Dragon Strike: The Millennium War

TWO

Well before dawn on the second day of Operation Dragonstrike China deployed the three Russian-built Kilo (Granay) class SSK attack submarines at the chokepoints of the South China Sea. Capable of travelling at 17 knots, they were the cream of China's modern diesel-electric submarine fleet, the most exported of all of Russia's submarines. Each vessel had hull-mounted medium-frequency Shark Teeth sonar for both passive and active searches and high frequency Mouse Roar sonar for active attack. Once the enemy was identified, the hunter-killers of the Chinese navy would track and destroy. Those were the orders of engagement. Each submarine had thirteen officers; many had been trained in Russia in a special programme launched by the PLA-N to put its submariners onto a war footing. Only a few years earlier, Chinese submarines were unable to stay at sea for more than a week at a time because of inadequate training. That problem was now solved.

At 0300 the Xinhua (New China) News Agency released a statement:

The Chinese government hereby gives notice that all international shipping is banned from the area commonly known as the South China Sea (longitude 110g to 120g east of Greenwich and 5g to 22g of north latitude) until further notice.

The People's Navy and Air Force are patrolling the South (China) Sea and will prevent all ships from entering this exclusion zone. International airlines are also warned not to overfly the area. Ships will be prevented from entering the sea through the Bashi Channel and the Luzon Strait, as well as through the Mindoro Strait and the Balabac Strait. Although the Straits of Malacca fall outside Chinese sovereign waters, international shipping companies are advised to avoid these straits as shipping leaving them will not be permitted to enter the South Sea.

The State Council said that China's armed forces would enforce the nation's sovereignty in the South Sea and called on all fair-minded and peace-loving nations in the region to recognize the justness of China's claim. The State Council said it was not the Chinese government's intention to restrict access to the South Sea indefinitely and that shipping lanes would be reopened in due course.

The Philippine Navy Whidbey Island class dock-landing ship Cagayan de Oro and the supporting corvette Cebu stopped 5 nautical miles off Mischief Reef, far enough to be out of range of Chinese heavy machine-gun fire. The moon dipped in and out of cloud cover. Four fibreglass rigid raiding craft, carrying thirty-six Marines, left the safety of the ship and moved off quietly towards the reef. Their destination was a grey metal and wooden structure which had been built by occupying Chinese troops in 1995 claiming they were shelters for fishermen.

The Marines were the most highly trained and motivated men in the Philippine military. Their orders were to go in under darkness, establish a foothold on the island, and observe enemy movement before being reinforced. A heli-borne platoon and more amphibious troops would come in at dawn to reclaim the territory. The Marines landed quietly among the rocks. Using dead ground, where they couldn't be seen from the main building, they found their positions and reported no enemy movement. The windows of the building were without glass. Polythene flapped in the frames, some of it torn by the strong winds. The whole place looked battered and weather-beaten, apart from the Chinese flag which flew pristine from a turret at the top of the building. There were no lights, no sign of life at all. An hour later, in that hazy period when the tropical daylight arrived, a Sikorsky Sea Stallion troop-carrying helicopter took off from the Cagayan de Oro.

More raiding craft sped from the ship, this time with engines at full throttle. Four American-built F5A fighter aircraft screamed overhead, coming in from their base on Palawan Island 130 kilometres away. The F5As descended low over the structure, then two broke away from the formation and climbed high to give cover to the approaching Marines.

The Sikorsky was directed in by the troops already there, who had set up three fields of interlocking fire to cover the Marines now arriving. Two at a time fast-roped down from the helicopter. Others from the raiding craft ran up to predetermined assault positions. They had expected to have secured the whole reef, torn down the enemy's colours, and replaced it with the Philippine national flag within ten minutes.

The Marine corporal led his men forward. There was enough light to see the hazards among the rocks. Soon they were crouched up against the walls. Using mirrors they covertly looked through the windows, satisfying themselves that the structure had been abandoned. But this was a dangerous mission. Even several of the most highly skilled men hadn't seen action of this kind before. They continued with caution according to their training. They threw hand grenades through the windows and waited for the deafening noise to settle before bursting through the main door, firing their M-16 automatic rifles. The room was empty. They hung Philippine ensigns from the two windows nearest the door to indicate to the covering troops outside that those rooms were cleared. The corporal reported back on the radio the signs of habitation. A Chinese magazine, exalting the leadership of President Wang; a PLA cookbook; a printed canvas board for playing Chinese chess, crumpled and torn on the floor. The Marine corporal moved towards the next room.

Suddenly, a huge explosion tore through the building. The victim-initiated booby trap killed the corporal and three of his men instantly. Seconds later, Chinese Marines set off remote-control explosions in the central area of dead ground where the Philippine troops had based themselves. Seven Filipinos died. Twelve were injured. The Sikorsky pilot, flying low with the sun just rising behind him, spotted the Chinese position and fired his 12.7mm machine-gun. The bullets tore apart the timber and hit drums of fuel. The Chinese flag disappeared in an inferno of fire. Flames leapt up the timbers, but were slowed by the dampness which hung over the whole reef. The helicopter's heavy machine-gun continued to rip through the building. Then as the Sikorsky turned to line up on another target it exploded in a shattering, roaring fireball.

The Chinese soldier who fired the ancient shoulder — launched SA-7 surface-to-air missile died before the first pieces of debris from the Sikorsky hit the water. A hail of gunfire from the Philippine Marines ripped him to shreds. The Chinese returned fire. But the Marine lieutenant had chosen their cover well. Bullets sparked off the rocks around them, but harmlessly shot off into the water. They had direct lines of fire to the two main entrances to the structures, where the enemy was now identified. Now reinforcements came, the reserve platoons from the Cagayan de Oro, heading at full speed towards the battle. The Philippine F5s gave cover with cannon fire. Then six Chinese Su-27s attacked out of the sun. Each fired air-to-air missiles and although some missed or failed to detonate, the Philippine aircraft fled or were destroyed. The Su-27s split into two formations. Three, armed with anti-ship missiles, climbed steeply and flew back over the reef. Their radar-homing missiles hit the troop carrier amidships near the centre of the radar, passing through bulkheads before their relatively small warheads detonated, causing fires deep inside the vessel, which lost propulsion. The second formation attacked the men in the raiding craft with short bursts of cannon fire. The Cagayan de Oro was listing. One of the Su-27s had conventional bombs with short delay fuses, and ran in along the length of the ship, which was stationary in the water and defenceless. Two bombs hit the damaged ship and the larger warheads broke her back and she sank quickly. The last message from the captain said: `Mischief Reef and all vessels lost.'

The Philippine Marine lieutenant waved the white flag of surrender. As he stood up from behind his cover, the Chinese troops held their fire. For the next half-hour, both Chinese and Philippine troops helped the other Marines up the rock faces. The field medical packs could do little to help the wounded. The final count was 152 Philippine servicemen dead and 7 injured. The only Chinese to die was the man who downed the Sikorsky.

A Xinhua (New China) News Agency announcement said: `Sixteen Philippine military personnel whose ship sank in heavy weather have been rescued by the People's Liberation Army on the Nansha Islands. They will be returned to their units as soon as possible. Because of the swift and courageous action of Chinese troops, there was no loss of life.'

Unusually for the season, low rain clouds hung over most of northern Vietnam. The Chinese pilots came in with their Israeli Harpy V radar sensors activated. They were to destroy Vietnamese air-defence installations around the northern port city of Haiphong. Even in the appalling weather the sensors picked them up easily. The aircraft fired 30 kilogram fragmentation warhead missiles, guided onto the active radar signal, until they hit and destroyed. Then the skies over Haiphong were free for the city to come under attack. But it was too late to stop the alert. The Vietnamese early warning system had picked up the movements as soon as the Chinese aircraft had taken off from their base on Hainan Island.

Yet as the Vietnamese cities were about to come under attack, President Nguyen Van Tai prepared for a television interview. His country couldn't match China for weight of numbers, but it could in the skills of international diplomacy. During his time as Chairman of the National People's Congress in the nineties he had invited international observers to witness village and municipal elections. The State Department described them as a significant step towards creating a democratic Vietnam. CNN spotted him as a president in waiting. He was flown to their headquarters in Atlanta as part of a policy to gain access to aspiring future world leaders. He was given a day-long course on how to handle the media, and later remarked that it had been the most useful six hours of his life. He was taught to sit in a fixed, and not a swivel chair; to keep his eyes on the interviewer; never to say anything in the studio which was not on the record; to make only one, at the most two points and to say them in twelve seconds; to watch the clock if he wanted the last word; to be on first name terms with his interviewer; never to lose his temper. They also told him to pick his audience and venue. That's why Nguyen Van Tai had turned down CNN tonight. His message was to the people of France.

