The last time there was a Taiwan crisis, China’s low-tech military was badly outmatched by U.S. forces. Not now. | Big Indy News
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The last time there was a Taiwan crisis, China’s low-tech military was badly outmatched by U.S. forces. Not now.

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Three French-made Mirage 2000 fighter jets taxi on a runway in front of a hangar at the Hsinchu Air Base on August 5, 2022. China conducted its largest-ever military exercises encircling Taiwan despite condemnation by the United States, Japan and the European Union.

Sam Yeh | AFP | Getty Images

The last time tensions soared between Beijing and Washington over Taiwan, the U.S. Navy sent warships through the Taiwan Strait and there was nothing China could do about it.

Those days are gone.

China’s military has undergone a transformation since the mid-1990s when a crisis erupted over Taiwan’s president visiting the U.S., prompting an angry reaction from Beijing.

“It’s a very different situation now,” said Michele Flournoy, a former undersecretary of defense for policy in the Obama administration. “It’s a much more contested and much more lethal environment for our forces.”

Chinese President Xi Jinping, unlike his predecessors, now has serious military power at his disposal, including ship-killing missiles, a massive navy and an increasingly capable air force. That new military might is changing the strategic calculus for the U.S. and Taiwan, raising the potential risks of a conflict or miscalculation, former officials and experts say.

During the 1995-96 crisis, in an echo of current tensions, China staged live-fire military drills, issued stern warnings to Taipei and launched missiles into waters near Taiwan.

But the U.S. military responded with the largest show of force since the Vietnam War, sending an array of warships to the area, including two aircraft carrier groups. The carrier Nimitz and other battleships sailed through the narrow waterway that separates China and Taiwan, driving home the idea of America’s military dominance.

“Beijing should know the strongest military power in the western Pacific is the United States,” said the then-defense secretary, William Perry. 

The Chinese People’s Liberation Army (PLA) back then was a low-tech, slow-moving force that was no match for the U.S. military, with a lackluster navy and air force that could not venture too far from China’s coastline, former and current U.S. officials said.

“They realized they were vulnerable, that the Americans could sail aircraft carriers right up in their face, and there was nothing they could do about it,” said Matthew Kroenig, who served as an intelligence and defense official in the Bush, Obama and Trump administrations.

The Chinese, taken aback by the U.S. military’s high-tech display in the first Gulf War, “went to school on the American way of war” and launched a concerted effort to invest in their military and — above all — to bolster their position in the Taiwan Strait, Kroenig said.

Beijing drew a number of lessons from the 1995-96 crisis, concluding it needed satellite surveillance and other intelligence to spot adversaries over the horizon, and a “blue water” navy and air force able to sail and fly across the western Pacific, according to David Finkelstein, director of China and Indo-Pacific security affairs at CNA, an independent research institute.

“The PLA Navy has made remarkable progress since 1995 and 1996. It’s actually mind-staggering how quickly the PLA Navy has built itself up. And of course in ’95-96, the PLA Air Force almost never flew over water,” said Finkelstein, a retired U.S. Army officer.

Gen. Mark Milley, chairman of the Joint Chiefs of Staff, has described China’s dramatic rise as a military power as a strategic earthquake.

“We’re witnessing, in my view, we’re witnessing one of the largest shifts in global geostrategic power that the world has witnessed,” Milley said last year.

The Chinese military now is “very formidable especially in and around home waters, particularly in the vicinity of Taiwan,” said James Stavridis, a retired four-star admiral and former commander of NATO. 

China’s navy now has more ships than the U.S., he said. Although U.S. naval ships are larger and more advanced, with more experienced crews and commanders, “quantity has a quality all its own,” said Stavridis, an NBC News analyst.

China is currently building amphibious vessels and helicopters to be able to stage a possible full-scale invasion of Taiwan, experts say, though whether the PLA is capable of such a feat remains a matter of debate.

During the 1995-96 crisis, China lost communication with one of its missiles, and came away determined to wean itself off global positioning systems linked to the U.S., said Matthew Funaiole, a China expert at the Center for Strategic and International Studies think tank. “It got them thinking that ‘we can’t rely on technology from other countries,'” he said.

