Dragon Strike: The Millennium War

ONE

A thin frost covered the paving stones around Tiananmen Square: the most haunting symbol of Chinese Communist power. The lights on its edges shone through the smog which hung around the city. The bored and cold figures of the young soldiers stood guard around the square, a monument to the Party's success in ruling the motherland. Apart from them it was empty. A furtive, eerie silence lingered across its hundred acres and its buildings.

To the south was the Mausoleum of Mao Zedong, the twentieth-century emperor, whose turbulent revolutions had laid the seeds of today's robust one-party state. Out of granite he had built the Monument to the Martyrs of the People, 30 metres tall with 170 life-sized figures and a plinth, inscribed in his own handwriting Eternal Glory to the People's Heroes. To the east were the gigantic Museum of the Chinese Revolution and the Museum of History. To the west, the pillars and steps of the Great Hall of the People stretched more than 300 metres from one end to the other. Its banquet hall held 5,000 guests and the Hong Kong, Macau, and Taiwan Rooms served as memories to China's once lost territories and the humiliating dismemberment of the motherland.

To the north was Tiananmen Gate, where Mao Zedong proclaimed Communist Party victory in 1949 and where his enduring portrait still hung. Five bridges ran from there towards the gates of the Forbidden City. Tiananmen Gate was the link between the new and the old emperors. The Forbidden City was the Great Within. There were 9,000 rooms in over 250 acres once attended by 70,000 Imperial Eunuchs. Its doors opened onto the square, from which was drawn the power and patriotism for the whole of China. Tonight this was the reference point for the man who wanted to be emperor. A few hundred metres to the west, next door to the Forbidden City, were the high, red-painted walls of Zhongnanhai. The sign inside the main gate proclaimed in large Chinese characters: To serve the People. Along the wall on the west side of the gate a slogan read: Long live the great Chinese Communist Party. On the east wall another paid tribute: Long live the unbeatable thoughts of Chairman Mao. The broad, uncluttered roads, the drooping willows, frozen lakes, reception rooms, and luxurious houses were more modern but no less mysterious, no less prohibited, than the Forbidden City was in Imperial times. The symbols of power in the modern state were everywhere surveillance cameras, microwave dishes, and radio transmitters. The armed men in green uniforms at the gates belonged to the Central Guards Regiment, once known as the legendary unit 8341, which had protected China's leaders since the Revolution. Their success record was remarkable for such a turbulent country. The unit of more than 8,000 men secured the secrets of the Communist Party. For Western intelligence, this was one of the least penetrable centres of power in the world. Recruits to the Guards Regiment had to be illiterate or barely educated and were usually from peasant families in remote mountainous areas. Not one senior leader had been assassinated since 1949. The guards were told that the Chinese President would leave shortly before 0500 hours. When the motorcade of three stretched Mercedes 88-series limousines approached, the heavy wooden gates swung open. Four motorcycle outriders on turbocharged 1100cc BMWs flanked the convoy at the front and back.

They drove without flashing lights and sirens. It was a black convoy. The moon barely cut its image through the pollution. The streets were deserted. The homeless warmed themselves around fires under flyovers. The latest figures reported to the Politburo said the number of unemployed had now reached 250,000,000. That was the population of America wandering the country, homeless, tired, penniless. They had yet to become violent, but poverty had severed their bond to the Communist Party. Only fear kept them quiet.

Chinese leaders usually preferred to travel by the network of underground roads and railways, but tonight President Wang wanted to savour the city he was about to change for ever. No one spoke in his car. The driver turned west onto the Avenue of Eternal Peace. To the left, they passed the Ministry of Foreign Trade and Cooperation, which had so skilfully coaxed in foreign investment. America's blue-chip companies, Boeing, Motorola, McDonald's, and others, were entrenched in billion-dollar investments and twenty-year finance plans. The landmarks above the Socialist buildings were the neon signs Kenwood, Digital, and Remy Martin. All had ignored the pleading of human rights groups and continued their business with the world's biggest authoritarian government. All had made money and advocated constructive engagement with Communism which had allowed the economy to boom. On the right, they passed the Air China offices, the Minzu Hotel, and the Bank of China. They crossed the Second Ring Road and went by the Military Museum, which would soon have another glorious victory to add to its exhibits.

Further west, outside China Central Television, the regular guards had been replaced by a detachment from the Guards Regiment. They would also be outside the Xinhua (New China) News Agency building. Beijing's street lights became intermittent, the landmarks less important. In less than half an hour they passed the Summer Palace, the imperial retreat sacked by Western armies in the nineteenth century. The road wound round towards the Botanical Gardens, where they turned left into a country road flanked by peach orchards. Military aerials protruded from the ground. Antennas were on the hills in the distance. The Operations Command Centre of the People's Liberation Army was carved out of the mountain in the fifties when China believed it was under nuclear threat from the United States. The cavernous rooms were still used now.

This was the culmination of the President's career, which began when he was given a pistol by his father at the age of five. He was born in the early 1940s in the mountains of Yan'an where Mao was running the civil war against the Nationalists. Wang's father, Wang Fei, was a veteran of the Long March and a Marshal. As the Communist Party became entrenched in power, the young Wang made friends with the sons and daughters of the leaders. He attended the elite 101 secondary school, where he was a star of the soccer team. In the army, he served in Yunnan in the south-west and in Heilongjiang on the Russian border in the far north-east, but the turning point of his career was the command of a regiment in the war against Vietnam of 1979. The campaign was a military disaster. It was meant to teach Vietnam a lesson for overthrowing the Chinese-backed Khmer Rouge government in Cambodia: instead, the skilled Vietnamese fighters slaughtered Chinese troops as they charged across the border in human waves. China lost between 15,000 and 20,000 men. Wang managed to capture the main border town of Lang Son. He blew up the city centre before withdrawing, and was convinced then that China had to modernize its armed forces. It should never be humiliated again by a foreign army. He also harboured an ambition to avenge the deaths of so many Chinese soldiers. Now, almost a quarter of a century later, Wang was about to launch his terrible riposte. Before the week was over, the strategic map of the Pacific would be redrawn. China's honour would be upheld and Wang's position as paramount leader established as unassailable.

The motorcade turned right off the road into a straight driveway and under an arch decorated with a lone red star in the middle. The cars were expected. Sentries saluted. The convoy drew up in front of an innocuous ferroconcrete building. The lift to the underground operations centre was waiting. President Wang stepped out onto a gallery overlooking the control room. Below him was a large, well-lit oblong room and opposite was a screen stretching almost the full length of the long wall. It displayed the southern half of China and South-East Asia to the coast of Australia in the south. From their consoles operations staff, using a computer mouse, could point and click on any highlighted object and bring up all current intelligence, including the whereabouts of political leaders. They could bring up other areas which might be involved in the theatre of war, such as troop deployments in northern India on the border with Tibet, Russian border activities, and Russian naval deployment in the northern Pacific. The disposition of the PLA Air Force and PLA Navy were shown. Red stars identified their position, next to which dialogue boxes identified the size, type, and disposition of the forces in question. The key enemy positions identified were Vietnamese, Philippine, Indonesian, Thai, Singaporean, and Malaysian air force units and warships. The state of alert of defence forces on Taiwan was being closely monitored. Agents would be updating regularly any civil disturbance in Taiwan, Hong Kong, or the more unruly provinces of southern China. A special unit of analysts was watching the military movements of the larger foreign powers: the USS Nimitz carrier group, on exercises in the Sulu Sea off the west coast of the Philippines, the joint British, Australian, and New Zealand carrier group on a goodwill visit to Brunei, and American and Japanese air and naval forces in the East China Sea.

An aide to the President motioned him towards a flight of steps leading to the operations floor. As he began to climb down his presence in the room became known and a hush descended. When he reached the bottom he walked straight to a podium bedecked with the Chinese flag. An officer called the assembled officers and men to attention.

`For too long, Comrades,' the President began, `China's enemies have exploited the oil riches contained in the waters around the Nansha [Spratly] and Xisha [Paracel] Islands. Our scientists estimate that there are 10 billion tonnes of oil beneath the surface of our great southern sea. This is Chinese oil and China's 1.3 billion people need it. China is a poor, developing country and we cannot continue to import oil at the present rate demanded by the growth in our economy.

`Vietnam has illegally occupied the Nansha and Xisha Islands. Vietnam has ignored the consistent stand of the Chinese government and hindered our legitimate activities. The Chinese people love peace and do not hope for war. But the Vietnamese authorities are wrong in thinking that we are weak and easy to bully simply because we desire peace. This mission you embark upon this morning is a warning to President Tai to abandon once and for all his ambitions of swallowing up China's sacred territory.

`Comrades, these are momentous times. In a short while units of our heroic air force and navy will set out on a mission no less important than any our mighty revolutionary army has faced in the past. Success in the battle will ensure a bright future for our Party, our motherland, and our people.'

The roar of the engines from twelve Chinese Su-27 Flanker air-defence fighters crackled through Vietnamese airspace and soon the aircraft were over the coast above the target of Cam Ranh Bay. The Flankers gave protection to twenty A-7 attack aircraft, the new generation of Chinese ground-attack aircraft developed from the Russian Su-24 Fencer. They came in low on terrain-following radar. The pilots used head-up cockpit displays which showed their instruments without the need to look down. Once over the target, the Chinese unleashed a deadly cocktail of weapons on the Vietnamese defences. The weapons of choice for this operation were cluster bombs which, on release, sowed a path with smaller bomblets that had warheads for cratering concrete, delayed-action mines, and fragmentation for damaging `light structures' such as aircraft, vehicles, and personnel caught in the open. Most people woken by the noise had no time to escape before the bombs hit. Debris fell throughout Vietnam's main naval base. The mines did further damage later and delayed clearing-up operations.

As soon as the Fencers pulled up from the first attack, those with gun pods pulled round hard to strafe any undamaged elderly Vietnamese MiG-21 Fishbed fighter/ ground-attack aircraft lined up along the airstrip of the naval base. Lack of warning had prevented the Vietnamese from dispersing their aircraft to make them more difficult to attack. In less than five minutes, part of Vietnam's air-defence system lay in twisted wreckage. Many buildings and radars were damaged, and the control tower was temporarily out of action. But a heavier attack would be needed to complete the destruction. The Chinese pilots pulled away, climbing fast at over 1,000 kilometres an hour, their aircraft now light and manoeuvrable. A single message from the Chinese attack leader crossed the airwaves: `Dragon.' This told the next attack wave that the defences had been suppressed.

