By LESLIE P. NORTON | MORE ARTICLES BY AUTHOR
The U.S. military is getting ready to leave Iraq and Afghanistan. The next threat is much bigger.
Even the most casual observer seems to know that China's economy has been growing at a roughly 10% annual rate for much of the past decade. Less recognized and arguably more important to the state of the world is the fact that China's defense spending rose even faster than that -- 12% or more a year between 2000 and 2009.
"The accelerating pace of China's defense budget increases is driving countries in the region, as well as the U.S., to react to preserve a balance of power and stability," says Jacqueline Newmyer, head of Long-Term Strategy Group, a Cambridge, Mass.-based defense consultant. "There is a real potential for arms races to emerge," she adds. "While once we assumed we'd have access to areas to conduct anti-terrorism or anti-insurgency operations, now we're compelled to think about preserving our ability to gain access to East Asia."
Stephen Rosen, Harvard's Beton Michael Kaneb professor of national security and military affairs, agrees. "All of us are clearly moving in that direction: We, the Japanese, the Indians. The only thing stalling it now are fiscal problems in Japan and the United States," says the former advisor to one-time presidential hopeful Rudy Giuliani.
Highlighting one of the fastest military buildups in history was China's debut of its stealth jet just hours before the January visit to Beijing by outgoing U.S. Defense Secretary Robert Gates. The fighter will rival the U.S.'s F-22 Raptor, the world's only operational stealth fighter. Larger than the F-22, with bigger fuel tanks, it will fly higher, faster and with less chance of detection. It's one of many Chinese weapons that will impede the U.S. military's ability to roam freely in the region.
Nelson Ching/Bloomberg News
An Asian arms race is getting under way, driven by China.
The investment implications for China's military modernization are only starting to take shape. But some U.S. companies like Lockheed Martin (ticker: LMT) and United Technologies (UTX), facing big budget cuts as President Obama withdraws the U.S. from wars in Afghanistan and Iraq, should get some offset from a new spending cycle worldwide. Like it or not, U.S. investors also are likely to hear more about Chinese companies such as Xi'an Aero-Engine (600893.China) and China Shipbuilding Industrial that are helping arm the country.
There's likely to be a steady stream of new IPOs for Chinese defense companies that some Western investors may choose to avoid. The effects go beyond equities. The sounds of new sabers rattling will stir both the bond and currency markets.