Rain swept across the boulevards of Hanoi. It streaked down the facades of the magnificent colonial buildings, many of which even now served as government offices. But Nguyen Van Tai had chosen the French-owned Metropole Hotel for the interview. He did not want the cameras to show the still entrenched bric-a-brac of the Communist regime which lingered in the corridors of the Imperial Palace. His underemployed staff, asleep with cooling jars of tea at their desks, would not have cultivated the image of an economic tiger on the brink of democratic government. Vietnam was not, but images were all-important.

The Vietnamese government paid for the suite. Listening devices, installed at the time of renovation, were activated. Nguyen Van Tai had insisted in going live into a rolling news late-night current affairs programme. As the microphone was clipped to his lapel, the producer revealed that the Chinese Ambassador to Paris would also be part of the discussion. Tai nodded. Vietnamese agents in Paris had already told him.

Then suddenly, only minutes before airtime, Nguyen Van Tai unclipped his microphone and excused himself to an adjoining room where his military intelligence chief was on a scrambled line to a colonel at the military headquarters in Hanoi. The Chinese attacks were expected to begin within the next five minutes. The aircraft were heading towards the northern port of Haiphong and the commercial capital Ho Chi Minh City in the south.

Nguyen Van Tai returned to his chair and allowed the Chinese Ambassador to speak first. The diplomat's French was imperfect. He stuttered and appeared to be unaware of the details of the Chinese military operation. Nguyen's turn came just as the first Chinese H-6 fighter-bombers broke through the clouds over Haiphong.

`Mr President, China says you started this conflict,' said the presenter in Paris. `What is your response to that?'

`We and our ASEAN allies (that's Singapore, Indonesia, Thailand, Brunei, Malaysia, Myanmar, Cambodia, Laos, and the Philippines) have known about the Chinese claim to the South China Sea for some time. The Ambassador, I'm afraid, is telling the world nothing new. What he has failed to mention is the 1994 pledge by the then Chinese Prime Minister, Li Peng, that all differences would be settled peacefully. More to the point, China completely ignores the diplomatic note that passed between us as late as 26th of December last year. May I remind you of what that note said? We took the unusual step of publishing it in full yesterday. That note said "the two sides should refrain from the use of force to settle disputes and avoid any clashes that may aggravate the situation".

`Now China has broken that pledge in a most horrible and bloody way. The Ambassador has said we have illegally occupied reefs. He accuses our troops of violating the border area. I'm not going to answer those accusations because if I do your viewers will be asked to judge who's telling the truth and who isn't. The key element, which we all know to be true, is that French citizens have been killed by Chinese pilots. Vietnamese and other nationalities are also victims. We are not discussing the occupation of reefs. We are discussing the mass murder of civilians by the Chinese government.'

The anchor broke in: `You talk about your ASEAN allies.

Are you convinced that they will support you against China?'

`That is what ASEAN has been about ever since its inception. The 1972 proclamation of South-East Asia as a zone of peace stated just that. Written into the articles of ASEAN is the pledge that no state may stand by and watch the dismemberment of another by a foreign power. In Asia we have a problem with short-termism. We have always put money ahead of culture and civilization, which is why we were so easily colonized in the nineteenth century.'

`So you are saying that-'

`Please let me finish, because it is important,' interrupted the Vietnamese President. `My fellow leaders in ASEAN are right now under great pressure from the overseas Chinese businessmen who have an extraordinary control over the economies of their countries. For example, 10 per cent of the population of Thailand is Chinese. Yet Chinese business accounts for 90 per cent of the wealthiest families. It is the same throughout South-East Asia. These are the families who can coax China into change, who can bring pressure for reform. If they were united they could cripple the Chinese economy by freezing their investment. I urge them to act as we in Vietnam did with France and America. We fought and won. We sacrificed and now we are friends with both countries on equal terms. Our pride is high. Never has Vietnam put profits before its independence and freedom.'

`Do you welcome the support from the French government?'

`We can't win a war with China. We welcome support from whoever offers.'

`And from the Americans with whom you fought so bitterly less than forty years ago?'

`Before that we fought France. And you are invited back.

Our founding father Ho Chi Minh offered Cam Ranh Bay to the Americans in 1945. If they had taken it then perhaps there would have been no war.'

`Is it still on offer?'

`We have now seen that if a responsible superpower weakens in East Asia an irresponsible one moves in. And I would say this to the Ambassador in your studio. We might have fought America and France, but our soldiers have never been used to murdering their fellow countrymen unlike those in China.'

The anchor turned to the Chinese Ambassador for a response.

`The Chinese nation has a history of five thousand years and has a national characteristic of strong self-respect,' he said. `Over the past hundred-odd years, the Chinese nation has had its fill of aggression and devastation by Western foreign powers. We therefore highly treasure our independence and sovereignty.'

While the Ambassador struggled with his rhetoric, the head of Vietnamese security came into the room and slipped Nguyen Van Tai a piece of paper. The President read it, and then interrupted the Ambassador. His voice was transmitting while the cameras remained for a few seconds on the Ambassador's face. `I am not sure what point the Ambassador is making, but I have been given some devastating news.'

`Go on,' prompted the anchor.

`Right now, Chinese attack aircraft are in action over civilian areas in our northern port city of Haiphong and Ho Chi Minh City, better known to many of you as Saigon. One of the Chinese missiles landed on the roof of the Rex Hotel. There were guests having breakfast. Many are dead. Residential areas in Haiphong have been attacked, mainly near the port. An apartment block, where port workers and their families live, has collapsed. Again, it was early morning. Many people were at home. Merchant ships have been sunk in Haiphong, but that appears irrelevant against the huge loss of life.'

It was still dark when the driver picked Kobayashi up and handed him copies of the Nihon Keizai (Nikkei) Shimbun, the financial newspaper, and the Yomiuri Shimbun, a general news broadsheet. Kobayashi was the head of strategy and trading at Nomura Securities pan's, and the world's, biggest dealer in shares and bonds. He looked first at the Yomiuri Shimbun. It was close to Prime Minister Hyashi's faction in the Democratic Party and in Japan, after all, politics was business. Hidei Kobayashi's driver took the same route every morning, and this morning was no exception. After turning into Aoyama-dori Kobayashi's car made its way east, towards the Imperial Palace and beyond that Kabuto-cho. But this morning something was different. Along the way Kobayashi could not help but notice the queues forming at gas stations. The Chinese attack on Cam Ranh Bay had dominated the television news bulletins the night before and the broadcasts that morning were already full of the naval blockade of the South China Sea and the attack on Haiphong and Ho Chi Minh City. The Japanese motorists, he reflected, were taking no chances.

The sky was lightening with the approaching dawn as he reached the Imperial Palace and it was serene. The moat surrounding it was like a mirror reflecting perfectly the massive cedars and cypresses planted to keep prying eyes from the Imperial family. At the corner of Hakumi-dori and Hibiya-dori ill dominated by the Dai-ichi Mutual Life Insurance Company building from where the American General Douglas MacArthur ruled Japan after World War II turned north along Hibiya-dori. This is the Marunouchi district of town where `old money' corporate Japan has its headquarters. The great houses of Mitsui, Mitsubishi, and Sumitomo are headquartered here, as are some of the leading banks such as the Industrial Bank of Japan. Since the seventeenth century, when the Shogun Ieasu Tokugawa made Edo his capital, the commercial and financial heart of Tokyo had been to the east of and beyond the Imperial Palace. In the aftermath of the firebombing of Tokyo more than sixty years before Tokyo's owners had rebuilt the city, or at least this part, in the image of its destroyers. Marunouchi was one of the most Western-looking areas of the city. The streets were wide and regular, the buildings square and squat. On the street in some parts of Marunouchi, like the fashionable Ginza area, it felt almost Parisian. Small, immaculately manicured and boxed trees lined streets full of high-priced boutiques and smart coffee shops.