Immediately, there was a different kind of engine roar, the drone of twenty-four Chinese H-6 bombers pies of the Soviet Tu-16 Badger. The 2,000 kilometre radius of action with a bomb load of 5,000 kilograms was enough for the flight from Haikou airbase on southern Hainan Island. From the ground, the bomber group might have appeared unmanoeuvrable and vulnerable. They may have been subsonic but they were well protected. Pilots from twelve Shenyang J-8II Chinese-designed delta-winged interceptors guarded them. Their Russian Zhuk radar system could simultaneously track ten enemy aircraft and guide anti-aircraft missiles. They had extended their range to that of the bombers with air refuelling and ferry tanks, now jettisoned ready for combat. The tankers orbited 500 kilometres away to enable them to reach home after the attack.

The first air-to-air combat of the Dragonstrike war lasted less than thirty seconds. A J-8 pilot locked on to two elderly Vietnamese MiG-21 Fishbed fighters returning from a routine dawn patrol, and launched two missiles. The missile warning systems on the Fishbeds were old. They probably never knew what was coming towards them when the first aircraft was hit. The second aircraft was lucky at first because its missile's homer was confused by the two aircraft in formation and it passed between them. Unfortunately the formation was too close and the first aircraft, out of control, crashed into his number two and both exploded. There was only a small fireball because they were very low on fuel.

It was 0610.

The bombers approached the naval base in formations of three. They were met in the first instance by light anti-aircraft fire from two positions which had escaped the Fencer strike. Two of the escort J-8s silenced them with gunfire in short bursts. Figures running across the base, lit up by the fires, half dressed and just woken, fought back ineffectively with small-arms fire which always passed behind the targets. They were engulfed in the inferno when the bomb struck seconds later. Most died. The Chinese pilots had been given precise orders. The first H-6s finished off the work of the Fencers by turning the aircraft and their parking areas into a flaming mass of churned-up concrete and contorted metal using more cluster bombs. Aircraft fuel tanks exploded. Flames caught in the undergrowth of the dry, flat grassland around the base. The second group destroyed the command centre using conventional single-warhead bombs with radar airburst fuses to increase the area of damage on structures such as buildings. The third hit the fuel and ammunition dump with a mixture of cluster and airburst weapons. The flames caught the poor quality housing, weakened by the shock waves from the airbursts. The domestic gas pipelines were not deeply buried and they burnt, adding to the inferno. It was a catastrophe which would never have happened in a NATO military base. Cam Ranh Bay had been built by the Americans, but taken over by the Soviet Union in 1979. Survivability for a determined surprise attack had not been an issue.

Even before the H-6 bombers had finished their task, another squadron of Fencers approached the base. Each carried four C-802 anti-ship missiles. Within minutes the waters in the harbour of Cam Ranh Bay were ablaze, although some missile homers were confused in the congested space and took their warheads to unexpected targets. If anything, this increased the chaos. Again, the message received from the air commander was simply `Dragon'.

800 kilometres north, the Chinese pilots found success more elusive. Thick cloud hung over the main Vietnamese airbase at Da Nang. The twelve Su-27s, twelve Fencers, and twelve PLA Navy Jang Hong 7 fighter-bombers made their approach for the attack at 0620. There had been a crucial ten-minute delay. The slower JH-7s held up the group.

The PLA Air Force had never wanted the navy along. The air force had long ago rejected the JH-7's outdated airframe, avionics, and Rolls Royce Spey engines which left it underpowered by modern standards. But the Military Commission insisted on a joint operation. Politics won over practicality and the animosity continued into the cockpits. The weather was appalling. Visibility was bad and there was risk of flying into the ground. The JH-7 group commander misread his terrain-following radar and climbed too high. The aircraft were picked up minutes before the Su-27s electronically jammed the Vietnamese radar. It was enough time for fifteen Vietnamese aircraft to become airborne.

The Vietnamese MiGs should have been no match for the faster and more versatile Su-27s, whose avionics and attack capabilities were greatly superior. But the Vietnamese pilots were more familiar with their old aircraft, and better trained in realistic combat tactics. Vietnam gave its pilots at least 16 flying hours a month. It was less than half of America's C-1 (fully combat ready) 33 hours a month, but twice the training given to the Chinese. The first Chinese casualties were two of the less manoeuvrable JH-7s, and before the sleeker Su-27s became orientated one was hit by a Vietnamese air-to-air missile. Another JH-7 was downed by an SA-6 missile fired from the ground.

Then the Vietnamese pilots turned west. Over the next thirty minutes, the scramble alarm was sounded from north to south throughout the narrow strip of country which is Vietnam. Pilots took to the skies from their bases, and flew their aircraft out of Vietnam into the two countries they had used as traditional sanctuaries from combat — Laos and Cambodia. In wars against its more powerful twentieth-century enemies, the French, the Americans and the Chinese, Vietnam concealed its combat forces and saved them to fight at a place and time of its choosing. The enemy won some of the battles: Vietnam won the wars. The Chinese pilots badly damaged Da Nang airbase, but when the military successes were recounted in the People's Daily, the number of Vietnamese aircraft destroyed was not mentioned, nor were the Chinese losses. By the time the Vietnamese pilots had touched down in Cambodia and Laos, the first news of the attack had reached the White House.

It was 0645.

From the Russian-built M-17 troop transport helicopter, Discovery Reef in the Paracel Island group looked like two large horseshoes placed end to end. In the shallow waters in the middle was Discovery 1, a 160 man oil well undergoing tests and due to begin production in April. The thirty men working there first heard the throb of the rotor blades, then watched the chopper's nose dip as it swooped down towards them. In the distance, in the medium swell of the South China Sea, six fibreglass raiding craft powered by twin 150 horsepower engines sped away from the Yukan class tank-landing ship 927. Each craft carried ten men towards the rugged terrain. The helicopter hovered menacingly. Warning shots were fired into the water. The boats slowed from 40 knots. The Chinese Marine commandos came ashore among the inhospitable rock faces and reefs and took up positions. With them was a unit from the PLA's special film unit, which had recorded Chinese military history since the Revolution. This morning China heralded its total control of the islands and rugged atolls which were an inseparable part of its sovereign rights.

The commandos were under orders to minimize bloodshed. Discovery 1 was an Anglo-Japanese joint venture involving a subsidiary of British Petroleum and Nippon Oil. Once the water-borne Marines had secured the ground, the helicopter landed on the rig's helipad with another twenty troops. A burst of small-arms fire into the air convinced the maintenance crew that spanners and wrenches were no match for automatic weapons. The communications officer had enough time to broadcast an alert before a Marine stopped him at gunpoint and changed the frequency. The chopper left. All but two of the raiding craft were returned to the supply ship. The PLA film unit covered the raising of the flag. The commandos sang the national anthem. Then both attackers and captives stayed silent as they were addressed by President Wang Feng through the PA system which the Marine signals corporal had rigged up through the radio.

`Like Hong Kong, Taiwan, Macau, and Tibet, the territory you have recovered today is an inalienable part of our motherland. In recent years there has been a situation of the islands and islets being occupied, sea areas being carved up, resources looted, and marine rights and interests being wantonly encroached upon. But we gave serious attention to the strengthening of our naval and air force construction. And today we proclaim victory. You should all be proud of what you have achieved, not only for your success today, but also for the direct bearing it will have on our country's thousand year cause, and on our descendants for all generations to come.'

That was the last action China had to take to secure the whole of the Paracel Island group and was the easiest task assigned to the Marine units. In the Spratly Island group, 800 kilometres to the south, the offensive would not go so well.

China had never carried out an air and naval operation of this magnitude before. The area to be seized and held covered 340,000 square kilometres. The targets were twenty-one islands and atolls, fifty submerged land spits, and twenty-eight reefs, most of which were underwater. These rugged and inhospitable places were of use as strategic footholds and as a source of oil and mineral wealth. Only soldiers lived there, with their national flags. Most of the camps were erected on stilts, high enough to avoid the waves which swept over the rocky landfalls and the tides which immersed the bases in water. The Spratly Islands were nightmare postings.

The northern and easternmost reefs were claimed by the Philippines. The southernmost islands were occupied by Malaysian troops. One, Terumbi Layang-layang, had an airstrip and a naval base. To the west were Vietnamese forces.

China's only outpost of any substance was Fiery Cross Shoal. It was 26 kilometres long and 7.5 kilometres wide. In 1988, Chinese engineers blasted the coral with explosives to allow warships through the reef. They built a wharf, roads, a helicopter hangar and landing pad, and a two-storey barracks covering 1,000 square metres. The upkeep had been shoddy. The sanitation and water supplies were broken down. The Marines, who had been living there cheek by jowl, cheered when they heard their orders. They wanted to be anywhere but Fiery Shoal.

The first Chinese Z-8 Super Frelon helicopter took off at 0620 with ten Marines on board. Soon eight were in the air heading towards a cluster of Vietnamese-held reefs 70 kilometres to the east. Seven Su-27 Flankers joined them for air support from their base at Lingshui on Hainan Island. They were refuelled 120 kilometres out from three Chinese Il-76 tankers, converted from transport aircraft. Each aircraft could run out three fuel pipes with refuelling drogues on the end, one from each wing and one from the under-fuselage.

The Su-27s were able to stay above the conflict area for at least thirty minutes, and complete the 1,500 kilometre round trip using tanker support. Months earlier, there had been fractious disagreement among the Communist Party leadership as to whether the PLA could launch Operation Dragonstrike without an aircraft carrier to project power throughout the South China Sea. One document leaked from the Central Military Commission argued that 40 aircraft on board a carrier could achieve the combat effectiveness of 200 to 800 land-based fighters. But to obtain, equip, and train crews for carrier operations takes years. Disagreements about the timing of carrier capability ranged from as late as 2015 to as soon as 2005, which would be a Harrier jump-jet operation. But the political leadership in the Communist Party said that even that might be too late. `By then,' said the document, `American hegemony would have taken over our coastal cities as the European powers did in the nineteenth century. The Americans would attempt to split China through whatever means and the motherland would be dismembered again.'

In the mid-nineties the Chinese air force carried out a number of in-flight refuelling tests. They negotiated with Israel for technology, but the deal never went ahead because of pressure on Israel from Washington. Western intelligence believed the Dragonstrike refuelling technology had been bought from the Pakistanis, and the refuelling drogue units made in China. The probes to take the fuel were simply bolted into the refuelling pipes of the fighters and helicopters and the valve nozzles copied from the standard NATO type. It worked, and gave potentially unlimited extra range and flexibility, although the clumsy tankers were vulnerable unless well protected.