Officials in the U.S. and Taiwan now have to take into account a much more lethal and agile Chinese military that can deny America the ability to deploy warships or aircraft with impunity, and even to operate safely from bases in the region, Funaiole and other experts said.

“The game has changed in terms of how stacked the deck is for the U.S. It’s much more of an even game. Whatever the U.S. does, China has options,” Funaiole said.

Outraged by House Speaker Nancy Pelosi’s visit to Taiwan this week, China has launched large-scale, live-fire military exercises, including ballistic missile launches, that have surpassed the drills carried out in the 1995-96 standoff. The exercises are located in waters surrounding Taiwan to the north, east and south, with some of the drills within about 10 miles of Taiwan’s coast. China once lacked the capability to conduct a major exercise in waters east of Taiwan, experts said.

China on Thursday fired at least 11 ballistic missiles near Taiwan, with one flying over the island, according to officials in Taipei. Japan said five missiles landed in its economic exclusion zone, near an island south of Okinawa.

This time, the U.S. government has made no announcements about warships moving through the Taiwan Strait. “Biden could try to do that, but China could put them on the bottom of the strait. That’s something they couldn’t do in 1995,” Kroenig said.

The White House said Thursday that the USS Ronald Reagan aircraft carrier would remain in the region as China carries out its exercises around Taiwan to “monitor the situation.” But National Security Council spokesperson John Kirby said that a previously scheduled ICBM test had been postponed to avoid any misunderstanding.

Despite the tough rhetoric between the two powers and the mounting tensions, China is not looking to start a war over Pelosi’s visit and is seeking to stage a show of force, not an invasion of Taiwan, former U.S. officials and experts said. 

For the moment, Chinese President Xi is focused on shoring up his country’s sluggish economy and securing an unprecedented third term at the next Communist Party congress later this year. But China’s newfound military might prompt overconfidence in Beijing’s decision-making or lead to a cycle of escalation in which each side feels compelled to respond to show resolve, former officials said.

There is a risk that Xi could underestimate U.S.’s resolve, and that he believes there is a window of opportunity to seize or blockade Taiwan in the next few years before American investments in new weapons alter the military balance, said Flournoy, now chair of the Center for a New American Security think tank.

“I worry about China miscalculating because the narrative in Beijing continues to be one of U.S. decline, that the U.S. is turning inward,” Flournoy said. “That’s very dangerous, if you underestimate your potential adversary.”

To prevent such an outcome, Flournoy argues both Taiwan and the U.S. need to bolster their military forces to deter Beijing and raise the potential cost of any possible invasion or intervention against Taiwan.

Finkelstein said he worries about an “action-reaction” chain of events that could lead to a conflict no one wants, and that the risk of miscalculation in Beijing, Taipei and Washington is “going sky-high.”

To keep a lid on the tensions, the U.S. and China need to pursue an intense dialogue to lower the temperature, he said. “We need to be talking to each other constantly.”

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Opec+ tipped to hold oil output levels steady

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Opec and its allies are expected to keep the group’s oil output targets unchanged when it meets this weekend, with one eye on the impact of European sanctions targeting Russia’s oil that come into force next week.

The Opec+ group, which includes Saudi Arabia and Russia as its two largest producers, could still decide to make a small production cut, according to people familiar with the group’s discussions, but are leaning towards rolling over production targets.

The group was due to meet at Opec’s headquarters on Sunday but this week changed course to hold the meeting online, in a sign many have interpreted as the group not planning any dramatic shifts in policy.

“It means that they’ve already taken a decision,” said Jorge León, a former Opec official now at energy consultants Rystad.

“Normally, if there’s no agreement ahead of the meeting then it makes sense to bring 23 ministers to the table.”

At Opec+’s last meeting in October, the first held face to face since the start of the coronavirus pandemic, the group agreed a cut to production quotas of 2mn barrels a day, but faced fierce pushback from the US and other consumer countries.