It was a glorious winter's morning: cold and crisp. It was also clear and that meant the sun would shine today. As Kobayashi surveyed the newspapers the headlines were universally gloomy. The Nikkei's splash said it all: Minami umi shokku! it trumpeted. `South Sea shock', indeed. China's military action the day before was sure to send share prices lower on the Tokyo Stock Exchange. The yen would come under pressure and the prices of government bonds would fall, which meant that interest rates would rise. Other Asian stock markets would not be immune from this. Kobayashi's job was to profit from this mess or, at the very least, minimize the losses to his firm. A kilometre or so north his driver turned left into Eitai-dori. As they crossed Sotobori-dori Kobayashi looked up, noticing the pre-war facade of the Bank of Japan, one of the few surviving buildings of the American firebombing. The Bank would have its work cut out for it today, he thought. The car turned north into Chuo-dori and drove toward Nihonbashi, the graceful old two-arched bridge from where all distances from Tokyo are measured, and the headquarters of Nomura nearby. An item in the Yomiuri caught his eye. It was a commentary by Professor Hiroshi Sato, a foreign policy adviser to Prime Minister Hyashi. Professor Sato said he thought Japan could build something new from the current adversity. `For too long we have been prepared to hide behind others' skirts. We have legitimate national interests and we should assert them with whatever means we have at our disposal.'

At the morning meeting of Kobayashi's strategy and trading team the only topic of discussion was the Chinese seizure of the South China Sea. Few could see any good coming from it for Japan. The nation's dependency on foreign energy supplies had been well canvassed in the press. Only 14 per cent of Japan's total electricity supply was generated by facilities totally within the nation's control clear and hydroelectric power. The remaining 86 per cent was from oil-, coal-, or gas-fired power stations whose raw-material inputs were imported. The vast majority of those imports re than 90 per cent had to transit the South China Sea. The discussion turned to the effect a possible interruption to supply or a prolonged oil-price rise would have on Japan. An interruption to supply was not seen as likely. If international shipping was barred from the South China Sea then the ships from the Persian Gulf and from Australia could travel up the east coast of the Philippine islands. This would add four to five days' extra sailing time which, while unsettling, was well within acceptable limits given the country's stockpiles of oil. It would, however, raise the price of oil on a c.i.f. (cost, insurance, and freight) basis. That would impact on domestic gasoline prices. The bigger price effect, however, was judged to come from the reaction of international oil markets to the incidents in the South China Sea.

Oil was not the only factor. Many Japanese companies were involved in the Chinese economy. In the early years of China's opening the Beijing authorities, suspicious of outside influences, had encouraged foreign investors to seek local partners and with them form joint venture companies. Latterly however China had allowed foreign companies to set up businesses on their own, without local partners. In general, the companies more knowledgeable about doing business in China preferred these `stand-alone' arrangements. Going it alone was not cost-free but it was a risk many took because management control rested firmly in the hands of the investor and profits did not have to be shared with local investors. A good, and now vulnerable, example of this was Matsushita Electric Company, best known for its National range of consumer electronics. It had invested heavily in China, especially in the north-east which was once called Manchuria or, when the Japanese controlled it, Manchuko. It was the north-east port of Dalian where Matsushita made its biggest investment $180 million to produce video recorders. For the Chinese, the Japanese investment was rich with a bitter-sweet significance. This was the trading region which Japan invaded and seized from the crippled Nationalist government in the 1930s. Earlier, however, the Japanese had defeated the Russian Pacific fleet, and showed the world that Asians could fight and win against a European superpower. But Matsushita's managers also knew that China was a country of regions where local priorities often overrode national aspirations. So it spread its largesse up and down the country. In Canton (now called Guangzhou) it had invested $35 million in a plant to manufacture electric shavers, and $28 million in electrical appliances like rice cookers; in Beijing, it invested $28 million in telephone exchange relays. The not wholly unsurprising view of the meeting was that Matsushita was sure to be hit. Kobayashi observed that Matsushita was a little like Boeing, the US aerospace company. Both had made large investments in China and both had hitched their fortunes to the success of China's modernization programme.

Even more vulnerable to selling pressure would be some large firms, like Nippon Oil, which had big investments in the South China Sea itself and was a 30 per cent shareholder of the Discovery 1 oilfield in the Paracels. This placed Nomura in a tricky position. As Nippon Oil's broker, it was honour bound not to sell the company's shares. Years ago it had floated Nippon Oil's shares on the Tokyo Stock Exchange and was the company's agent in all dealings. And the relationship, now spanning thirty years, went deeper. Whenever Nippon Oil wanted to raise fresh capital for expansion Nomura advised on the best form of financing. Indeed, Nomura arranged the billion loan which Nippon Oil issued to fund its share of Discovery 1's development. Nomura was the biggest securities company in Japan, with a 40 per cent share of turnover on the Tokyo Stock Exchange. But only 25 per cent was executed in Nomura's name. The rest was handled by subsidiary firms which traded under different names. Despite the high-tech facade, Tokyo was not like London and Wall Street. Honour, loyalty, and stamina created the Shoguns of Kabuto-cho. This was capitalism, Japanese-style. It worked. It had created the undisputed economic leader of Asia in less than a generation. But there was no way Kobayashi could be seen to be selling Nippon Oil's shares. To do so would be to tear the soul out of Japan's banking tradition. He also had to act within the best interests of his own noble institution. Kobayashi instructed a Nomura subsidiary to handle the Nomura sell orders, while Nomura in its own name would execute any buy orders that might come the firm's way. This way Nomura would be seen to be supporting Nippon Oil.

And who might these sellers be? They fell into two groups: retail and professional. `Retail' was market jargon for household investors. These were the same people Kobayashi had seen queuing for petrol on his way to work and they were invariably women and they were powerful. Retail investors were responsible for 23 per cent of the Tokyo market's turnover. The Japanese housewife was every bit as determined as her `salariman' husband. She managed the household finances, as is customary in East Asia, and was an experienced stock market investor. Having filled up the family car with petrol the next thing the formidable Mrs Suzukis of Japan would do was call their broker with a view to selling. Bitter experience had taught Kobayashi that the firm could not stand in the way of these women. It was best to redirect their funds elsewhere. With the yen under pressure, the dollar was the place to be.

Then there were the professionals. These were the big Japanese trust and investment companies that managed pension funds. They were huge and powerful but paradoxically impotent. They were so big that changing investment direction was akin to the difficulties the captain of a supertanker faced in attempting a U-turn. It could be done, but it required time and a lot of sea to execute. The professionals were to a large extent locked in. They could adjust their holdings at the margin, but not overall. They were at the mercy of the `hedge funds'. These were the money managers who moved hundreds of millions of dollars in an instant from one end of the world to the other and back again. They placed big bets on shares, commodities, bonds, and currencies, and often won, and lost, spectacularly. But Kobayashi's real concern was the US mutual funds. Their power had become awesome. During the 1990s they became the preferred means for US citizens to save. By the end of 1995 their total value was $1.25 trillion. Since then they had grown, on average, by 10 per cent a year, and on the eve of Dragonstrike US mutual-fund managers controlled some $2.6 trillion of assets. Their asset base was staggering and they had a portion of it invested in Asia. But this was mobile money. Mutual-fund managers were notorious for being driven by the requirement to make short-term gains. Here today, gone tomorrow, their presence in Asia's stock markets had added considerably to volatility in share prices. A telephone call and an investor in Kansas could sell Hong Kong and buy US Treasury bills; sell Europe and buy Australia. Individual transactions, however, did not count when compared to the decisions of investment managers. Kobayashi knew from the business Nomura had seen coming in overnight that the mutuals — for all their belief in the Pacific Century — are about to repatriate their funds. And the decision the managers had taken on the Sunday was to sell.

The Private Secretary to the Philippine President, Miguel Luzong, opened the high teak double doors to the conference room without knocking. As he walked across the room the President's concentration was distracted towards the news he was about to receive. The conversation around the table faded, then quietened while the man who used to command the Philippine Armed Forces was told about Mischief Reef.

`This has just happened, sir,' said the Private Secretary.

Luzong addressed the meeting of ministers and businessmen. `Gentlemen, our troops have met resistance in their attempt to recover Mischief Reef and we have lost contact. We are sending reinforcements.'

The powerful Mayor of Manila, Hernesto Lim, a Chinese-Filipino, replied quickly. `Don't, Mr President. Speaking for the overseas Chinese community, we ask you to back off. If we send reinforcements, they'll send reinforcements. We cannot hold that territory, nor for any reason except national pride do we want to.'

`National pride is not an unimportant sentiment, Hernesto,' Luzong countered.

`It is a disease which is afflicting the Chinese government at the moment and might well destroy it. This country suffered from the disease of dictatorship for twenty years. It made us the sick man of Asia. While Korea, Taiwan, Malaysia, and Thailand became rich, the Philippines became a joke. Mr President, this South China Sea conflict is not one for us. It is for America, China, and Japan. If we take sides, like we did during the Cold War, our national morale will be destroyed again. We will be accused of being an American puppet. Let us take a lead from Malaysia. They have abandoned the Mariveles, Ardasier, and Swallow Reefs, even their airbase at Terumbi Layang-layang. Forget about Mischief Reef. We rid ourselves of the Americans in 1992. We restored democracy. We are building the foundations of a Philippine heritage of which we can be proud. Our economy, much of which is interlinked to the Chinese communities throughout the world, is growing strong. We fought the Cold War while our ASEAN neighbours kept a low profile and became rich. If another global conflict is approaching, let us not get involved. Let us concentrate on building hospitals, roads, airports, ports, power stations, schools, and houses for our people. That, sir, is where our duty as leaders of the country lies.'