The seven Su-27s headed for Vanguard Bank, at the south of the Spratly group and occupied by Vietnamese forces. Because of thick cloud and poor visibility, the pilots at first failed to identify the correct islands. They flew over them once before realizing they had gone too far, giving the Vietnamese a first advantage. Three SA-6 missiles were fired from the ground, but the Chinese pilots dropped clouds of chaff-like metal strips and turned sharply at maximum G. The force generated by this manoeuvre pushed their bodies deep into their cockpits despite their anti-G suits, which squeezed their legs and abdomen in an attempt to prevent the blood pooling in the legs and draining the brain of life-giving oxygen. The SAMs missed. Then four Vietnamese MiG-21 Fishbed fighters entered the conflict from their base in Ho Chi Minh City, destroying two of the Su-27s with air-to-air missiles while they were distracted in trying to evade the SAMs. The surviving Chinese aircraft separated, and with their superior manoeuvrability found two of the Fishbeds. The two Vietnamese pilots dived to 120 metres and pulled up, each with an enemy plane locked on. One Fishbed exploded on the impact of a missile. The second started to lose a wing. The pilot ejected. The plane spiralled into the sea. Then an Su-27 pilot, distracted by the explosion of the Vietnamese plane, was killed in a direct hit on the cockpit by another SA-6.

Down at surface level, the twin 100mm gun on the bow of China's Luhu class destroyer Haribing opened up on the Vietnamese positions. The destroyer was also equipped with French surface-to-surface missiles, Italian torpedoes, and American engines. It was a example of the mixture of systems in China's armed forces, causing problems in training, resupply, and maintenance. For four minutes the 15 kilogram shells pounded the reef while the dogfight continued above it. Then a Vietnamese Shershen class fast attack craft joined the battle, heading towards the Haribing at 45 knots. The Principal Warfare Officer in the combat room first gave the command for a surface-to-air missile to be launched. It destroyed another Su-27. Five seconds later, he fired two 533mm torpedoes at the Haribing. One passed in front of the bow. The second hit. As the Vietnamese warship sped away, the Haribing fired a surface-to-surface missile. A Zhi-9a Haitun helicopter also managed to take off, and caught up with the Vietnamese. Then suddenly it was enveloped in a rain squall, lost visual contact, and had to concentrate on not ditching into the sea. The SSM veered off course, allowing the Vietnamese to escape.

The damage to the Haribing was not critical. The gun was still in action, although the mortar, used for anti-submarine warfare, was unworkable. Another seven Su-27s had now come in from Hainan. The dogfight was over. The eight transport helicopters from Fiery Cross Shoal were clear to land the troops. They came in under fire, but the Vietnamese had already taken heavy casualties. Their resistance had weakened. Chinese troops took only 23 prisoners. They found 106 bodies. The Chinese flag was placed on Vanguard Bank at 0645. Within the hour it had been raised on other Vietnamese outposts nearby.

There was fighting throughout the Spratly Islands that morning, while reef by reef and atoll by atoll China pushed through its territorial claim with military force. Philippine troops put up a lacklustre fight, then surrendered. Malaysia and Brunei had told their troops to hand over their positions without resistance. Apart from Vanguard Bank, the fiercest battle took place around the craggy coastlines of Itu Aba Island, Sand Cay, and Spratly Reef, where Vietnamese and Taiwanese troops joined forces to hold off an invasion force of Chinese Marines. At first, they set up a line of fire at two jetties. Then, keeping that covered, they waited as the Marines tried to land on the small beach on the other side of Sand Cay. They mortared the landing area and destroyed the boats with heavy machine-gun fire. They mortared the back of the beach where the Chinese Marines were running for cover. They turned the beach itself into a killing zone. Most of the Chinese were killed over the next fifteen minutes. The wounded were picked off by snipers, until two Chinese Zhi-9a helicopters came in with covering fire. The Taiwanese and Vietnamese made a controlled retreat, sacrificing a small vanguard group. They escaped in a Taiwanese PCL type offshore patrol craft and a Vietnamese Poluchat class coastal patrol craft. Despite her speed of 20 knots the helicopter crew were able to target the Vietnamese vessel. Those on board the Taiwanese warship survived.

The secure telephone rang on the desk in the Oval Office of the White House. President James Bradlay had been elected only three months earlier in a landslide victory. Charismatic, good-looking, youthful, though not young, a family man who, unlike his immediate predecessor, felt no need to prove his manhood with every pretty stranger he met, Bradlay had seized the opportunity to preach the gospel of renewal after riots had turned many inner cities of America into no-go zones for most of the summer. He had galvanized the electorate when in Chicago he faced down an angry crowd on the Southside, quelling what the authorities feared would be the worst civil unrest in that city since the Democratic Convention of 1968. In his inaugural address, less than a month earlier, he was concerned almost solely with domestic issues, especially the need for a new covenant between black and white. He paid ritual homage to the United Nations, the need for Japan to open its domestic market to foreign trade, and to his administration's desire for a cooperative relationship with China.

He had stopped in at the Oval Office to look through papers on welfare reform before going on to a small dinner in the White House. The telephone interruption reminded him of the time. Only a handful of his closest colleagues had the number. Bradlay picked it up. The caller was Marty Weinstein, his National Security Adviser. `Mr President, I'm sorry to disturb you,' he said.

On the eve of Operation Dragonstrike China was an economically powerful one-party state, ruled behind the scenes by the People's Liberation Army, a military force of two million men under arms. At the leadership's disposal were strategic nuclear weapons, a blue-water navy and a modernized air force.

The economies of Russia, the United States, and Europe were inextricably linked with China. Boeing, Motorola, Mercedes, Siemens, GEC, and other multinationals had factories and investment locked up in the Chinese market. The Russian arms industry, the main survivor of the Yeltsin years, supplied much of the equipment and technical know-how to China's growing military-industrial complex, especially its air force and navy. Western democracies had become resigned to Chinese human rights violations. The hope that the country would fragment like the former Soviet Union had proved to be an illusion.

The Chinese economic miracle had astonished the world, but the Communist Party's leaders were themselves only too aware of the problems posed by sustaining such rapid growth. Corruption was widespread; food shortages returned to haunt the Party. It had to keep 1.3 billion people believing (or at least not resisting the thought) that only the Party held the Mandate of Heaven to rule China. To bolster its popularity, the Party developed an ideology of authoritarian nationalism which stressed the unique qualities of Chinese culture and civilization. It reminded the Chinese people that democracy was alien to their society. It invoked the great sage Confucius, who said the bonds that united the Chinese nation were like those which held the family together: respect for one's parents and for the institutions of government. Opponents of the regime argued that this selective mixture of nationalism, authoritarianism, xenophobia, and expediency was not much more than an Asian form of Fascism. They warned that China posed the greatest threat to world peace since the rise of Fascist Germany and Italy in the 1930s.

By the mid-nineties, the Party leadership was convinced that the United States planned to contain China's growth. Confirmation came in March 1996, when United States warships were deployed in the South China Sea to protect Taiwan during Chinese military exercises. The PLA vowed that it would never again be humiliated by America. Funds being used for civilian infrastructure development were diverted to accelerate the modernization of the military. The areas of concentration were the navy, air force, and missile research. A strategic partnership with Russia was forged.

There were also economic reasons to build up the nation's military capability. China's independence in energy supply was being eroded by its rapid development. To maintain the momentum China had become a huge net importer of oil. It felt vulnerable to the vagaries of the international oil markets. The government believed the only largely untapped reserves of oil were around two remote and uninhabited groups of reefs and shoals in the South China Sea known as the Spratly and Paracel Islands. They were 800 kilometres apart, and lay in one of the world's busiest waterways. Oil exploration had been limited because the territory was contested. China had a historic claim to the whole of the South China Sea, but its ownership was disputed by several countries in the region: Vietnam, which argued a history of occupation and development of the islands, and the Philippines, Malaysia and Indonesia, all of which could mount plausible claims to some of the islands and a lot of the South China Sea. These waters, which carried the shipping routes between the Indian and Pacific Oceans, were a vital waterway for all countries of the region, especially Japan, which had to import virtually all the energy it consumed. Nearly a quarter of world ocean-going trade crossed them each year.

By the end of the twentieth century, as the forces of national pride and economic vulnerability converged, East Asia became embroiled in an arms race. There was a sense that the serene days of living under the security umbrella of the United States would soon end. America was tired. Its carping about human rights had made it unpopular among nations whose Western-educated leaders preached the virtues of strong leadership and warned of the dangers to social cohesion of Western decadence. The region felt it was ready to look after itself; it was impatient to do so. Many of the South-East Asian countries prepared to defend themselves. Both Japan and China were jostling to inherit the mantle of regional leader. Yet Japan was unwelcome because of its record of colonization during the first half of the twentieth century; China because of its cultural chauvinism.

Defence spending in East Asia became the highest in the world. Between 1994 and 1996, budgets in some countries went up by more than 20 per cent as they commissioned new aircraft and fighting ships. Japan became the highest spender on defence of any country in the Pacific apart from America. Its security relationship with the United States, once rock solid, was cracking under the strain of yet more vociferous American demands for Japan to open its market, and a desire among a new generation of Japanese leaders to see the country stand on its own two feet. China's plans remained veiled in secrecy. It designed fighter aircraft with Pakistan. It bought warplanes and fighting ships from Russia. It hired teams of Russian scientists to work on delivery systems for long-range missiles. It dispatched agents to Europe, America, and Australia to bring back technology which was denied to it by the international community on the open market. Within a few years, it had created the ability to project its power regionally through combined naval and air operations. What it lacked in technology it made up for in human ingenuity.

The overriding consideration for China's leaders had remained unchanged since Mao proclaimed the founding of the People's Republic in October 1949: preservation of Communist Party rule. Yet, by the dawning of the twenty-first century, the Party's grasp on power was uncertain. The leadership's fear of luan (chaos) was palpable. They needed a fresh mandate. A war to recover sovereign territory rapidly moved from being a plausible to a necessary way ahead. In pursuit of their aims, China's leaders were prepared temporarily to forfeit economic development for nationalism, and to take casualties in war. President Wang concluded that none of China's smaller Asian neighbours would risk conflict, nor were they united enough to confront China as a single military force. Only Vietnam would fight. Wang knew from personal experience how well the Vietnamese could fight. This time, however, the outcome would be different. Historically, the Chinese and Vietnamese were known as `brother enemies'. The Vietnamese Communist Party had already held provincial-level elections and had hinted at full parliamentary and presidential elections within the next five years. It had signed a bilateral defence treaty with France, its former colonial power.

Dragonstrike, the Chinese military occupation of the South China Sea and the humbling of Vietnam, would receive widespread support throughout China. It would legitimize the Party's grip on power, secure energy supplies, challenge the military power of America, and declare China the regional leader in East Asia.

The interruption came at the end of an informal dinner with Michael Stephenson, the Prime Minister, Charles Wentworth, the Foreign Secretary, Peter Makinson, the Party Chairman, and their wives at No. 10 Downing Street, the Prime Minister's official residence in London. A light-hearted conversation about the party's bank overdraft was quickly forgotten when a duty officer handed the Prime Minister news of the Chinese attacks.

