role of ASEAN as a "player" in the region is most clearly expressed not on military or economic aspects, but whether this organization can "guide" the powerful "ogres" such as the United States, China, and Japan to accept the codes of conduct, and the legal framework for the common game in Asia, particularly in the Southeast Asian region.

The fact that China has signed the joint declaration between ASEAN and China on the conduct of all parties on the South China Sea, or the fact the United States participated in the Treaty of Amity and Cooperation in South East Asia after multiple delays, had proven the influence of ASEAN in the role of "engaging" the "big players" in the game on its own terms. Through this technique, ASEAN had put in efforts to ensure security and stability in the region, and helped member countries to focus on developing their economy and society.

Important Investors in ASEAN

It is obvious that the two-horse race between the United States and China will directly affect ASEAN member countries because both are important partners, or more correctly, primary partners in this organization. Economically, the United States and China are major trading partners, and important investors in ASEAN member countries.

In terms of politics and military affairs, both the United States and China have partners and allies in South East Asia. Therefore, any "problem" in the US-China relationship, if escalated to a military conflict (although the possibility is not high), would cause direct damage to ASEAN member countries. In that case, ASEAN cannot be in the "third-party benefit" position, but there

ASEAN-China Free Trade Agreement

The ASEAN (Association of Southeast Asian Nations)-China Free Trade Area Agreement covering 1.9 billion persons in this free trade zone will become effective on 1 January, 2010. After 10 years of efforts between ASEAN and China, the smooth sailing of this significant agreement is a challenging test not only to ASEAN countries but also to China. Beginning 1 January, a new round of tariff reduction between China and six key ASEAN member states namely Malaysia, Brunei, Indonesia, the Philippines, Singapore, and Thailand will see more than 90 percent of the products from both parties with tariffs drop to near zero.
In November 2000, then Chinese Prime Minister Zhu Rongji put forth this idea of the formation of an ASEAN-China free trade zone with the purpose to lift the trade barriers between China and ASEAN member nations, so that China's huge market and ASEAN countries' natural resources could reach a mutually beneficial win-win trade relations.
However, within the past few years, the economy of China has increasingly consolidated and become powerful. This is most noticeable during the global financial turmoil when China's economic performance has continued to be outstanding. The strength of China's economy has become a concern to ASEAN member nations in the midst of the establishment of this ASEAN-China Free Trade Area Agreement. Such concern is in particularly reflected in ASEAN member countries that have high volume of trade dealings with China. The enterprises and business firms in five ASEAN member nations namely Malaysia, Singapore, Thailand, Indonesia, and the Philippines are worried that the exemption from customs duties for goods coming from China will challenge their local business survival with an influx of cheaper Chinese goods in the local market.

Advantages and Disadvantages
On contrary, other less economically developed ASEAN countries, including countries that do not even have established stock market mechanism will probably welcome the formation of this ASEAN-China trade agreement. These countries include countries such as Cambodia and Laos. In the case of Laos, under the ASEAN-China Free Trade Area Agreement, China would give Laos zero tariffs or less than five percent tariffs of over 7,000 kinds of goods and products import to China. To Laos, having this ASEAN-China free tree agreement will undoubtedly give the country more advantages than disadvantages.
However, to Indonesia, which is the economic engine head of ASEAN, its business enterprises do not think the implementation of the ASEAN-China Free Trade Area Agreement is a good idea. Erwin, chair of the Indonesian Young Entrepreneurs Association Chairman has earlier called on the Indonesian Government not to make a rush in the implementation of the free trade area with China. He said that Indonesia had not yet prepared for such a free trade agreement with China. He even warned that when the ASEAN-China Free Trade Area Agreement became effective, a number of industrial areas, particularly the small and medium-sized industrial zones and the industries in special economic zones might face the risk of bankruptcy. In view of such concern, the Indonesian Government has now formed a joint committee with the Indonesian Young Entrepreneurs Association and the Indonesian Chamber of Commerce and Industries to gather feedback from business community and entrepreneurs on the impact of the ASEAN-China Free Trade Area Agreement.
As for Malaysia, although the business community and private sector do not have such a strong rebound over the ASEAN-China Free Trade Area Agreement as in Indonesia, nevertheless, some larger enterprises, in particular the automotive industries are concerned about the impact of having a comprehensive free trade agreement with China. This is because the Agreement can have a huge impact level on local automotive industries. If Malaysia were to follow the country's original national automotive policy announced in 2006, Malaysia would fully abolish the permit to import foreign cars by December 2010. But under Malaysia's latest national automotive policy guideline, the abolishment of the AP (Approved license to import foreign car) system has furthered been delayed to 2015.
Although the ASEAN-China Free Trade Area Agreement will become effective on 1 January, all indications have shown that to most ASEAN member countries, this new free trade agreement with China comes with mixed felling of happiness and worry. We can even say ASEAN member nations are more worried about the impact of this Agreement than happy about the new trade opportunities available. When market force of China's 1.3 billion populations and ASEAN's total 600 million population combine and compete in the same market, it is quite natural for varied businesses and enterprises in ASEAN countries to worry about the impact of it. The ASEAN business community and enterprises are concerned whether an ASEAN-China Free Trade Area Agreement concept that was mooted ten years ago could still hold the original goal in allowing mutual and win-win trade between ASEAN and China to reap fruitful result ten years later. This is because over the past ten years, the China's economy today has growth much stronger now than ten years ago. There is a concern on the part of some ASEAN countries that the implementation of the free trade agreement with China now will eventually lead to trade imbalance between ASEAN and China. Some ASEAN member nations are afraid that there will be increased trade in favor of China rather than in favor of ASEAN member countries. This is because China is a huge country with not only huge market for domestic consumption but also a strong ability to export and supplies cheaper goods to the ASEAN region.