`And we let China take over the South China Sea?' prompted Luzong.

`What does it matter? They will allow trade.'

`My generals are restless.'

`Then they should pick a battle that they can win. If they can't defeat the Muslim terrorists in the south, they shouldn't pick a fight with the People's Liberation Army.' Without calling for a vote, the President looked at each man around the room, then nodded to his Private Secretary to call off the recovery of Mischief Reef.

Twenty-four hours after their first meeting, James Bradlay, the American President, was alone with Martin Weinstein, his National Security Adviser. The first pictures of the bombing of Ho Chi Minh City were being broadcast on CNN. The correspondent speculated that it had been targeted because it was a favourite winter retreat for the Vietnamese cabinet.

`It's to prove their long-range attack capability,' Weinstein said quietly. `Saigon is 500 kilometres from Yulin, their southernmost airbase. It's evidence of their in-flight refuelling capabilities, which gives them at least thirty minutes to attack, turn, and go back. We call it loiter time.'

The appeal by Nguyen Van Tai, dubbed and translated, was run over the scenes of devastation on the roof of the Rex Hotel. An American woman, with blood streaming down her side, carried a child wrapped in a tablecloth away from the debris.

`So what have you got for me, Marty?'

The NSA outlined America's immediate military capability.

The 100,000 tonne nuclear-powered aircraft carrier USS Harry S. Truman had been redirected from the Sea of Japan towards the Chinese blockade. No public announcement would be made yet. She could be on the edge of the South China Sea within twenty-four hours. She was carrying 20 F-14 Tomcat fighters, 36 F/A-18 Hornet fighter-bombers, 4 EA-6B Prowler electronics countermeasures aircraft, 4 E-2C Hawkeye early warning aircraft, 6 S-3A Viking submarine hunters, and 8 SH-3 Seahawk rescue helicopters.

She led a formidable battle group which once within the South China Sea could project power throughout. It comprised the brand-new 9,217 ton Arleigh Burke class guided-missile destroyer USS Oscar Austin, commissioned only a year earlier, carrying Harpoon anti-ship missiles, anti-submarine missile torpedoes (ASROC), and Mk50 torpedoes; the 4,100 ton Oliver Hazard Perry class guided-missile frigate USS Ford, with similar weaponry; the 8,040 ton Spruance class destroyer USS Hayler, whose armaments included Tomahawk long-range land-attack and anti-ship cruise missiles and Sea Sparrow anti-aircraft missiles; the Kilauea class ammunition ship USS Shasta; the Jumboized Cimarron class oiler USS Willamette; and the 9,466 ton Ticonderoga class guided-missile Aegis cruisers USS Port Royal and USS Vella Gulf. They carried Tomahawks, Harpoons, standard surface-to-air missiles, ASROC, and Mk32, Mk46, and Mk50 torpedoes. Three submarines accompanied the group, the Los Angeles class USS Cheyenne, Columbia, and Boise.

Another American battle group was led by the aircraft carrier USS Nimitz, which because of her age was confined to the East Asia region. Joining her was the Tarawa class amphibious assault ship USS Peleliu. With 1,600 Marines on board, she had been on joint training exercise for international disaster relief with Philippine Marines, and was heading back to Hawaii when ordered to stay with the Nimitz. The battle group was holding its position in the Sulu Sea near the Cagayan Islands between Negros and Palawan. It was only eight hours' sailing time from the South China Sea.

`Are you telling me, Marty, we could just go in there and take back the South China Sea and the islands?' asked Bradlay.

`Yes and no, Mr President,' Weinstein replied. `The Chinese might have a lousy army, navy, and air force. But when it comes to missiles you could say they are getting close to us. You only need one missile to get through the net to reap destruction. The Bunker Hill is there to help our own IMINT operations. She can watch any missile from its launch up through the atmosphere and down again to target. So the Chinese could up the stakes and threaten to send a missile into Vietnam or something if we move against them.'

`And we couldn't shoot it down?'

`There would be no guarantee. And there's one other thing.'

`Go on.'

`We have the same problem as China. We could take the South China Sea, but we couldn't hold it. The best damn navy in the world is simply not powerful enough. Our armed forces are suffering from the Base Plan implemented in 1992 by the then Chairman of the Joint Chiefs of Staff General Colin Powell. Our navy ships have been cut from 443 to 340; our carrier battle groups from 14 to 12; our air force fighter wings from 16 to 13. The armed forces have been cut and cut, yet our commitments are increasing.'

`But we can still send four more carrier groups to the South China Sea.'

`Again, Mr President, yes and no. We maintain 35 operational deployments around the world. There's 160,000 American service personnel out there in jobs ranging from the 35,000 on the Korean Peninsula to 2,000 in Burundi. They're costing money. Burundi is $120 million. The processing of Caribbean refugees at the Guantanamo base in Cuba by 1,100 soldiers is costing $250 million a year. Unforeseen flare-ups with Iraq and Libya amounted to $550 million. It's little bits here and there which mount up and get noticed by Congress. We have to go cap in hand every time we want to set up another operation.

`The current configuration of our armed forces is precisely for these multilateral operations and has been since the 1990s, when we went into post-Cold War deployment. But the reduction has meant that we are incapable of fighting two regional conflicts at once. One example is the new C-17 transport plane. Our operations mean the airlifting of thousands of troops very quickly. In this crisis, they would probably go to Vietnam or we could persuade the Philippines to let us back in. Our C-17 airlift fleet is thirty aircraft short because they haven't come off the production line yet. America's ability to fight two major regional conflicts will remain sharply limited until 2006.'

`I'm hearing you, Marty, but we've only got one conflict right now, in the South China Sea.'

`That's this week, Mr President.'

The two men were silent for a moment, watching the pictures of the bombing in Haiphong. Fire and black smoke leapt out from an apartment block. Ships listed, ablaze, in the harbour.

`Who's on our side, then?' Bradlay asked.

`Western Europe. Most of them will pontificate. But we can rely on France and Britain. Japan's an ally. But do we want it to get militarily involved? Shades of World War II and all that. India will stay neutral and privately back us. India's wary of China and of Pakistan. They like us around. Don't count on Pakistan. They've been thick with China. Their Karakoram-8 jet trainer, Khalid tank, HJ-8 anti-tank missiles, and Anza-2 surface-to-air missile are all based on Chinese design and technology. Burma's military is kitted out and bankrolled by the PLA. The rest of South-East Asia wants to make money. If America looks like jeopardizing that, they won't support us. Africa doesn't matter.'

`What about the Russians?' asked the President.

`They have teams of engineers right now down on Hainan Island, working on the Su-27s at Yulin, the Kilos at the Sanya submarine base next door, and whatever else they've sold to China at Zhanjiang, the headquarters of the South Sea Fleet. On top of that, their scientists are helping with Chinese missile programmes. Without Russian cooperation, sir, we should be a lot better placed to go to war with the Chinese.'

The morning trading session, which in Tokyo lasts from 9.00 until 11.00, was overactive, with 200 million shares trading. But what was worrying was the scale of the fall in share prices in the Nikkei index of 225 leading Japanese stocks led by Matsushita, Nippon Oil, and a raft of blue-chip Japanese companies. The index had only sailed through the 40,000 barrier at the end of January, and it ended the morning more than 400 points, or more than 1 per cent, lower, at 39,700. More worrying still was the behaviour of the yen. It had been trading in a narrow band of to to the US dollar, but in the Tokyo morning session it had fallen to.6 4 per cent depreciation. The Bank of Japan was frantically selling dollars for yen, but dollars were what the market wanted to buy… except First China. As investors dumped the yen it began to calculate the value of its short-yen position. First China, with General Zhao's backing, had borrowed billion and immediately sold it forward. For the bet to pay off, the spot yen rate against the dollar e rate at which people deal minute to minute during the day would have to weaken from the average rate at which First China borrowed. The collapse in the yen was just what Phillips and Zhao had predicted. Trading through the day in Tokyo it managed to achieve an overall profit for General Zhao of 10.8 per cent or the equivalent of $181.95 million. But Damian Phillips was only a keen spectator on Monday. He knew the yen had far further to fall.