The Chairman and Secretary of the Joint Intelligence Committee, together with the Chief of Defence Staff and the Defence Secretary, were contacted and told to stand by. Staff monitored two television sets, tuned to the BBC and CNN. Downing Street opened lines to Permanent Joint Operations Headquarters in Northwood in North London, Britain's joint military command centre. Minutes before informing Downing Street, Northwood had itself been alerted by Government Communications Headquarters (GCHQ) in Cheltenham; GCHQ had been informed by Britain's Far East listening post in Darwin, northern Australia.

Wentworth was quickly told that the White House regarded the attack as a serious international crisis and was planning a response by 0045. It was not known exactly what line the Americans would take. The Prime Minister asked for a verbal report and draft statement by 0025. His Press Secretary, Private Secretary for Foreign Affairs, and a senior official from the Foreign and Commonwealth Office drew up Britain's reaction. The Foreign and Commonwealth Office made sure the Press Association and Reuters were ready to put it out immediately.

On the other side of Downing Street, at the Foreign Office, officials collated the assessments of Britain's representatives in Hanoi, Beijing, and elsewhere in the region, in time for the Foreign Secretary to present them for the 0045 meeting. From Hanoi the Ambassador reported that there were 1,750 permanent British residents in Vietnam and possibly up to 5,000 tourists. Unconfirmed reports from the bombing were one British engineer dead and two slightly injured at Cam Ranh Bay. Russians, French, Germans, Americans, and other Westerners were believed to be hurt. The Consul-General in Hong Kong said that eighty-seven British nationals were listed as working on the rigs in the South China Sea. An unknown number of Hong Kong Chinese with British Dependency passports were also employed there. At least seven might have been on Discovery Reef at the time of the attack. It should be assumed that they were being held by Chinese troops. In a telephone conversation with the Resident Clerk (Duty Officer) at the Foreign Office, the Consul-General in Hong Kong said the situation in the territory was volatile: `We must do everything to retain the confidence of the Chinese. They think we are trying to destabilize the situation here. This South China Sea adventure could not have come at a worse time.' The British Ambassador in Beijing spoke on the telephone from a secure room inside the embassy known as the Wendy House. He had not had official confirmation of the attacks. His information was coming from CNN and the BBC. He urged London to treat the Chinese leadership carefully. `These are highly intelligent and highly motivated national leaders who are facing a domestic crisis. It may be a dictatorship, but it's fracturing. Corruption's rampant, food shortages abound, and there's a shortage of oil. My advice is to tread carefully and see what they say. China is a nuclear power with large ambitions.'

By 0050 Wentworth was nearing the end of his report. He noted that Britain had treaty obligations to Malaysia, one of the claimants to the South China Sea islands, under the Five Power Defence Agreement drawn up in the 1960s. If the Malaysians asked for Britain to honour it, Australia and New Zealand would also be involved.

The Prime Minister asked: `What would they do?'

The Foreign Secretary replied: `New Zealand, for what it's worth, would support us. Australia, which is more important, may well take a lead from Asia. It would have to consult its Asian neighbours. It doesn't have the European Union. It doesn't have the North America Free Trade Agreement. If it puts a foot wrong in East Asia, it loses the only operational trading bloc to which it aspires to be a member.'

Wentworth then told the meeting that the Ambassador in Paris reported that France's reaction to the attack on Vietnam would be volcanic. The Ambassador had recalled a conversation about Indochina with the French President, who said bluntly: `We once owned the jewel of Asia. We lost it in 1954. We don't intend to lose it again.' He pointed out that after the Vietnamese provincial elections Paris and Hanoi had begun drafting a mutual security treaty. France might use this to take a military position in support of Hanoi.

A message from the Ambassador to the oil-rich sultanate of Brunei reminded the ministers that a British naval group led by the aircraft carrier HMS Ark Royal was paying a visit to Brunei on its way to Australia. Deliberately, this was not included in the Foreign Office statement which came out in time to lead the 0100 radio news bulletins:

`The British government is deeply concerned about the violence and loss of life in Vietnam and the South China Sea. We are in contact with our European and American allies and urge China to withdraw from disputed territory to avoid further bloodshed. The government calls on China and Vietnam to uphold the pledges made over many years: that sovereignty disputes in the region should be resolved through peaceful means. `The government is particularly concerned for the safety of British nationals in the war zone.' As soon as the statement was broadcast, both BBC and CNN switched to the live press conference from the State Department in Washington.

Nguyen Van Tai, President of Vietnam, had planned a visit to Hue, Vietnam's old imperial capital, that morning, but for the past forty-five minutes he and his staff had been poring over maps of Vietnam and the South China Sea. Tai, the man known as Vietnam's Gorbachev, an honour he did not fully accept, sat at the head of an ornate nineteenth-century French table, his generals and civilian advisers on either side. Two portraits hung on the wall opposite: Ho Chi Minh, the founder of Communist Vietnam, and General Giap Vo Nguyen, who delivered defeat to the French at the siege of Dien Bien Phu in 1954. As the faces of these two great Asian leaders looked down upon their successors, President Tai was concluding his summing up.

`So you are telling me, gentlemen, that our best course of action is inaction,' Tai said. `I should order our air force to stay in Laos and Cambodia. Our navy, or what is left of it, I should keep at sea running away from China's attacks. So be it and so ordered. General Diem, see that the air force and navy are informed immediately. I am not, however, entirely happy with the idea of doing nothing other than protecting our military assets. I want the Chinese to pay for what they have done. We should unleash a reign of terror along our mutual border. Nothing big. Small units only. I want our best troops held back to defend Hanoi. What I have in mind are guerrilla operations. Surgical and clean, but designed to produce maximum impact. General Thu, please see to it. Finally, I think we should involve the international community, especially France and the United States. I will put in a call to President Dargaud and I will see the US Ambassador here.

`In the meantime, I want a full statement issued over Radio Vietnam condemning the Chinese unequivocally. I also want a clear exposition of the legitimacy of our claim to the islands. It should conclude with a call to the United Nations to intervene. That is all.

' Radio Hanoi broadcast:

`This morning at dawn the Chinese government launched an unprovoked attack on our air force and navy aimed at destroying our capacity to defend the nation. This is a dagger aimed at the heart of the Vietnamese people who in 10,000 years will never forget this perfidious act. At the same time the Chinese navy has laid siege to the oil-production facilities on the Hoang Sa (Paracel) and Truong Sa (Spratly) Islands in the Bien Dong Sea (South China Sea). The government of the Democratic Socialist Republic of Vietnam calls on China to withdraw immediately and renounce its rebel claim to Vietnamese territory or accept the consequences of protracted war.'

`In the face of the extremely serious situation in the Truong Sa archipelago area, since December last year Vietnam has three times proposed to the Chinese side to open talks for the settlement of differences concerning the Truong Sa archipelago and other disputes over the common border and the Hoang Sa archipelago. (Notes respectively dated 17th December and 23rd December.) At the same time it proposed that pending the settlement of disputes by means of negotiations "the two sides should refrain from the use of force to settle disputes and avoid any clashes that may aggravate the situation.' (Note dated 26th December.)

`The Chinese authorities slanderously labelled the Vietnamese proposals "hypocritical" in order to reject negotiations with Vietnam and have not responded to Vietnam's proposal that the two sides undertake not to use force to settle disputes. All this shows that China continues implementing a policy of hostility against Vietnam, and continues its acts of usurpation in the Truong Sa archipelago. In the face of China's policy of reliance on the use of force, the Democratic Socialist Republic of Vietnam is determined to defend its sovereignty and territorial integrity. Chinese actions in the Hoang Sa archipelago previously, and in the Truong Sa archipelago at present, in fact are nothing more than part of China's expansionist and hegemonist policy towards Vietnam and South-East Asia.

`These two archipelagos lie 800 kilometres from each other. They consist of a large number of islands and coral reefs and shoals. The total emerging area of each archipelago is about 10 square kilometres. The value of both archipelagos lies in their strategic position in the Bien Dong Sea and their great riches of oil and natural gas. Vietnam's case is that it has maintained effective occupation of the two archipelagos at least since the seventeenth century, when they were not under the sovereignty of any country, and the Vietnamese state has exercised effectively, continuously, and peacefully its sovereignty over the two archipelagos until the time when they were invaded by the Chinese armed forces.

`Relations between Vietnam and China have not developed as well as the Vietnamese people hoped. Along with the escalation of provocative acts and land-grabbing operations along the land border, in January 1974 Peking used a military force to attack and occupy the remaining western group of islands of the Hoang Sa archipelago. With the war by proxy of the genocidal Pol Pot clique in south-western Vietnam, the war of 1979 involving 600,000 Chinese troops in the northern border regions of Vietnam, and now this disgraceful attack, Peking has brought Sino-Vietnamese relations to their worst. The realities of the last twenty years and more have clearly shown that China has turned the tables, switching friends and foes and brazenly carrying out an anti-Vietnam policy.

`Throughout the past thousands of years, China had never exercised sovereignty over these two archipelagos. What China did, though, was by the gradual use of military force between 1956 and 1999 occupy the Hoang Sa archipelago. And what she has been doing since the end of last year is to begin threatening the occupation a number of rocks and reefs in Vietnam's Truong Sa, again by use of military force. Thus, China is translating into action the 30th July 1997 declaration made by former Chinese Foreign Minister Geng Wuhua: "The Chinese territory spreads down to the James Shoals near Sarawak (Malaysia)… You can carry out exploitation as you wish. When the time comes, however, we will retrieve those islands. There will be no need then to negotiate at all, these islands having since long ago belonged to China."

`Chinese claims to sovereignty over the islands are nonsense. Peking has cited the astronomical surveys by the Yuan Dynasty (thirteenth century) in Nanhai to conclude that the Xisha archipelago lay within Chinese territory under the Yuan. Nevertheless, it is written in the official history of the Yuan Dynasty itself that the Chinese domain under the Yuan Dynasty extended only to Hainan Island in the south and not beyond the Gobi Desert in the north, that is to say, it did not include the islands which China calls Xisha today. China has cited a patrol cruise by Vice-Admiral Wu Sheng in the years 1710 to 1712 or so during the Qing Dynasty alleging that Vice-Admiral Wu himself set out from Qiongya, proceeding to Tonggu, Qizhouyang, and Sigengsha, making a 5,000 kilometre tour of inspection. On this basis, China asserts that Qizhouyang is the present-day Xisha archipelago area which was then patrolled by naval units of Guangdong Province. Qiongya, Tonggu, and Sigengsha are names of localities on the coast of Hainan Island, while Qizhouyang is a maritime zone lying between the north-eastern coast of Hainan Island and the group of seven islets situated to the north-east of Hainan. So that was just an inspection tour around Hainan Island. Peking's conclusions are obviously contrary to historical and geographical facts.

