Something fishy in the Yellow Sea

China's land grab in the Western Pacific.

China is seeking to shift the strategic political balance in the waters of the Western Pacific.

Alpha Bites has previously highlighted China’s provocative actions and progressive land grab of the Spratly Islands in the South China Sea. Over the last few years, we have continued to monitor the territorial dispute between China and its smaller neighbours, including Malaysia, the Philippines, Taiwan, and Vietnam, as well as highlighting the ongoing tensions in the Straits of Taiwan. It is disturbing to read, therefore, that China is now creating friction with its neighbours in the strategically important Yellow Sea – located between the Korean Peninsula and the Chinese mainland.

Tensions are building in South Korea over Chinese fish farming installations in the Yellow Sea. China started constructing large-scale deep-sea salmon fish farms in 2016 for Norwegian companies. Shanlan-1 was the first to be built in the Yellow Sea in 2018, to be followed by Shenlan-2 last year. Both are within the ‘provisional measures zone’ where Chinese and South Korean exclusive economic zones overlap.

South Korea is now unhappy about fixed steel platforms which have recently been installed – that appear to violate the terms of existing agreements between the two countries.

China insists the structures are intended for fishing, but some South Korean politicians see them as the latest example of China’s ‘grey zone’ tactics to block other countries access to the South and East China Seas. Meanwhile, officials in the Philippines are concerned that China will use its fishing vessels and farms to underpin historic claims to parts of the region. The Philippines and China have repeatedly clashed in the South China Sea. Last week, China ‘seized’ a tiny Sandy Cay sandbank near to the Spratly Islands, which is likely to escalate the regional dispute.

This all comes at a time when Trump is looking to secure a rapid peace deal in Ukraine so that the US can focus on other matters. America’s military has been transitioning from the counterterrorist war in Iraq and Afghanistan to the Pacific and the growing threat from China. This is reflected in the trilateral UK-US-Australia AUKUS security pact under the Biden administration. Trump is now trying to strengthen America’s ties with India to confront the growing threat from China. The US has offered to sell F-35s to India to replace its Russian fighter jets.

The bigger picture – can the US and China reach an amicable trade deal? The two superpowers and largest economies in the world are now engaged in a trade war with Trump’s reciprocal tariffs.

Even if they do so, tensions in the Pacific are likely to remain elevated. Given Trump’s handling of the Ukraine-Russian ceasefire talks, America’s allies in the Pacific must be feeling uneasy.

What have we been watching?

Stock markets continued to recover last week, propelled by positive rhetoric on tariffs and some reasonable US economic data. Most major stock markets have recovered all of the losses incurred since infamous ‘Liberation Day’. The S&P 500 achieved nine consecutive days of gains by Friday close, the longest such run of gains in 20 years. Although, for overseas-based investors, the weak dollar suppressed the extent of the recovery.

UK blue chips have also enjoyed a period of sustained market positivity. The FTSE finished the week racking up fifteen consecutive sessions of gains – the longest winning streak on record!

Tangible tariff developments were scarce, but the US administration noted that it had received some very good trade proposals and that substantive movement on negotiations was likely. Reports also suggested that the US auto industry could see relief from tariffs for up to two years. Finally, progress with China remained elusive, but markets again finished the week with the expectation that these were likely to start soon.

US economic data generally remained resilient, with the US services sector still in expansion and employment figures still strong. However, consumer confidence data remained a concern, weakening to levels last seen in the spring of 2020. Whilst initial figures suggested that the US economy had contracted in the first quarter of the year, this was generally attributed to the significant increase in imports, as companies had stockpiled ahead of the tariff announcement on 2nd April.

US earnings season saw a number of major companies unveil earnings, including 4 of the ‘Magnificent 7.’ So far, the picture appears to be mixed, and understandably, companies have generally struggled to provide guidance, given the uncertainty of tariffs.

US inflation data was also fairly benign, albeit this may well have been the calm before the storm of the tariff effect, which is likely to see an initial spike in prices for the coming months. This, in combination with the strong US employment data, suggests that the Federal Reserve (Fed) is likely to stand pat this week and hold interest rates. Whether this then sees Donald ‘I know more about interest rates than the Fed’ Trump issue another broadside remains to be seen.

 

The UK had council and mayoral elections in certain areas which saw a surge in support for the populist party, Reform UK. This would have been very disconcerting for both the ‘main’ parties, but it is also still a long time until the next general elections. There is plenty for them to ponder, to challenge the ‘all things to all men offering’ of Nigel Farage. Elsewhere, populist parties saw defeat in both Canadian and Australian elections.

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Elsewhere, the oil market continued to weaken, reflecting both concerns around demand given the impact of tariffs and reports that OPEC+ would add capacity to the market. Nevertheless, at current prices, higher cost producers such as US shale are likely to start cutting supply and the largest independent US shale producer has declared that shale production has likely peaked.

The week also saw the US-Ukraine minerals deal finally signed, and whilst progress on peace negotiations remains glacial, it is notable that there has been a hardening of language by the US towards Russia. Peace in the Middle East also remained a distant prospect, with reports that the Israeli cabinet had approved a plan calling for the conquering of Gaza.

The UK had council and mayoral elections in certain areas which saw a surge in support for the populist party, Reform UK. This would have been very disconcerting for both the ‘main’ parties, but it is also still a long time until the next general elections. There is plenty for them to ponder, to challenge the ‘all things to all men offering’ of Nigel Farage. Elsewhere, populist parties saw defeat in both Canadian and Australian elections.

Finally, he might be one of the brightest humans on the planet, but even a genius like Elon Musk apparently has his limits. He has pledged to ‘significantly’ cut his role in the US government DOGE cost-saving programme and to allocate far more of his time to Tesla. That should provide some comfort to Tesla shareholders, where the latest earnings revealed a 70% fall in profits and a lack of forecast guidance, as ‘changing political sentiment’ could meaningfully hurt demand.

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