In 2001 the countries of South-East Asia possessed sizeable minorities of ethnic Chinese. Tens of millions had fled their country's civil wars, tumults, and famines to far-flung corners of the Earth. They built the railways in Canada, America, and Australia and stayed on to pan for gold and set up restaurants and business, but most emigrated to the countries bordering the South China Sea. In these countries their business acumen enabled them to build formidable money empires which dwarfed those of the generally less entrepreneurial native populations. Small in number, these overseas Chinese possessed great financial power. In Indonesia just 3.5 per cent of the population were ethnic Chinese yet they controlled 80 per cent of the assets of the top 300 companies. This pattern of economic dominance was repeated throughout the region. In the Philippines the ethnic Chinese represented 2 per cent of the population and controlled up to 60 per cent of the stock market; in Thailand, about 10 per cent of the population and 80 per cent of the stock market. Hong Kong was the point at which the overseas Chinese met the mainlanders. While they loathed the Communist system which had compelled many of them to flee China, their adherence to the teachings of the ancient Chinese sage Confucius and their yearning for China had not diminished. Importantly, neither were their links to the ancestral villages of their ancestors' birth completely severed. Chinese businessmen from Indonesia, Malaysia, Singapore, and the Philippines had traditionally used Hong Kong as the base for the `offshore' wealth. Now it had become the beachhead for their commercial thrust into China and the place where they felt most comfortable wining and dining their mainland business partners and contacts.

Since the mainland takeover of Hong Kong on 1 July 1997 little appeared to have changed. Hong Kong still retained its astonishingly modern skyline. Towers of glass and steel, designed by some of the world's leading monument builders to the rich, were set dramatically against the steeply rising north face of Victoria Peak. To the tourist who stopped over for three days on his way to Australia, or before or after visiting China, Hong Kong appeared to be business as usual. The Stanley market still offered value with its cheap T-shirts and fake Ming porcelain, the jade market in Kowloon still did a lively trade, and, to the amazement of many (especially given China's tough laws on the export of antiquities) it was still possible to buy a horse from the Tang Dynasty (ad 618) in the antique shops along Hollywood Road in Central. But below the surface, the new tougher sovereign exercised power in place of its benign and neglectful predecessor. China observed the outward forms of civic life bequeathed by the British. Beijing had no need to send down officials from the capital to rule Hong Kong; through inducement they saw to it that their chosen people found success in elections to the local parliament, or in appointments to the top jobs in government, academe, and the media. The worst time for the local administrators was the winter. Since the takeover Hong Kong had become a popular place for the more elderly military and Party leaders to spend the harshest months of the northern Chinese winter. A vast estate on the south-east of the island at Chum Hum Kok which the British had used to spy on China had been converted into a resort for the leadership. The local Cantonese referred to the place as the `retirement village'. But it was a whispered joke. A telephone call from any of the thirty or so senior leaders ensconced at the resort and a livelihood, though rarely a life, could be lost. Outside the random interventions of the elderly, Beijing's control was exercised at a weekly meeting between Hong Kong's Chief Executive, as the post-colonial governor was styled, and Beijing's senior representative in the `Special Administrative Region', as the colony was now known. A curl of the Beijing representative's lip or a flicker of his eyebrow was sufficient to indicate to the Chief Executive whether his choice for, say, the chairman of the hospital authority or monetary authority was likely to find favour in Beijing.

The media marched to the beat of the same drum. The Communist Party had been assiduous in infiltrating trusted agents into the main Chinese language and English-language newspapers and broadcast organizations. Together with the Party's stranglehold on the universities, the takeover of the media was one of the most successful of its operations in Hong Kong, all the more for being largely unnoticed. The people who rose to the top in Hong Kong's news media after 1997 were well-educated and articulate presenters of China's point of view. They ensured media gave full and positive coverage to the Chinese government's plans for the country's economic development. That morning the newspapers carried in full China's reasons for seizing the South China Sea. China was simply making de jure what had always been its de facto sovereignty over the South China Sea. Its pre-emptive strike against Vietnam was prudent, though the consequent casualties on both sides were regrettable. The newspapers recounted how generous Hong Kong had been in giving refuge to the Vietnamese boat people during the 1980s and 1990s. The only section of the media which remained relatively immune from interference was the financial pages. Yet even there care was taken not to offend any of the `Better Hong Kongers' group of Chinese tycoons who joined forces towards the end of 1995 to promote the view that it would be `business as usual' in Hong Kong after the China resumed sovereignty. This was an astute move as most of the tycoons who wanted an active public life were allowed one.

Hong Kong was a HK$500 billion, or about US$65 billion, stock market: the region's biggest after Tokyo. Such a concentration of wealth was like honey to the world's investment-banker bees. They swarmed there. But the problem for Hong Kong was that the US mutual funds owned nearly 40 per cent of the market.

On the first trading morning of the crisis the position of the overseas Chinese was far from the minds of traders in Hong Kong. Confidence had taken a serious knock. The Hang Seng Index of the top 33 stocks opened 120 points, or half a percentage point, lower. Then, as the pressure of selling by the US mutual funds gathered pace and brokers, in a process known as `bottom fishing', continued to cut prices to see if investors would be tempted to buy, the index continued lower. Citic Pacific, China's flagship enterprise in Hong Kong, lost nearly 10 per cent of its value in the morning session alone. The pattern was repeated for other Hong Kong stocks, both blue-chip stocks and the `red'-chip stocks of the mainland Chinese companies listed there. Foreign companies listed in Hong Kong fared marginally better, with the notable exception of Boeing, the US aerospace group. It had recently acceded to a Chinese government request to list its shares on a Chinese bourse and had chosen Hong Kong.

As share trading got into full swing the Hong Kong market was less concerned with elegant justifications for China's actions than it was with rumours that some of the selling pressure was emanating from Beijing. This was not as strange as it first seemed. The military and party leaders in Beijing were some of the biggest speculators on the Hong Kong exchange. Hong Kong was a perfect place for them. It was China yet in some mysterious way it was also not China, it was foreign. It was a place where the delights of the West could be experienced in total safety but without the trouble of actually having to deal with foreigners. The banks were still relatively confidential and knew how to be discreet about money transfers, but most senior officials preferred an alternative to the local banks. They put themselves beyond the prying eyes of the secret police by dealing through nominee companies registered in the British Virgin Islands. The association with an outpost of Britain colonialism was painful but far from terminal. These companies required no audited company accounts to be submitted to the authorities, and allowed incorporation with just one company director, rather than the usual two directors in most other `offshore' financial centres. This was as close to total financial secrecy as one could get. The gossip around Exchange Square was about which senior official in Zhongnanhai was liquidating such large positions. It didn't say a lot about the leadership's belief in success in the South China Sea operation for one of them to be so conspicuously on the sell side of the market.

Damian Phillips, Chairman of First China Securities, dismissed the rumour as idle speculation when rung up by a reporter from the South China Morning Post. Lunching that afternoon with a partner of Li & Li, a respected firm of mainly Cantonese brokers, in the Red Room of the Hong Kong club, his guest was heard to say: `Then again, Damian, they are probably just forcing the market lower so they buy back at a cheaper level. It would be amusing if he was a PLA man, wouldn't it?'

`Indeed it would, Peter,' he said, betraying no more than civility.

The German Chancellor waited for the last member of the cabinet to leave the room, then told his Private Secretary that he was not to be disturbed for at least fifteen minutes. There had been surprising agreement among his ministers about the need to show neutrality in the South China Sea dispute. He had expected some token objections.

For weeks the Chancellor had dismissed the opposition's prediction that Germany was foundering and would soon go into an inevitable decline. But even the 1815 quotation by Goethe framed above the wall behind his desk reminded him of the challenge ahead: `Anything in the world can be endured except a succession of prosperous days.'

Unemployment was at 4,000,000. Unofficial estimates put it at 6,000,000. The last time so many Germans were destitute and humiliated was in 1945 after the fall of the Third Reich. Welfare costs were rising. The Mittelstand the small and medium-sized private firms that were the foundation of German manufacturing might re losing their edge.

The German economic model was disintegrating as a result of high wages, low morale, a cradle-to-grave attitude among workers, bickering politics, and a changing global market which the Grossmacht had been too proud to respect. There was a brain drain of the best and brightest to Harvard and Stanford. The German universities were not good enough: yet before the Second World War Germany had been the world centre for medicine, chemistry, and physics. Research and development, the foundations of a strong economy, had become a joke. A similar tale of woe could be told about Germany's position in computers, office technology, and lasers.