`Besides, if maritime patrol and inspection tours are presented as an argument proving Chinese sovereignty over the two archipelagos, one may wonder whether China is going to claim sovereignty over such territories in relation to which Zheng He under the Ming Dynasty seven times (between 1405 and 1430) dispatched a large naval fleet with more than 60 gunships and 28,000 men to impose Chinese hegemony on territories within the Indian Ocean zone and undertake territorial exploration in the Red Sea zone and along the coast of eastern Africa.

`Comparing the respective cases of Vietnam and China, one can see that China has never administered the Hoang Sa and Truong Sa archipelagos and it is all the more impossible to say that China has exercised effectively, continuously, and peacefully her "sovereignty" over these islands. The claim of Chinese sovereignty is one that China has not up to now been able to prove. The state of Vietnam has effectively occupied the two archipelagos of Hoang Sa and Truong Sa since at least the seventeenth century and has effectively, continuously, and peacefully exercised its sovereignty ever since. From the seventeenth to the nineteenth century, Chinese dynasties had never protested but implicitly recognized Vietnamese jurisdiction over the archipelagos.

`Our jurisdiction over the islands is recognized by many leading countries, including France. One the basis of equality and mutual respect the government of Vietnam has asked France to send a detachment of troops to help with the assessment of damage that the Chinese have inflicted upon our military forces. We confidently expect a positive response from France. `The developments up to the present day point to all the dangers inherent in China's policy of reliance on the use of force. A peaceful settlement of the dispute over the archipelagos of Truong Sa and Hoang Sa would respond to the desire for peace of the peoples of Vietnam and China, in conformity with the principles of international law and the UN Charter, with the interest of peace, stability, and cooperation in South-East Asia, the Asia-Pacific region, and the whole world. This is the most correct way. Public opinion in South-East Asia and in the whole world is looking forward to China's positive response. Being one of the five permanent members of the UN Security Council, China has a major obligation to abide by the UN Charter.'

The first statement from the United States came from the State Department spokesman, Donald Bryant, who called a news conference for correspondents accredited to the department.

BRYANT: As you know, we are still trying to ascertain exactly what is happening in Vietnam and the South China Sea. The President, the Secretary of State, the National Security Adviser, the Defense Secretary, and the Joint Chiefs have been briefed.

The President has been meeting with the Secretary of State and the National Security Adviser at the White House for the past half an hour. The President has issued the following statement: `The American government is disturbed by the outbreak of violence in the South China Sea. Our first reports indicate that there have been substantial casualties, particularly among Vietnamese civilians. We are shocked by the bloodshed. This is a part of the world which had been an example to us all of how to make trade and the creation of wealth a priority above all else. We urge both Vietnam and China to stop their hostilities. America will do everything in its power to end this dispute. We are still trying to ascertain the casualties among American citizens. You will be kept informed of any developments.'

Any follow-ups?

QUESTION: Have you any more on American casualties?

BRYANT: We believe some Americans may have been hurt in the bombing of Cam Ranh Bay. Civilian areas were hit hard there. There are several hundred Americans on the oil rigs in the South China Sea. We don't know what's going on there at the moment. The Chinese have claimed sovereignty over the Crescent Group in the Paracels. They've announced it on their state radio. That's all we've got so far. Sarah.

QUESTION: You say civilian areas were hit hard at Cam Ranh Bay. Do you mean Vietnamese civilian areas in the town, or the quarters for Western workers there? And if so, are they strictly civilian? Aren't they helping the Vietnamese military?

BRYANT: Correct. I'm referring to the foreign quarters. But when you get to bombing homes with children in them, I think we're talking civilian.

QUESTION: Would you consider American oil workers out there on territory captured by the Chinese as being hostages or prisoners?

BRYANT: They are in captivity. We want them freed.

QUESTION: What are our embassies saying in Beijing and Hanoi?

BRYANT: The Assistant Secretary, Bostock, has spoken personally to each of our Ambassadors there.

QUESTION: So what are you saying: they don't know anything?

BRYANT: Our Ambassador to Hanoi is expected to meet with President Tai in a few hours' time. Our Ambassador to Beijing has not been told whether he'll be able to meet with a senior Chinese leader.

QUESTION: Why don't you condemn this definitely as an act of Chinese aggression?

BRYANT: I don't want to get drawn down a road of inflammatory language. China carried out air strikes on Vietnam. As the President said, there have been casualties. He also emphasized that we are friends of both countries.

QUESTION: What actions do you see Vietnam contemplating which would add to the tension?

BRYANT: Well, Barry, I'm not going to speculate about, you know, what we may be anticipating the authorities in Vietnam to do. I mean, one can imagine quite easily all kinds of things which would provoke the Chinese.

QUESTION: I'm trying to understand why you've chosen to volunteer an admonition to both sides.

BRYANT: We've been….We’ve been-

QUESTION: The Chinese are the people who are on the move. The Vietnamese are standing there, shaken a bit and wondering if anybody will help them, and you're telling them: `Don't be provocative.'

BRYANT: Just — John? You got a question?

QUESTION: Where do we go from here? Is this one for the UN or for the Marines?

BRYANT: I don't want to second guess what the President and his advisers are discussing. I'll be here most of the night. I'll let you know if we've anything else to say.

Prime Minister Stephenson read the latest reports from Northwood Permanent Joint Operations Headquarters while waiting for the end of the State Department briefing, then he spoke to the President. The two men agreed that Europe and the United States must show neutrality at this stage. President Bradlay pointed out that America had a security treaty with Japan dating back to 1960. It also had commitments to the Philippines. If China interfered with shipping, particularly oil supplies through the South China Sea, then America would have to send a military signal to Beijing. Carrier groups in the region were on standby.

Shortly after midnight, the British Ambassador to Paris reported that between twenty and thirty French technicians and their families had been killed in the bombing of Cam Ranh Bay. French children were among the dead. The first television pictures would be aired within the hour. France was preparing a statement condemning China. Wentworth, the Foreign Secretary, remarked that France had only taken over the presidency of the European Union in January. There was a danger of it going public against China without consulting its fellow members.

In a telephone conversation Stephenson asked the French President, M. Dargaud, if France could ensure the neutral leadership of the European Union.

The President replied in English: `Prime Minister, French civilians have been killed by Chinese bombs. French people know this. Do you expect me to parrot the American President and say we are friendly with both countries?

No. No. No. My statement is for France, not for Europe. It is for the families of those who were bombed.'

Stephenson repeated his request: `Could France stay neutral at least until there has been a vote in the UN?'

But Dargaud was emphatic: `What can I do? As soon as those pictures are shown, Prime Minister, I have to support Vietnam. Anything else would be political suicide. And you would do the same.'

`In which case, Mr President, can you make it clear you are speaking for France and not the Union,' finished the Prime Minister.

Wentworth, on another line, was speaking directly to the Ambassador in Germany. The Chancellor was about to issue a statement urging restraint and caution. His tone was to highlight the trade which would be lost if the crisis escalated. `Can Germany keep the French in line?' asked the Foreign Secretary.

`Germany will keep its mouth shut when it comes to French citizens being killed in an act of war,' replied the Ambassador.

The meeting room in the Prime Minister's residence was Spartan in appearance. An oblong beech wood table surrounded by armchairs dominated the room. At the head of the table sat Noburo Hyashi, the Prime Minister. On his right sat Yoichi Kimura, the Foreign Minister, and on the Prime Minister's left sat Yasuhiro Ishihara, the Minister of Defence. The three, together with Takeshi Naito (Trade) and Shigeto Wada (Finance), comprised the Defence Committee of Japan's cabinet. Only one official was present and he was General Shigehiko Ogawa, Director, Defence Intelligence Headquarters.

Hyashi was a formal man. He opened the meeting by thanking the ministers for coming at such short notice, then asked General Ogawa to brief the committee on the latest developments in the South China Sea.

`As you all know, China has taken control of the South China Sea,' General Ogawa said. `In the process it has also set out to destroy Vietnam's capacity to retaliate. Our estimates are that the Chinese first strike against Cam Ranh Bay has resulted in the destruction or disablement of 40 per cent of Vietnam's navy.'

`Isn't that the same ratio as what we achieved in the attack on Pearl Harbor?' Hyashi interjected.

`For the navy, yes,' the General replied. `But attacks on the main air force bases were less successful. The Vietnamese saved their aircraft by flying them to Laos and Cambodia. However, the Chinese have the ability to deliver a second strike and we expect them to launch it against the navy within the next twenty-four hours. The Vietnamese do as well. Reliable sources in Vietnam report that the remaining seaworthy elements of the navy are at sea or are putting to sea.'

`General, what do you expect next of the Chinese?' asked Hyashi.

`We expect them to secure their hold over the oil-production facilities,' he replied. `There is one new facility in the Paracel Islands that has not yet reached full commercial production and three fully operational facilities in the Spratly Islands. There is a possibility that they will blockade access to the South China Sea for a period to validate their claim to the sea.'

`Thank you, General, you may be excused,' the Prime Minister said. `Naito-san, what is the assessment of the Ministry of International Trade and Industry?'

`Profound concern, Hyashi-san,' his Trade Minister said. `My telephone has not stopped ringing all morning, the Chairman of the Keidanren said industry expects a firm response. I couldn't get Tanaka from Nippon Oil off the telephone. His company is a big investor in the Paracel oil production facility.

`As you know we import 99.6 per cent of our petroleum products. Nearly 80 per cent of our crude oil imports comes from the Middle East l traverse the South China Sea. We import oil from Brunei, Indonesia, and Australia. It all passes through the South China Sea, although Australian crude (which is a light crude good for making only gasoline) can be diverted. I am informed that our strategic stockpile will meet all our needs — gasoline and petrochemical — for two to three months. A similar situation obtains for liquefied natural gas or LNG. We import all our considerable LNG needs me 60,000,000,000 cubic metres d 90 per cent of those imports traverse the South China Sea. I highlight energy because that goes to the heart of our national survival. But Japan is nothing if it cannot trade.'

`Wada-san, what does the Finance Ministry have to say?' the Prime Minister asked. `We think there will be considerable instability in financial markets when they open for trading tomorrow morning,' Wada said. `The Bank of Japan will be prepared to step into foreign exchange markets to stabilize the yen against the dollar. Officials will be in touch with the Bundesbank, the Bank of England, and the US Fed, if they are not already, to talk about a coordinated response to this conflict. In closing, my officials expect a quite large fall in the stock market. The oil market will be unsettled, but there is little we can do about that.'