While Saudi Arabia argued Opec+ was reducing output because of concerns about a slowing world economy, the White House accused its longtime ally of effectively siding with Russia.

Russia has slashed gas supplies to Europe since its invasion of Ukraine, sparking off an energy-led cost of living crisis that has left many countries grappling with inflation.

The oil price reaction since the Opec+ cuts has been limited, however, with Brent crude, the international benchmark, trading at $87 a barrel on Friday — near where it was when it became clear in October Saudi Arabia was leading a push to lower production.

Oil prices had jumped immediately after Russia’s invasion of Ukraine and were trading at $120 a barrel as recently as June.

But they have cooled to roughly where they were trading at the beginning of the year, with Russian oil exports having only slipped slightly since the invasion and China’s zero-Covid policy crimping demand.

That may change in the coming weeks, however, as European sanctions barring seaborne imports of Russian crude come into effect on Monday, with restrictions on refined fuels to follow in February.

The G7 is also launching a so-called price cap that aims to keep Russian oil flowing to other countries like India and China — by granting waivers to sanctions targeting shipping Russian crude — but at a price point set by western powers. The EU agreed on Friday to set the price at $60 a barrel.

Russia has repeatedly said it will not deal with any country utilising the price cap, stoking concerns it could retaliate by severing oil pipeline flows to Europe that were exempt from sanctions.

Amrita Sen, at consultancy Energy Aspects said there were “huge unknowns”.

“It is prudent for Opec+ to hold steady rather than adding to the volatility.”

Officially the next Opec+ meeting after Sunday is not scheduled until June. But Sen said the cartel could take action later in December or early next year to boost or cut supply if required.

“We believe that if the market warrants it, they would meet at a short notice,” she said.

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Crypto broker Genesis owes Winklevoss exchange’s customers $900mn

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Digital asset trading group Genesis and its parent company Digital Currency Group owe customers of the Winklevoss twins’ crypto exchange $900mn as the collapse of FTX reverberates across the market.

New York crypto exchange Gemini, run by Tyler and Cameron Winklevoss, is trying to recover the funds after Genesis was wrongfooted by last month’s failure of Sam Bankman-Fried’s FTX crypto group, according to people familiar with the matter.

Gemini’s bid to recover the funds underscores how the crypto lending market, where investors lend out their coins in exchange for high rates of return, sits at the centre of the industry’s credit crunch.

Genesis is the main partner in Gemini’s “earn” programme, where retail investors lend out their coins in exchange for a fixed stream of returns. Gemini halted withdrawals from the scheme last month after Genesis said “unprecedented market turmoil” meant it did not have sufficient liquidity to make good on all of its redemption requests.

Gemini has now formed a creditors’ committee to recoup the funds from Genesis and its parent DCG, the people said. Gemini and Genesis declined to comment.

Genesis has been scrambling to raise funding and has hired investment banking boutique Moelis & Co to help it explore all possible options, according to the people familiar with the situation.

The creditor committee is in negotiations with both Genesis and DCG, the parent group of Genesis which is run by billionaire Barry Silbert, the people said. DCG was founded in 2015 and is one of the biggest investors in the crypto industry. It was valued at $10bn last year by investors including Singapore’s sovereign wealth fund GIC, Google’s venture arm CapitalG and SoftBank, and its subsidiaries include Genesis and investment manager Grayscale.

DCG itself owes money to its subsidiary Genesis; these intercompany loans have complicated the picture for creditors.

DCG has $2bn worth of outstanding debt, $1.7bn of which is owed to its own subsidiary Genesis through two loans. Over the summer, Genesis lost $1.1bn on a loan to collapsed hedge fund Three Arrows Capital. DCG took on Genesis’s liabilities in the process, subsequently owing $1.1bn to Genesis. Silbert told investors last week that DCG had separately borrowed $575mn from Genesis “on an arm’s length basis” to fund undisclosed investments and share buybacks from non-employee shareholders.

“Because of the way the liabilities are, they’re negotiating together,” said one person familiar with the matter about Genesis and DCG’s approach to creditors.