Then there was the bureaucracy. While Britain had cut through red tape and attracted foreign investment, Germany had not. Investors had to wait on average three months in Britain, six months in France, and twenty-two months in Germany to get their investment plans approved. `The Americans invent, the Japanese produce, while the Germans dither.' The words from the Hanover Chamber of Commerce echoed silently around the room. How many billions of Deutschmarks had been lost in business which had gone to the cheaper labour markets in Poland, Hungary, and the Czech Republic? A German worker charged $25 an hour. A Czech worker cost just $2. There could be no competition.

There was no guarantee that the wealth of the Far East would solve the problems. But the opportunity was too great to risk by being drawn into a regional conflict. The consumer market was growing so fast that each Chinese province would soon represent the buying power of a European country.

But today a spectre of morality had been cast across trade with China and the Far East. France, without consultation, was moving its warships and fighting men to protect a former colony in Asia. The Chancellor had no doubt that the British navy would get involved in a day or two.

He flicked on his television set to see France announce the deployment of warships from its base in Tahiti. He hoped, in the spirit of economic competition, that when the crisis had blown over he could announce new joint-venture deals worth billions of Deutschmarks, with Daimler-Benz moving into Chinese provinces once earmarked for Citroen.

After the television broadcast, in the car back to his official residence, the French President flicked through the cue cards to which he had referred. He knew the statistics intimately, knowing that his policies would be applauded in the cafe´s and tabacs throughout France. There were two unquestionable assets in French political life: a mistress and overseas troop deployment.

The President suffered no less from economic problems than his friend the German Chancellor. France was undergoing painful reforms to wean it off subsidy and welfare. Clawing back benefits had caused the worst riots since the 1960s. But the President had no doubt that both rioters and government ministers would agree on the announcement he had just made. Over the years, the statistics had been unchanged.

50 per cent of the public thought more should be spent on defence, compared to between 20 and 35 per cent who thought spending should drop. 45 per cent believed France's national security was better preserved with the North Atlantic Treaty Organisation (NATO) than with either neutrality (16 per cent) or a European alliance (30 per cent).

90 per cent of French people believed troops should be sent to free French hostages. 84 per cent said they should go to protect French lives. Whatever other political nightmares he was facing, French military action against China would be the one which could be carried out without dispute. Vietnam belonged to France, not to the European Union.

Rebuilding Vietnam, its roads, ports, telecommunications, and armed forces, would more than compensate for the irritating and difficult business of getting contracts in China.

Light was fading over Moscow when the American Ambassador was shown into the suite of offices at the Russian Foreign Ministry. Even during the few metres from the Ambassador's limousine to the majestic front doors, the chill wind of the Moscow winter cut through his overcoat and numbed the exposed skin on his face. The Foreign Minister was sitting in a comfortable chair in the corner of the vast room. His manner was informal. The two men had worked with and against each other for nearly twenty years as the Soviet Union and then Russia lurched through its changing political face. The Foreign Minister had always regarded the Ambassador as a democratic ideologue who was short on pragmatism. Today he was preparing to give America a sharp jolt of reality. But he let the Ambassador speak first.

`Yergor, I will begin as a humble man always does, by quoting the words of one of my predecessors, Charles Bohlen, a far greater Ambassador to your country than I will ever be. He said: "There are two ways you can tell when a man is lying. One is when he says he can drink champagne all night and not get drunk. The other is when he says he understands Russians." Well, I can do neither, so can you help me?'

`You want to know what we are doing with China,' responded the Foreign Minister, without acknowledging the humour of the opening gambit.

`Perhaps we could start at the beginning. Did you know about Dragonstrike?'

`Is that what they're calling it? No, I didn't, Andrew. Nor I think did the President. Our generals, as you know, are a rule to themselves. But as it is difficult for anyone to know what the Chinese are thinking I wouldn't be surprised if they had been kept in the dark with the rest of us.'

`What, then, are you supplying to them in the way of military equipment and personnel?'

`Only what we are obliged to do under our contractual arrangements. I'm sure the CIA has as many details as I have. But there are the Su-27 attack aircraft, Kilo class submarines. They even keep talking about buying an aircraft carrier from us. For years our air force is flying men and equipment to China on Beijing's request. It is obliged to under the deal we signed with the People's Liberation Army.'

`We want you to stop.' `It is out of my hands,' said the Foreign Minister. `Why don't you call Rosvoorouzhenie, the state corporation for export and import of armaments and military equipment? They're handling it.'

`Yergor, don't get involved in this one. The world's getting dangerous enough with China going crazy. If Russia goes in…'

There was a silence of thirty-three seconds. The Foreign Minister then replied.

`Andrew, if I wanted to stop those airlifts, I couldn't. The generals would put the phone down on me. They would do the same to the President. And, frankly, during our negotiations over the past couple of years, America has been too blind to see what's going on. The dangerous world has been created by your policies, not by flying some aircraft spare parts to China.'

`I cannot agree to…'

`Then stop thinking about agreeing and listen for once.' The Foreign Minister got up and walked around the room as he spoke. `What were you fighting against during the years of the Cold War. Communism? Or an expansionist Russia whose Marxist banner provided the excuse to plot her containment? Tell me, what do your analysts conclude is the character of my country? Are the Russian roots stained only with Bolshevism? Or will they always be at odds with what you call the Free World and the West because the Russian Bear will for ever be a threat?

`If you were fighting Communism, then you saved the Russian people and are now helping them recover, creating lasting democratic and economic institutions, and joining the global community as an strong and equal partner. But perhaps not. If Communism was the enemy, then why has your government been so friendly towards China? You have given us no evidence that America's campaign of containment was not against Russia herself; that America does not intend to weaken her and divide her. Many people think that America believes the long-term security of Europe lies with a feeble Russia, surrounded by an isolating cordon through which we cannot expand d this is the view fuelling the constituencies of your enemies, the Communists and the Nationalists.'

`Which do you adhere to, Yergor?'

`I am not entering an academic debate, Ambassador. I am giving you a message for your President.

`The policeman to this cordon is the North Atlantic Treaty Organisation. This is a military and not a political organization. And far from leaving it as it was, an effective weapon for Western Europe, you are now allying yourself with Poland, Hungary, and the Czech Republic. You are parking your tanks on our front lawn. Poland says it is willing to host NATO nuclear weapons. It is an act of hostility.'

`But all this is being negotiated. It has been for years. What is the point of bringing it up now?'

`Because, Andrew, this is the reason I cannot call off the military airlifts to China. This is the reason that the nationalists and Communists are winning support daily among our electorate. Your policy and I quote from Clinton at the 1994 NATO summit, "It's not a question of whether NATO will take on new members, but when and how" creating a Russian monster again. If you expand, you will transform millions of allies of democracy into allies of radicals and madmen. Russians will realize that they had been wrong to trust you. An embittered, defeatist complex would be cast over the country, of the sort that once brought Hitler and Mussolini to power and pushed the world into war.

`We are too weak to expand west. So if you expand east we have no choice but to go east as well. There's only one place to end up there and that's in Beijing. If I am not making myself clear, I will spell it out. You are bankrolling our former East European satellite states. This is only to be expected with shared white faces and civilization. But you are not bankrolling our former eastern states, filled with slant-eyed, brown-skinned Muslims. The Presidents of Kazakhstan, Kyrgyzstan, and Tajikistan, Ambassador, have been bought by China. Why don't you take a plane there and walk through the hotel lobbies in Dushanbe and tell me who you think runs the place? The tectonic plates of global power are scraping together this month. They have been activated by Dragonstrike and only your government is powerful enough to control the dangers it has released.'

Of all the American companies affected by China's strike against Vietnam and its blockade of the South China Sea, Boeing had the most to lose. The company had become deeply enmeshed in China and its rapidly growing aviation market. A Chinese engineer, Wang Tsu, helped design the new 314 Clipper seaplane, which made its first transpacific flight to Hong Kong in 1939. A Boeing 707 carried Richard Nixon to China in 1972 in a historic visit which rewrote global power alignments. Shortly after that the Civil Aviation Administration of China (CAAC) ordered ten Boeing 707s to establish itself as an international airline. Deng Xiaoping visited the Boeing headquarters in Seattle when he went to America in 1979. When Jiang Zemin, the President of China when Deng died, went to America in 1994 he met an `average' American worker and his family. That was in Seattle. The worker was an employee of Boeing. So far China had bought or ordered 224 Boeing airliners in contracts worth $9 billion. The company had field representatives in sixteen cities throughout China. A thousand pilots and engineers were trained by Boeing every year. It had installed flight simulators free of charge at China's Civil Aviation Flying College. There were joint-venture factories in Xian making Boeing 737 vertical fins, horizontal stabilizers, forwards access doors, and 747 trailing edge ribs alongside the construction of the H-6 bombers for the Chinese air force, and in Shenyang making Boeing 757 Cargo doors; a plant in Chongqing made aluminium and titanium forgings.