`Thank you. Ishihara-san, what is the state of our military preparedness?'

`Hyashi-san, we have been monitoring this situation closely and especially since relations between China and Vietnam deteriorated at the end of last year,' Ishihara began. `We currently have a battle group on manoeuvres in the waters around Okinawa. We also have two submarines in the area, but, for operational reasons, I would rather leave that vague. We are in constant contact with the Americans. They have a number of naval deployments in the region. The USS Harry S. Truman is currently in the Sea of Japan, and the USS Nimitz battle group is in the Sulu Sea. The British also have a Commonwealth naval group performing exercises with the Ark Royal off Brunei. Since the Chinese attack began we have had long-range AWACS in the air from our bases in Okinawa. From these we have a detailed picture of the deployment of Chinese forces.'

`Foreign Minister, what is your assessment? What will the Americans do?'

`We have all of us, I think, expected this,' Kimura said.

`It was only a matter of time. The UN Security Council will meet, although we have little hope that it can do much. China will exercise its veto. Our best hope lies in our security treaty with the United States. I am, at best, ambivalent about this. Their economic relations with China have gone deeper and are spread wider than even ours which are considerable enough at total investment of $120 billion. Moreover, ever since the Americans withdrew from Okinawa and Yokosuka I have felt that their commitment to the security treaty was more one of form than substance.

`I will be seeing separately the US and Chinese Ambassadors after this meeting.'

The Prime Minister gathered his papers. `Very good, Kimura-san. Keep me informed.' He cleared his throat. `Gentlemen, I do not think our nation has faced so great a threat to its survival since the Pacific War. But adversity often presents opportunities. China is pushing us, and the Americans, to the limit. Maybe the time has come for Japan to stand up.

`Of one thing I am certain, it is high time we put our treaty with the US to the test. Tell the American Ambassador that we expect to see the treaty honoured in full. A threat to Japan's national interests used to be a threat to America's. Is that still so, and what do they plan to do about it? As for the Chinese Ambassador, I think we need to be more subtle. Explain to him our interests in China and the region and the need to minimize conflict. And if we are to have difficulties with the Americans, perhaps we should massage the European Union round to our way of thinking.

`Gentlemen, I suggest we be prepared to reconvene at a moment's notice. Thank you for your attendance.'

President Bradlay said he would take no more calls unless in extreme emergency. Any Vietnamese or Chinese leader should be put through without delay. He then formally convened an extraordinary meeting of the National Security Council and asked the Secretary of State to begin his assessment.

Mr Newton Fischer, the Secretary of State, described China's attacks as having an element of military surprise, but not unexpected. The threat, and the stated claim to the South China Sea, had been made public for years. Since the end of Deng Xiaoping's leadership the shift had been irretrievably towards nationalism. With restructuring of the military and the purchasing of new weapons, it was inevitable that sooner or later the People's Liberation Army would do something to justify its role.

Fischer stressed that President Wang was not a mad dictator. He was a shrewd strategist determined to project China's power. For years, China had flexed its muscles. As far back as 1989, the People's Daily observed: `For a country to shake off foreign enslavement and to become independent and self-reliant is the premiss for its development… Once people lose their sense of country, of national defence, and of nation, total collapse of the spirit will inevitably follow.'

`What do they want?' interjected the President Bradlay.

`They want us out of Asia, sir,' was the reply. `It's been a long time coming. We have to face the fact that America will be dealing with a quasi-military government during this crisis. I have their most authoritative statement on the South China Sea and the islands which they claim as theirs. You get a feeling for the regime by the language they use.

`"Since Vietnamese warships were dealt stunning blows after encroaching on China's territorial waters in March this year, an upsurge of war preparations has been whipped up in Vietnam. "Vietnam will simply be seeking its own destruction if it really wants a major confrontation with the Chinese navy. A major factor in boosting the Chinese navy's combat capabilities in recent years is its combined blue-water training to protect our sovereignty against aggression.

"According to the provisions of the `UN Convention on the Law of the Sea' adopted by the world conference on the Law of the Sea, China has several million square kilometres of territorial sea including its continental shelf and associated economic zones, plus our original territorial waters. This vast sea area is extremely abundant in biological, mineral, and energy resources. Protecting and cherishing China's territorial seas and defending the country's maritime interests is the people's navy's unshirkable task… This strong concept of territorial seas is deeply imprinted in the mind of every cadre and fighter."'

Bradlay said he was alarmed at the element of surprise exacted by China after so much material was in the public domain. Secretary Fischer replied that the lobby of businessmen and the public relations machine of the Chinese government had been a far more persuasive force than defence analysts.

The meeting was interrupted by a flash telegram from the US Ambassador to Malaysia.

Five American oil workers escaped with Malaysian troops in the first few minutes of the attack on the Malaysian-claimed territory. They report that their naval patrol boat came under fire from the Chinese. There were Malaysian, but no (repeat no) American casualties. However, the Chinese opened fire when they stormed the atoll. The oil workers believe that some of their colleagues may have been hit. The Malaysians had been under standing orders to leave if confronted by overwhelming enemy forces. The oilmen will not (repeat not) be available to the press. Both they and the company believe they can go back to work once the conflict has ended.

Fischer responded that Malaysia would not be expected to react without consulting its neighbours from the Association of South-East Asian Nations (ASEAN). ASEAN itself would probably take a non-confrontational line. He did not expect a military response from these nations. Even collectively they were no match for China. The wealth in those countries was controlled by Chinese businessmen. They might live away from China, but they cultivated contact with the Communist leadership in order to win contracts. The Secretary of State reminded the President that one such Chinese/Malaysian family was a large investor in financial services in Maine, the President's own state, and that they had attended his inauguration only one month earlier.

The overriding threat of the Chinese adventure was to Japan. Its total European and South-East Asian trade traversed the South China Sea. Moreover, Japan was a big oil importer with no supply of its own. Three-quarters of its oil came from the Middle East, and the rest from Brunei, Indonesia, and Australia. The major issue, the Secretary said, was the security treaty with Tokyo. The consequences of any American equivocation on the issue would almost certainly end the treaty and unleash on Asia a more militarily assertive Japan.

`Mr President, it is my considered advice that we move very carefully in this area. We have had a military alliance with Japanese since 1960. One should not discard a relationship like that lightly. I know there are those who will say China matters more deed, some at this table but the Japanese have been good friends to the United States.'

President Bradlay then turned to Martin Weinstein, the National Security Adviser, who confined his report to the intelligence-gathering activities of both governments.

`We put a network of satellites over the region when the military exercises began. We've had AWACS in the air and we've got Aegis cruisers with a carrier battle group off the Philippines. Not much moves there without us knowing it. I'm happy with our IMINT and SIGINT [imagery and signals intelligence]. The Chinese have their own satellites, but the technology is faulty and outdated. We can assume they don't watch everything. But we don't know what they're missing.

`The flaw in our operation is HUMINT [human-source intelligence]. We do not have any quality operatives on the ground in Beijing. We have no one inside Zhongnanhai. We don't know what Wang Feng is thinking. Are there divisions between him and the other powerful players in the government? How supportive is MOFTEC [Ministry of Foreign Trade and Economic Cooperation] towards the PLA action, which has extreme economic risks? In most countries, including the Soviet Union when it existed, we had scraps of the jigsaw thrown out to us. We ran agents. We had good networks. We don't have that anywhere important in China. Zhongnanhai is an impenetrable citadel. The best we get is information mainly from the children of the officials who live there. A lot of them fly over here and our agents befriend them. But it's gossip. Occasionally, one will leak a document to the New York Times or somebody.'

`What do they have on us?' asked the President.

Weinstein referred to his notes: `Their espionage operation is run through the Ministry of State Security or MSS. We believe in the United States itself the MSS draws upon the services of 1,500 Chinese diplomats and commercial representatives, 90 other Chinese establishments and offices, and 20,000 Chinese students arriving annually. They are either recruited to gather intelligence while here or debriefed back in China. If they don't comply their families are put under pressure; loss of job, home, medical care. That sort of thing. On top of that we have 15,000 representatives travelling through in about 3,000 delegations a year. The same happens to them. And there's an ethnic Chinese community of several million. In short, Mr President, if we enter into hostilities with the People's Republic of China they could have agents in every city.'

Bradlay turned to Peter Ray, the Director of the CIA. `So far, can you tell me what they know that they shouldn't know?'

`I can tell you the type of material. Two years before Richard Nixon redrew our China policy, the Communists knew of his desire to open diplomatic relations with them. In 1970 one of our analysts, Larry Chin Wu-tai, gave them a classified document which outlined his plan. They were able to adjust their foreign policy accordingly. We thought we were surprising them. They were across us all the time. Larry Chin worked for the CIA for thirty-seven years. He was indicted in 1981.'

`Are you telling me they have agents in our government?'

`I'm telling you, Mr President, that we don't have anyone with them. We don't know if they have anyone with us. The MSS actively seeks to penetrate American intelligence and policy-making agencies. Just recently, we had to bring out a communications officer from the embassy in Beijing. They had tried to recruit him. If they had succeeded, they would have had access to all embassy communications. We can be damn sure they'll be turning on all the taps today. We're watching. But HUMINT in Chinese society is very difficult.

`The other thrust of their intelligence operation is for technology. The South China Sea air strikes today could have been made possible by American technology. And you have to admire their nerve. The China Aero-Technology Import & Export Company, CATIC, bought a Seattle company which made aircraft parts, called Mamco Manufacturing Inc., in the late 1980s. Mamco had technology which could provide the Chinese air force with in-flight refuelling capabilities. In February 1990 we closed the operation down. But you look at the number of American engineering and technology companies now owned by Chinese firms. All those companies are ultimately responsible to the Communist Party. This is the policy of trade, interdependence, and constructive engagement. But tonight it reads to me like one of enemy infiltration.

`One point which also comes under the Joint Chiefs,' he said, winding up. `PLA intelligence activities have increased across the land border with Vietnam. In the past month, there have been low-level assassinations, the laying of mines, the killing of livestock. All no more than five miles across. A Vietnamese soldier was captured and tortured to try to get the Vietnamese order of battle. He escaped.'

`What are you saying?'

`We're watching that border, Mr President.'

Bradlay asked the Chairman of the Joint Chiefs to give his assessment.

`There's no doubt that the United States has the capability to regain control over the oil facilities in the Spratlys and the Paracels and to reopen the South China Sea to international navigation. Two carrier battle groups are close enough by to be there in a day.

`The Chinese have taken control of the oil-production facilities with Marine commandos. To retake them would not be easy. The best estimate is that at least several wells would be destroyed Iraqi-style, which could lead to an environmental disaster.