Importance of Agreement
Even so, we have to accept the fact that the engine head of this ASEAN-China Free Trade Area Agreement has already started running. We cannot pull the button and stop its advancement. This ASEAN-China Free Trade Area Agreement is not only China's first free trade area agreement in foreign trade; it is also the first free trade zone agreement ASEAN negotiated with a foreign nation. As such, the importance of this ASEAN-China Free Trade Area Agreement cannot be undermined. The importance of ASEAN's trade agreement with China will become particularly significance when under this free trade agreement ASEAN nations begin to use China's renminbi (yuan) as the major trading currency when engaging trade with China. Such development can greatly enhance the possibility that China's renminbi or yuan will eventually become a major global trading currency in addition to the US dollars.
Overall, we can only say that the birth of ASEAN-China Free Trade Area Agreement is a necessity product in the current regional economic environment. However, whether this Agreement can be achieved and reaped the expected result will, to a great degree, depend on how ASEAN member countries can maintain a united stance on the vast and varied goods and products entered into the Agreement with China as near zero tariffs products. If ASEAN member countries cannot stand united as one and begin to have different version of free trade area with China, then as a whole, it is impossible for ASEAN to reap trade benefits from the huge Chinese market.

Pakistan-China Currency Swap Agreement

Negotiations over swap currency agreement between Pakistan and China, with a view to conduct mutual trade in Pakistani rupees and Chinese Yuan instead of dollars, are underway. The governor of the State Bank would shortly visit China to give final shape to this agreement. The sources have learned that diplomatic talks between both countries in this regard have been completed. Now the governor of the State Bank would visit China to discuss technical issues in this regard, in which implementation of the agreement would be reviewed.

Impact of Economic Recession
The United States is witnessing recession these days. Several major companies are running into losses and several banks have also defaulted. Therefore, the credibility of dollar at global level has been damaged. This is the reason that the prices of gold are on the rise in the international market.

Some economic experts have voiced their opinion that if such situation continues, the economic situation of the United States would get worse by 2015; rather it is likely to take a dangerous turn. According to a Russian economic expert, the United States would disintegrate into 15 states at that time around.

BRIC's Trade and Economic
Four countries are progressing in the economic field very fast at this time. The US investment bank, Goldman Sachs, has used the term BRIC (Brazil, Russia, India, and China) for these four countries. The reason is that these four countries have made a strong group in the field of trade and economic progress. The growth ratio of national product of Brazil is more than 5 percent.

Russia is the only country where most of the billionaires are residing now. The population of Russia is gradually decreasing and its per capita income is on the rise. India has increased its contacts with Europe, the United States, and China. Its trade volume is increasing with BRIC group. The trade volume between India and China is around $52 billion, while between China and the United States it is $333 billion. The foreign exchange reserves of China are around $ 1.9 trillion.

World Bank Report
A statement by the Chinese prime minister has been published in the US journal the Newsweek in its 30 March edition, in which he has expressed concern over recession in the United States and decline in its economic situation. He further added that China has lent loans to the United States and it is worried over the payment. The growth rate of the Chinese national product is around 7 percent, while that of the United States and Japan is 3 percent, respectively.

Moreover, the United States, which stood first in the World Bank, now stands at No 5; whereas, China that used to be on No 10, now stands at No 1. The said group of four countries is increasing trade and prefers local currencies instead of dollars for the trade business. Therefore, the mutual trade of the currency group of these countries has been detached from dollar, which has very healthy effects, while the future of dollar seems to be in jeopardy.

Long-Term Cooperation
Now China has conducted negotiations regarding a trade agreement to conduct trade in local currencies. If the currency swap agreement is inked between China and Pakistan, it would prove helpful for Pakistan in saving its foreign exchange reserves. The European Union countries are already trading in local currencies through euro. Pakistan should also increase its trade links with BRIC group. Pakistan has a trade agreement with China at this time around. However, the trade ratio between both countries is far less than that of between India and China. Similarly, the trade could not be increased with Russia as well. Therefore, currency swap agreement would prove useful for regional countries.

Dollar was badly defeated in the currency market on 10 September, while the value of euro was witnessed increasing from 1 to 3 percent. The countries dealing in euro currency are strengthening credibility of euro in the world for their business credibility. The United State is playing with gold market to keep dollar intact and developing countries are experiencing its adverse effects. The offer to ink swap currency agreement is a result of Pakistan-China friendship agreement, which would play an important role in Pakistan's economic and financial stability. This is also an open proof that China is a true friend of Pakistan.