This was why Reece Overhalt Jr., Chief Executive Officer and leading proponent within Boeing senior management of its `China push', was in his office at the company's Seattle headquarters at 6.00 on Monday morning. His office was sparsely decorated. Someone who liked the style might call it spare. Aside from a large desk, a Reuters monitor, computer, and scale models of Boeing aircraft, the only decorative feature was an example of calligraphy hanging on the wall opposite his desk. It featured a single Chinese character, itself made up of two separate characters: the character for knife and the character for heart. The former was on top of the latter and in combination they meant endurance.

Overhalt had seen the rise of Asia coming at the beginning of the 1980s. As Executive Vice-President of Overseas Business Development he had forged links with Japanese engineering groups like Mitsubishi Heavy Industries, who would provide the `local content' needed to secure aircraft orders from Japan's international carriers. But he hadn't taken his eye off China, which was destined to become the single biggest aviation market in the world. Overhalt had spent three years in China in the early 1980s and he knew the country and its people from the ground up.

It had not been an easy time for a Western executive who had grown soft on the creature comforts of suburban Seattle. Overhalt liked to remind people how he spent three years cooped up in an ageing hotel where eager hall attendants constantly found reasons to enter his room without ever managing to replenish the soap or toilet paper. And how he worked in an unheated office in winter, and tried to monitor the work of mechanics who refused to read the manuals that explained how to maintain and repair million-dollar aircraft. Such experiences would have turned off many, but not Overhalt. He knew he was observing the first, halting steps of a giant that had been kept in the dark for so long that it was afraid of the light.

He was not starry-eyed about China. Chinese managers were chronically poor at planning; they had no concept of preventative maintenance, which they regarded as a waste of money; they were appalling communicators; and they had a `petty cash' mentality. Overhalt never tired of telling the story of how the authorities refused to fly a damaged $4 million engine to the US for repairs, preferring instead to send it by sea because it was cheaper. The repairs took thirty days but the engine was out of commission for thirteen months. Yet he admired their tenacity. His other favourite story told of how in Shanghai he saw a disassembled Boeing 707. The Chinese had bought it in the early 1970s and, by his reckoning, spent $300 million trying to copy the design and technology of the aircraft. They couldn't do it.

The years in China stood him in good stead. As an adviser to the Civil Aviation Authority of China (CAAC), which at that time operated and regulated all non-military airlines in China, Overhalt got to make friends with many officials who, like him, would rise to prominent positions in China's deregulated airline industry years later. His time in China allowed him to renew his friendship with the man who became the Chinese Foreign Minister. They had been at Harvard together. Song had responded cautiously at first to the relaxation of Communist Party rule in the early 1980s, but by the time Overhalt left in 1985 Song was the proud owner of one of the only seven Cadillacs in Beijing. Song had also cultivated powerful political connections deep within the Beijing bureaucracy. Overhalt remembered vividly the afternoon Song took him to Zhongnanhai to meet the Politburo member with responsibility for aviation. It was late winter and bitterly cold but after the meeting they had walked around the partially frozen lake e dominant feature of Zhongnanhai d talked about China and its future.

That all seemed so long ago. As Overhalt looked at his Reuters screen he saw that Boeing's share price was beginning to sag — the company's share price was $5 and three-eighths lower than Friday's close. The New York Stock Exchange had just opened and of all the high-profile US companies with business in China, Boeing was seen as a prime loser. This was mirrored in other markets by other companies in Boeing's position. In Frankfurt, Siemens' share price was off; in London, GEC was also performing worse than the market as a whole. Both companies had made strategic bets on China in the 1990s and profited: GEC sold turbines for power stations, high-speed telephone switches to local telecommunications companies, and defence communications systems. Indeed, outside the NATO countries, China was the single most important market bar none.

The impact of China's actions was most keenly felt in the oil market, and in the Lloyd's insurance market. Brent Crude, the bell-wether crude traded in London, rose $1.40 per barrel to $26.40. When New York opened West Texas Intermediate, which historically always traded around $1.50 higher than Brent, rose to nearly $28 in sympathy with European trading. The world oil market was delicately poised. The big companies had been trying to achieve a `just in time' delivery of oil to their refineries. They had taken the idea from Toyota, the Japanese car manufacturer, which organized the production of a vehicle so that the components for its manufacture arrived at the factory gate just in time for assembly. This cut the cost to Toyota of holding stocks of parts. So to the oil majors. They were trying to manage their refineries so that stocks (and attendant costs) were held to the minimum. But the winter of 2000/2001 was one of the fiercest experienced in northern Europe and the US. Demand for oil — especially heating oil — rose up sharply. This weather-induced tightness in the market was exacerbated by the change in business practice to just in time delivery added to upward price pressures. World oil stocks were at a five-year low; the South China Sea oilfields were viewed as some of the most promising of any in the world. Oil futures rose strongly. The April contract, which was the most actively traded near-term contract and the one which First China had bought most aggressively, rose sharply. It closed at $35, up $10.

Trading was hectic on the International Petroleum Exchange in London. This was the home of the Brent Crude futures contract. More than 70 per cent of the world's oil was priced off this contract (that is, the prices of all other sorts of oil traded could be related to this price, as a margin either above or below it). The IPE was the world's biggest international oil exchange. It was that size average the exchange traded oil with a value of $2.4 billion every day at offered oil companies, investors, and traders unrivalled opportunities to protect themselves and make money. First China had a seat on the IPE. In the month before Dragonstrike it had built up a position in the futures market of $600 million. This position consisted of 200,000 futures contracts, which themselves represented 200,000,000 barrels of oil. If First China could unwind its position in the futures market instantly General Zhao and Multitechnologies would reap $1 billion in profit. But getting out of 200,000 futures contracts was harder than acquiring them. As the price of oil began to rise, Damian Phillips told his traders to unwind their positions slowly. By the end of London trading they had liquidated 40,000 April contracts at various prices, and pocketed for General Zhao a $400 million profit.

The strife in the South China Sea reverberated throughout London and New York. There was an immediate impact at Lloyd's e centre of the world insurance market. That Monday morning the War Risks Rating Committee had met to assess the significance of the conflict and to decide whether extraordinary premiums should be set on ships and their cargoes, as well as commercial aircraft. It set a new schedule of rates that ranged up to 3.5 per cent for Vietnamese ports. Rates for Singapore and Hong Kong bound cargoes were set somewhat lower with a minimum level of 2.5 per cent. For ships themselves, the Lloyd's market applied a rate of 5 per cent rate not seen since the Gulf War and one which drew howls of protest from ship owners. The supertankers transiting the South China Sea had a capital cost of some $60 million and more; $3 million in premiums for a single voyage was crippling. Similarly with aviation. British Airways was quoted a war risk premium of $162,000 for each Airbus 320 flight into Hanoi and $60,000 for a Boeing 747 to Hong Kong. An airline spokesman said that a war risk surcharge of nearly $845 was imposed on each passenger to Vietnam and almost half that to Hong Kong. The airline said it would continue to offer services for as long as it was safe to do so; others stopped operating altogether.

The drama in the oil market unsettled all others. In Europe and America financial markets have a way of taking regional conflicts in their stride, but the massive wave of selling that hit East Asian stock exchanges could not have come at a worse time. European and US bourses, after five years of virtually uninterrupted gains, were looking vulnerable to a setback. Some of the older traders drew parallels with 1987: the proximate cause of the October stock market crash was the disagreement that September between the US and Germany over interest rates. The Americans wanted the Germans to lower interest rates; the Bundesbank refused. Analysts in the City and on Wall Street reasoned that the Gulf War of the 1990s — the last big regional conflict — had had very little effect on the stock markets of Britain, Germany, and the United States because oil stocks were high, the world was coming out of recession, and Saddam did not have a chance against the military might of the US and its allies. The West's response to Kuwait had been relatively simple: Saddam was a tyrant who garnered no support in the West. But China's foray into the South China Sea was perceived as more than just an East Asian version of the Gulf War grab for territory by the regional bully who, in time, would be put back in his place. Distance diminished the impact of what the Chinese were up to: Asia was a long way away and few really cared about the Vietnamese, or about the stretch of water between them and the Philippines known as the South China Sea. But the markets cared. The world economy was differently placed now. Stocks of oil were low, world output, especially in Europe and the US, was growing strongly, indeed too strongly, and China was manifestly not Iraq. China might be a tyranny, but it was also a commercial opportunity in ways which Iraq never was and never could be.