`The Chinese have stationed surface ships and submarines at the chokepoints to the South China Sea. These are the straits of Malacca, Sunda, and Lombok, through which, most crucially, Japan's oil supplies go. As of a few minutes ago, President Wang cited China's 1992 Territorial Waters Act, banning military and nuclear-powered ships. Commercial shipping is allowed.'

`What's it doing?' interrupted the President.

`Some tramp steamers are going through. The big shipping lines are telling their captains to hold back.'

`I think, then,' said the President, `for the sake of tonight's assessment we should think of this blockade as not being on just Japanese or East Asian trade, but on American trade. We get a lot of stuff through those sea routes. With American national interest threatened, our thinking will be much clearer. My next question is a natural follow-on. What happens if we go in with the carrier battle groups?'

`Ultimately, they would be unable to defend themselves. But it will not be like the 1996 Taiwan stand-off. I understand that after that a policy was put in place by the PLA to fight and shed blood rather than be humiliated by a foreign hegemonistic power. So we would win, but we could take horrible casualties. Our Navy SEALS would be in hand-to-hand combat to take back the reefs. There is no reason to believe that the Chinese commandos would not fight to the death. In the sea battles, they have fifteen to twenty submarines out there. We might get nineteen of them. But two torpedoes could kill a lot of our servicepeople.

`As yet we are uncertain of support from our allies in the region. South-East Asia has become rich through pragmatism and neutrality. If they believe that China's going to win this, they're not going to let us use their ports and airports.

`Effectively, Mr President, they are daring us to go to war or give up our security role in Asia. What they lack in training and technology, they make up with balls and numbers. They also have location on their side.'

Ms Bernadette Lin, the Commerce Secretary, spoke with what had been the predominant voice in the Sino-American relationship, but she began on a personal note.

`We all heard the CIA assessment of Chinese intelligence-gathering operations here. I would like to stress one point. Please, no witch-hunts. No leaks to the press that every Chinese could be a spy. I am a Chinese-American. As a child, I fled from Shanghai in 1952. Our immigration policy doesn't come without risks. Let us accept the risks and not create a knee-jerk reaction which might effect the lives of hundreds of thousands of American citizens just because they look Chinese. It's not going to be an easy ride for any of us until this crisis winds down.'

`Your point is taken, Madam Secretary,' replied the President.

`Now, I'll be blunt,' Ms Lin continued. `Corporate America does not want confrontation with China. The country has too much to lose. In the mid-nineties, China sold $30 billion worth of goods to us. We sold $9 billion to them which meant that if there had been a trade war we would have won. Since then, that gap has closed. It's not equal yet, but China has diversified so that its exports now go in large quantities to South-East Asia, Europe, and Latin America.

`What would happen if we stopped buying Chinese goods? Sure, China would be hurt bad and people would be thrown out of work. But it would not be crippled. If China stopped buying American goods, Mr President, it would cost us maybe $15 billion this year. There are fifteen states whose economies are heavily reliant on trade with China. I'll list examples. In California, exports to China keep 216,000 people employed. In Seattle, Washington 112,000, many of them with Boeing. In Arizona, 16,000. New York, 100,000. Clearly, there would a domestic political impact with many families affected. That would be reflected by the electorate in the next elections. And to give you an idea, California has fifty-two Congressional seats going in the next election. Washington has nine; Arizona, six; New York, thirty-one. Florida, with 32,000 jobs at stake, has twenty-three seats. Throughout America there are 469 seats whose representatives will take China trade to their election platform.

`It's true that in China millions more will be thrown out of work. What are all those farmers going to do who gave up the rice paddies to set up a Barbie Doll factory? I can tell you what they're not going to do, Mr President. They are not going to protest. They are not going to vote out the government because they can't. Throughout America, there are one and a quarter million jobs which need China trade. Taking families and dependants into account, that means upwards of five million Americans would suffer severely if we let this crisis spiral.

`There are a number of blue-chip companies which consider China to be an integral part of their growth and survival. Boeing estimates that the total market for the sale of commercial jet aircraft to China through 2013 will be worth $66 billion. Other companies like Motorola and AT&T make similar sales projections. But the investments today are huge: Motorola has invested $1.2 billion in China and now makes the latest computer chips there. Hewlett-Packard and IBM both have $100 million investments as well. Auto makers have a big exposure to China d by Ford with $250 million invested in three factories making components, light trucks, and vans, and followed by General Motors with a $130 million investment in three auto parts facilities. In all our top ten investors in China have more than $4 billion invested in the country and it will grow.

`Mr President, I watched when President Jimmy Carter tried to stop selling wheat to the Russians and the business went to the Australians and the Canadians. I watched when Ronald Reagan tried to stop construction of a natural-gas pipeline in the Soviet Union, as it then was, and Caterpillar almost went out of business. And I watched as Clinton flailed about on the issue of Most Favoured Nation status for China. He learned the lesson. The simple truth is that more and more, money not war is the major point in foreign affairs. This incident in the South China Sea is regrettable but it's not going to change that.'

Foreign Minister Kimura's official car pulled out of the drive of the Prime Minister's residence and made for the Gaimusho (Foreign Ministry) in Kasumigaseki. The steel gates of the Ministry building parted as Kimura's Nissan President approached. A polite salute from the gate attendant and his limousine was pulling to a dignified halt in front of the main entrance.

Kimura waited patiently for the arrival of Mr Richard Monroe, the US Ambassador. Kimura did not like Monroe. He was too casual. He did not understand the virtues of silence. Yet he was a man to be taken seriously. Monroe was a close friend of the US President. Monroe had helped get out the Irish vote in Boston, where he was the owner of Boston Analytics Inc., a computer software design company. He was also a major party fund-raiser.

Monroe walked in to Kimura's office as if he had just walked off a tennis court. Apologizing profusely, he explained that the Gaimusho's request for his attendance at this meeting had reached him at a friend's house where he had been playing rackets. Kimura, with a half-smile on his face, inclined his head towards his guest and motioned him to sit down.

`Mr Ambassador, we seem to have a… little local difficulty in the South China Sea,' the Foreign Minister observed. `My government views the moves by the Chinese government with the utmost concern. We believe that the decision by China to seize the oil assets currently under development in the South China Sea, as well as its unwarranted attack on Vietnam, constitutes a threat to our own vital interests in the region and directly impinges upon the security of this nation. I have been instructed by my government, therefore, to invoke Article 6 of our mutual security treaty. We want a return to the status quo ante; we want China out of the South China Sea; we want you to send a carrier battle group to this region to back up those demands.'

`Well, I hear what you say, Mr Foreign Minister,' Ambassador Monroe said. `I shall report this immediately to the President.'

Half an hour later, the Chinese Ambassador walked into the room. Mr Bo Enzhu was a more ascetic diplomat, or at least liked to be seen as such. In reality he was exceedingly irritating. He had the habit of getting physically close, in a manoeuvre that suggested he was about to divulge some great truth, and then just spouting what he had read in that day's People's Daily. His cables to Beijing were colourless but accurate as to what was said to him.

`Ambassador, how kind of you to come at such short notice,' said Kimura, trying his utmost to sound solicitous.

`Not at all, Foreign Minister. It is always a pleasure to visit the Gaimusho,' Bo replied.

`We are… puzzled by your country's manoeuvres in the South China Sea. Do you have any explanation for us?' Kimura ventured.

`This need be nothing to concern your government, Foreign Minister,' Bo began. `China's sovereignty over the South China Sea is inalienable and historic. We have sought simply to make de jure what has been de facto for the past two thousand years. This represents no threat to Japan. China believes in the free passage of shipping through internationally recognized sea lanes such as the South China Sea.'

`And property rights?' Kimura asked.

`The sea and all below it and all it contains is ours. That, of course, is a statement about the future. We are not unaware of the existing facilities. I am instructed that there will be no change in ownership.'

`Tell your government that our concern is with economic security,' Kimura replied. `Virtually all our oil passes through the South China Sea. A threat to that would constitute a threat to Japan.'

On the way back to the Prime Minister's residence, Kimura noticed a queue of motorists at a service station.

General Zhao Yi was a man in his late fifties, thin, and true to his southern Chinese origins quite short. He was the Senior General in charge of the General Staff Department (GSD) and he planned to finance Dragonstrike by manipulating the world's financial markets.

He had had a remarkable career in the PLA. In an institution noted for its conservatism, his rise to eminence, after entering the services at the unusually late age of thirty-three, marked him as a special man. Like many of his generation, including President Wang Feng, he was born in Yan'an, although following Chinese tradition his official native place, his ancestral home, was given as Shunde, in the Pearl River delta of Guangdong province. His father Zhao Ping had survived the Long March and worked closely with Mao Zedong. In Beijing after the Revolution the family prospered. He was made a Marshal of the PLA; the family lived in a villa in Zhongnanhai. Zhao grew up playing and going to school with the sons and daughters of Liu Shaoqi, Peng Zhen, and Deng Xiaoping. His life of privilege came to a sudden end in 1967 as the Great Proletarian Cultural Revolution turned the world upside-down for China's 800 million subjects. Red Guard publications denounced Zhao for living a privileged life. He learned horse riding and motorcycling — past-times beyond the reach of average people. At the time of his denunciation he was studying at Beijing University. At the beginning of 1967 he lost touch with his father and mother and two younger brothers. He was not to see his mother until 1971, three years after his father's death. During these `lost years' Zhao lived the life of a fugitive. He made his way to Guangdong and, under an assumed name, worked on a ship sailing the Pearl River. His family in Shunde lent him some protection, but he was eventually caught and confined in a youth detention centre. And there he might have languished for many years but for the efforts of Zhou Enlai, the Chinese Premier and Mao's Lord Chamberlain. Zhou sought out Zhao and lent him his protection. That was in 1973.

Zhao's General Staff Department oversaw the PLA's sprawling industrial and financial enterprises, located within the GSD's Equipment Department. Since ancient Imperial times the military in China had been required to feed and clothe itself. But the PLA under late Communism had taken this tradition to extraordinary lengths. The military was in every form of industrial and financial enterprise known to man — engineering, pharmaceuticals, ship building, aviation, satellite launches, vehicle manufacture, stock broking, and banking. Profits from these companies were meant to supplement the budget of the PLA. And they did. They had proved vital in buying many of the military's most prized assets, such as the Russian Sovremenny class frigate Vazhny, and in funding the ongoing cooperation between China and Russia in military aviation. The General Staff Department was Zhao's home. He had spent all his career with it and had a reputation as being one of the cleverest financiers in the military e result, his colleagues noted, of natural Cantonese cleverness with money, honed by having to live his early life on the run.