DCG declined to comment. The Financial Times revealed last week that some of DCG’s borrowing was used to fund its investments into another of its subsidiaries, Grayscale.

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Sam Bankman-Fried’s trading shop was given special treatment on FTX for years

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Alameda Research was allowed to exceed normal borrowing limits on the FTX exchange since its early days, Sam Bankman-Fried has said, in a concession that illustrates how the former billionaire’s trading shop enjoyed preferential treatment over clients years before the 2022 crypto crisis.

In an interview with the Financial Times, the 30-year-old described the outsized role Alameda played in launching the exchange in 2019 and how it had access to exceptionally high levels of borrowing from FTX from the beginning.

Bankman-Fried said that “when FTX was first started” Alameda “had fairly large limits” on its borrowing from the exchange but he “absolutely” wished he had subjected the trading firm to the same standards as other clients.

Asked if Alameda had continued to have larger limits than other clients, he said: “I think that may be true.” He did not specify how much larger Alameda’s limits were than those of other clients.

FTX and Alameda portrayed themselves publicly as distinct entities to avoid the perception of conflicts of interest between the exchange, which processed billions of dollars’ worth of client deals a month before its collapse, and Bankman-Fried’s proprietary trading firm.

Bankman-Fried’s comments shed light on longstanding special treatment for Alameda. The close links between the firms and the large amount of borrowing by Alameda from FTX played a key role in the spectacular collapse of the exchange, once one of the largest crypto venues and valued at $32bn by investors including Sequoia and BlackRock. 

Previously one of the most respected figures in the digital assets industry, Bankman-Fried has apologised for mistakes that left up 1mn creditors facing large losses on funds they entrusted to FTX, but has denied intentionally misusing clients’ assets.

Bankman-Fried said the origins of the large borrowing limits for Alameda came as a result of the trading shop’s early role as the main provider of liquidity on FTX before it attracted other financial groups.

FTX, like other big offshore trading venues, handled large volumes of derivatives that allowed traders to magnify their bets using borrowed funds — but professional firms are typically needed to make the market function smoothly.

“If you scroll back to 2019 when FTX was first started, at that point Alameda was 45 per cent of volume or something on the platform,” Bankman-Fried said. “It was basically a situation where if Alameda’s account ran out of capacity to take on new positions that would lead to risk issues for the platform because we didn’t have enough liquidity providers. I think it had fairly large limits because of that.”

By this year, he said, Alameda accounted for around 2 per cent of trading volume and was no longer the key liquidity provider on the exchange. Bankman-Fried said he regrets not revisiting the trading firm’s treatment to ensure that it was subject to the same limits on borrowing as other similar firms operating on the exchange. 

FTX lent to traders so they could make big bets on crypto with just a small initial outlay, known as trading on margin. FTX’s large exposure to Alameda was a key reason that weakness in the trading firm’s balance sheet caused a financial crisis that engulfed both companies.

Bankman-Fried has estimated Alameda’s liabilities to FTX at roughly $10bn by the time both companies filed for bankruptcy in November.

“From a volume, from a revenue, from a liquidity point of view, the exchange was effectively independent from Alameda. Obviously that did not turn out to be true in terms of positions or balances on the venue,” Bankman-Fried said.

John Ray, the veteran insolvency practitioner running FTX in bankruptcy, has criticised its former leadership for failing to keep Alameda and FTX separate. In court filings, he pointed to a “secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol”. 

Automatic liquidation, or closing, of souring positions was a key tenet of FTX’s risk management procedures and a core part of its proposals to change parts of US financial regulation. When a typical client’s trade started to go underwater, FTX’s liquidation mechanism was meant to start draining the account’s margin to protect the venue from a single trade causing a loss for the exchange.

However, Bankman-Fried said there “may have been a liquidation delay” for Alameda and possibly other large traders. He said was “not confident” as to whether Alameda was subject to the same liquidation protocol as other traders on the exchange, and that the treatment of the trading firm’s account was “in flux”.

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