From the outset of inner circle discussions about Dragonstrike Zhao had determined that his role would be to make money for the PLA. He knew that knowing in advance when China would strike Vietnam and seize the South China Sea gave him an enormous advantage in global financial markets. It was an operation that would need clearance from the highest level because it was not without risk. It would also need meticulous planning which would have to be kept totally secret. General Zhao's first meeting with the President took place six weeks before Dragonstrike was launched. Then he had explained to the President how financial markets were driven by information and how investors were like herds of cattle on stampede — dashing this way then that, but always staying close together. Information was the key. A correct buy or sell order placed before news of Dragonstrike broke could net an investor many millions in overnight profits.

`Your idea is an excellent one, General,' the President said. `How much do you need? $50 billion?'

`No, sir, that would be far too much. To make the money I think we are able to make we need to keep our counterparts solvent. $50 billion runs the risk of ruining too many securities companies. Remember Barings?'

`Barings?' The President frowned.

`Nearly ten years ago a pillar of the British financial establishment collapsed, after losing nearly £1 billion. There was someone else, or a group of institutions, on the other side of those transactions who made £1 billion. Financial markets are zero sum, Mr President. Someone wins, someone loses. When we win, someone will lose. But the global financial system could not survive the loss of thirty Barings. It is not part of our war aim to bring down the world's financial system. It would not be good for China. So, we have to be more modest in our aims. We also have to invest in markets where governments are most active principally the foreign exchange market. The British government lost billions — and traders made it — in 1992 when it tried to keep sterling within the European Monetary System. The amount of profit we could make is still unclear, but I think we could finance a large portion of the cost of the war through some carefully planned deals.'

The President accepted the General's explanation and instructed him to proceed with detailed preparations. He also made sure that Zhao was kept informed of all developments relating to Dragonstrike. With approval obtained Zhao moved quickly. Foremost was a visit to Mr Damian Phillips, Chairman of First China Securities, a Hong Kong investment bank. First China had come to prominence at the fag end of Britain's rule. It was founded by the son of a City of London financier and the son of a rice farmer e very model of Anglo-Chinese cooperation. Phillips had seen the likely shape of the future well before most. He cultivated the local Chinese tycoons; they liked the attentions of an upper-class Englishman. When it came time to found First China he had a supportive group of local and mainland Chinese businessmen willing to stump up the necessary capital to get the business going. That was in the late 1980s and First China had never looked back. Phillips moved deeper into the Chinese community on both sides of the border. It was on one of his many trips to Beijing before the formal 1997 handover of Hong Kong to China that he met Zhao. Phillips was making a pitch hated the term, preferring presentation Multitechnologies, the PLA's leading arms trader and emerging domestic conglomerate; Zhao was its president. Phillips was explaining how, with the judicious use of offshore business structures, efficient, and anonymous, trading of currencies could be executed. The General had been impressed enough to risk some of Multitechnologies' hard-earned money playing the markets. Phillips' stratagems proved in practice as good as they had sounded. A relationship germinated. In the ensuing years Phillips saw to it that the relationship blossomed. He paid regular calls on the General, gave lavish parties for him in Hong Kong, and was always careful to leave him with a sure-fire investment tip for himself, or his company whenever they met. Slowly business grew. When Multitechnologies decided it wanted to base its international activities in Hong Kong, First China found a Hong Kong Stock Exchange quoted company it could buy. When Multi-Tech (Hong Kong) Holdings wanted to raise capital it was First China that drew up the prospectus and introduced the company to the big pension funds, mutual funds, and unit trusts. And First China wrote research on the company for foreign investors. Soon Multi-Tech (Hong Kong) had a modest following among US and European investors.

General Zhao arrived in Hong Kong five and a half weeks before Dragonstrike was launched. He entered as a civilian. Phillips sent his car to meet him at the airport. Instead of a meeting at First China's downtown headquarters in Central district on Hong Kong island, the General was driven to Phillips' house on the Peak. It was set well back from the road and was overlooked by no one. Phillips was there to welcome the General personally.

`I'm sorry I couldn't be at the airport to meet you,' Phillips said with ritualistic politeness, `but you said in your fax that you did not want attention drawn to your visit. Anyway, welcome and how are things in Beijing?'

`Cold,' General Zhao said, somewhat stiffly. `I don't have much time. As you know I'm returning to Beijing tonight. Shall we get down to business? We at Multitechnologies have decided to broaden our involvement in financial markets. We have decided that we want to trade currencies and oil and that we want you to be our agent. It is vital, Damian, that we and indeed China are in no way connected to the activities I am about to commission you to execute on our behalf. Do you understand?'

`Completely.'

`Good, well, let's move on, then,' he said.

General Zhao proceeded to outline to Phillips Multitechnologies' plan to play the foreign exchange and oil futures markets. He gave him a list of international banks — mostly second and third-line institutions keen to increase their involvement in foreign exchange — with whom he would parcel out his currency trades. His purpose was to accumulate US dollars and sell the Japanese yen. To buy dollars he had to sell another currency, and he wanted First China to borrow yen and sell them for dollars. Phillips thought that although the yen had not been particularly strong lately it would have to fall a considerable amount: for an investor to make much money out of selling it he would have to expect the yen to fall sharply so that when the time came to pay back the loans in yen — either prematurely or at maturity — the price of yen would have fallen to well below the initial purchase price. This is precisely what the General appeared to believe. However, he could not be seen doing it. Therefore if on any given day he bought $100 million through one bank, he should sell $20 million through another. His net accumulation would be $80 million, but the market would see him as trader, as a buyer and seller. When Phillips questioned the investment strategy all the General said was that First China would be indemnified. In all he wanted First China to have accumulated by mid-February debts own as `yen-shorts' — between $1.5 billion and $2 billion in yen-short positions. With the yen trading around to the dollar, these debts should amount to about bn.

Similarly, though on a smaller scale, First China was to build up a large position in the oil futures markets in London and New York. In the jargon of the financial markets, the General wanted First China to go `long' of the dollar and oil and `short' of the yen. The oil trade would, however, have to be for much smaller amounts. Though the markets were large they were purely private markets with little overt government interference. Zhao said he did not want to get involved in problems of counterpart risk. `The whole operation would be blown apart if we try to collect on a deal and find we have bankrupted Morgan Stanley,' he said, adding with a rare note of levity, `as pleasurable as such an outcome might be.'

Having explained the purpose of the transactions Zhao then told him how he wanted First China to account for the trades. This entailed parking the proceeds of all transactions in companies registered in the British Virgin Islands (BVI). There were seven banks he was authorized to deal with, but there were fourteen BVI companies for the currency trades. This was to enable the segregation of purchases and sales of foreign currency with each bank, and meant that transactions could be ring-fenced if the prying eyes of regulators should spot something unusual. If one of the banks asked First China who its client was First China could truthfully answer that it was acting for a private investor operating out of the BVI with a company called Bright Future, or the like. If a regulator got wind of something and wanted to freeze assets the fallout would be limited to one company. The oil futures trades would be held in one BVI company, although First China would trade in its own name on the International Petroleum Exchange in London.

As General Zhao sat down on the first morning of Dragonstrike he was in expansive mood. He explained to the President in meticulous detail his contacts with First China and the trades they had been making with the banks over the previous four weeks. He opened the satchel that was resting on his lap and produced a small stack of spreadsheets. These showed each British Virgin Islands company and the size of its position against the yen. Over the period First China had been able to build up for Multitechnologies a short position in the yen of some billion. Multitechnologies would make big money if the yen weakened to around to ¥160 to the dollar. Phillips had accumulated yen at an average cost to Multi-technologies of. It was currently trading around to the dollar.

`Did anyone detect us?' the President asked.

`No, we don't think so,' said Zhao. `There was a speculative report over the Bloomberg financial wire about First China. Their activity in the foreign exchange market in London had been noted. But Phillips handled it well. The overall operation went without incident. Sir, it is worth remembering that average daily turnover of foreign exchange is $1.2 trillion. In Tokyo alone the dollar/yen and dollar/euro trades are nearly $20 billion. So our activity, especially as we're buyer and seller, largely went unnoticed.'

`Profits?' the President murmured.

`We think the yen could fall by 20 per cent or more during the course of this conflict,' Zhao said. `That's a billion profit when we close the short position. But it's a conservative estimate; the yen could go a lot further, given the Japanese hypersensitivity about oil. The beauty of the deal for us is that when the yen begins to fall we will be one of the only buyers of yen in the market. It won't be at all difficult for us to cover our positions.

`Similarly in the oil market. We have nearly 20 per cent of the April futures contract. When the oil price begins to rise I think it will stand to do very well indeed.'

At 1130 the Xinhua (New China) News Agency released a curt statement. `In regard to the situation in the South China Sea, President Wang Feng drew attention to the Territorial Waters Act promulgated in 1992. Non-military shipping has right of passage in our sovereign territory. Military shipping and nuclear-powered ships must receive Chinese permission to pass through our waters. The sovereign territory is being patrolled by the submarines of the PLA-N.'

The Chinese were not bluffing. They had deployed twenty Romeo and Ming class submarines. The Romeos were functional but ageing Soviet vessels whose design dated back to the 1960s. The Ming was a Chinese-built version. The submarines were loosely positioned in packs of five, organized in semicircles to guard the shipping routes of the South China Sea. Other Romeo submarines were in the shallower waters around the Spratly Islands, which although more dangerous were ideal places for the quiet diesel-electric engines. They could only wreak enough destruction to sink a modern warship if the crews of the antiquated submarines could outwit their high-tech enemies. In many modern navies the old diesel-electric design was being wound down for nuclear-powered submarines. China aspired to having a modern military, but knew that for Dragonstrike to succeed the PLA would have to revert to the tactics of barefoot warfare with which it won the civil war in 1949. The men would be familiar with their equipment and know the area of battle. Then with a World War Two wolf-pack style of operations the naval commanders believed they could safeguard China's sovereignty.

Elsewhere in the South China Sea, three of China's Russian-built Kilo (Granay) class SSK attack submarines took up positions between Singapore and the Indonesian state of Kalimantan in Borneo; in the Luzon Strait between the northern Philippines and southern Taiwan; and across the Gulf of Thailand between southern Vietnam and the area around the Thai-Malaysian border.

Ten minutes after the Xinhua announcement, two torpedoes were fired by a Romeo class submarine off to the west of the Paracel Islands near the Gulf of Tonking, an area which so far had not been drawn into the conflict. A Vietnamese 400-ton Sonya class minesweeper/hunter split in two. The impact ignited the fuel tanks. All but one of the sixty crew died in the explosion, which even in daylight could be seen for kilometres around. The survivor lived for three more minutes before being sucked down by the wreckage and drowning.

`We have proved our point,' said Wang Feng so quietly that only the trusted officer from the Central Guard Regiment heard him.