The FT-SE 100 share index shed 136 points to 6,347 and Wall Street was faring no better. The Dow Jones Industrial Average had sailed through the 8,000 barrier in January but on Monday morning it opened 300 points lower at 7,838. The rise in the oil price and the prospect of higher inflation and interest rates unnerved an already uneasy Wall Street. In the executive suites of corporate America, anxiety was growing. Reece Overhalt for one knew that that China's actions presaged ill for Boeing. The company's move into China was deeply unpopular with sections of the Boeing workforce, and the International Association of Machinists, Boeing's main union, was bound to exploit it.

Mr Stephenson, the Prime Minister:… That, Mr Speaker, is the situation as it stands right now. As I said, the Chinese have continued to attack Vietnam. There are civilian casualties, including Europeans and Americans. We do not have specific information about British subjects. We are hoping therefore that British casualties are slight. I have talked personally to my American and European colleagues and we have decided that nationals being detained on oil rigs captured by Chinese troops should be regarded as hostages, although we do not believe they are in any danger. No demands have been made for their release. We believe the Chinese are facing a logistical problem in getting them to a place where they could be freed.

Mr Andrew Dixon, Leader of the Opposition: While thanking the Prime Minister for his statement, I remain confused about his government's policy. I have heard no condemnation of the Chinese action. I see no indication that we will support Vietnam, as the French have done. I see no moral stand upholding the democratic principles which once made this country great. So could the Prime Minister, before the House, tell us whose side he is on in this conflict, and will he condemn the violence of a non-democratic, one-party state against that of new Asian democracy?

Mr Stephenson, the Prime Minister: Clearly the right honourable gentleman is unused to the responsibility of government. I understand that and should he come and sit on this side of the House, he would realize that glib comments and cheap political point-scoring are more often than not against the national interest. Often ministers must put aside their personal views and consider the wider issues. Long gone are the days when Britain sent expeditionary forces all over the world. Could he tell us if his party would support risking the lives of British servicemen in an area of the world where we have no substantive national interest and no substantive treaty obligation to the nation coming under attack? Could he tell us if he advises taking action against China which could throw British people onto the dole queues with little prospect of finding new employment? Could he not agree for once, instead of chirping like an untrained parrot, that it is right for Britain to wait and assess the South China Sea crisis and only then, after talking to our allies, to formulate a policy which could well dictate the global geopolitical structure for the next fifty years?

Mr Andrew Dixon, Leader of the Opposition: Then tell us, yes or no, whether you support the French action?

Mr Stephenson, the Prime Minister: France has treaty obligations towards Vietnam. I support governments who honour their treaty obligations.

Mr George Cranby: In order to silence the Opposition benches and bring some national consensus to bear with this problem, could my right honourable friend tell us with which countries in the Far East do we have treaty obligations and in what way do we plan to honour them?

Mr Stephenson, the Prime Minister: We have long-standing arrangements with Malaysia, Singapore, and Brunei. Through the 1984 joint declaration with Hong Kong we have responsibility to ensure that the Chinese military campaign does not interfere with the Special Administrative Region in any way whatsoever. We also have military contractual arrangements with Indonesia and Malaysia which are included in the sale of aircraft and other equipment. We plan to honour all our commitments when and if we are asked to do so. So far no requests have come across my desk.

Sir George Fallon: The government has known for many years the nature of the Chinese government. It is a ruthless and repressive dictatorship which is no different from Saddam Hussein's Iraq, Gaddaffi's Libya, or Hitler's Germany. Frankly, I am appalled when the Prime Minister tells us that British jobs are dependent on doing deals with such a disgusting regime. Would we have let the Nazis across the white cliffs of Dover because BMW owned Rover? We on this side of the House have warned against your policy of `economic interdependence' with China and `constructive engagement'. Could the Prime Minister now tell us that his policy has been shamefully and morally wrong and that no more secret deals will be done with the regime in Peking?

Mr Stephenson, the Prime Minister: No.

Mr Fred Clarke: Could my right honourable friend assure us that he is not simply waiting for the telephone to ring to receive instructions from either Germany or the United States as to what path to pursue and that he will continue to ensure that Britain will safeguard its own national interests with its own policies in this most crucial time in world affairs?

Mr Stephenson, the Prime Minister: Britain will and always has followed its own path in foreign policy consultation with our allies. Nothing has changed in the past twenty-four hours to change that.

Ms Clare Truman: Then could the Prime Minister explain this to the House: if we honour our contractual arrangements to the authoritarian governments of Indonesia and Malaysia, because of our weapons sales to them, how can we bring pressure to bear on the Russians who as we speak are supplying hundreds of military advisers and tons of equipment to ensure that the Chinese war effort continues to be a success? And with that problem unsolved, Mr Speaker, could the Prime Minister tell us whether he welcomes a Newer World Order with a nuclear, non-democratic, expansionist China as the rising military superpower?

Mr Stephenson, the Prime Minister: I refer the honourable lady to the answer I made a few moments ago.

President Bradlay's Private Secretary alerted him to the incoming call from Japanese Prime Minister, Noburo Hyashi. The two were not close, in spite of Hyashi's more than passable command of English. They had crossed swords in the mid-1990s, when after the collapse of the Liberal Democratic Party Hyashi had made a push for prominence on a veiled nationalist ticket that was implicitly hostile to the US. Bradlay was an up and coming senator who had sought to project himself as someone with a deep understanding of international affairs.

`Mr President,' Hyashi intoned.

`Nobby, is that you?' Bradlay replied.

`Yes, Jim, it's me.'

`And how's Mitsuko? I trust she's well?'

`Yes, Jim, she is just fine. And the First Lady?'

`Fine, fine. You've got a bit of a problem in the South China Sea over there…'

`We have a problem, Jim, and that's the reason for this call. Have you learned of the catastrophe with the Philippine Marines on Mischief Reef? My cabinet colleagues and I feel that we must invoke our security treaty. We need a combined show of force here to demonstrate to the Chinese that they have gone far enough.'

`We certainly need to do something, Nobby, I agree with that. This morning in New York we will be calling upon the Security Council to censure China and demand that it withdraw from the Spratlys and Paracels and compensate Vietnam for the loss of life and equipment over the past two days.'

`As you Americans would say to chance. The Chinese will use their veto to quash any such resolution. I think we need something firmer than just mere words. The French have sent troops to Vietnam.'

`We have been down that route before, Nobby. The American people have little appetite these days for foreign wars, let alone wars in that particular part of Asia.'

Bradlay returned the receiver of his secure telephone to its cradle. Hyashi had a point, but so too did the Washington Post's latest poll. Its polling agency had pulled out all the stops on Saturday night, with a telephone survey of opinions about the Chinese seizure of the South China Sea and what, if anything, the US should do about it. A thumping 79 per cent of Americans, or at least 79 per cent of the 1,036 randomly selected Americans, thought the US should have no part of it. Moreover, an analysis of past crises and their effects on presidential popularity underlined the mixed nature of such events, from a domestic political point of view.

The piece pointed out that international crises historically tended to improve presidential standing. In three quarters of the cases studied from the 1940s to the 1980s, presidents received boosts in popularity in the month following international incidents. The President's approval ratings rose 5 points after the CIA-backed invasion of Cuba at the Bay of Pigs in 1961, even though the operation failed. Lyndon Johnson's popularity went up after the 1965 invasion of the Dominican Republic; Gerald Ford's improved 11 points after the 1975 Mayaguez incident in which a US merchant vessel was seized by Cambodia; Ronald Reagan's approval ratings went up 5 points after the 1983 US invasion of Grenada; and George Bush's increased 14 points after he announced the Persian Gulf military build-up in 1990 and another 18 points when he launched the war against Iraq in January 1991.

So far so good. But this poll showed people saw the fight in Asia as unwinnable. There was also a racial tinge. The main body of the poll showed a rising concern about Japan and dislike for the Japanese. Anti-Japanese feelings had increased sharply in the United States. A growing majority of Americans were saying they were trying to avoid buying Japanese products. The constituency in the American heartland for risking American lives to protect Japanese interests was as thin a gruel as anyone could make. Unhappily it was a Republican, Mr Joseph Borchert, Senator for Washington state, who caught the popular mood. `The overwhelming majority of Americans do not want the United States, by itself or in concert with other nations, to interfere in Asia,' Borchert said. `There is no national security threat, no public policy reason, no excuse at all.'

Borchert had read the national mood with uncanny accuracy. As events unfolded that Sunday it became plain that whatever constituency there might have been in favour of United States intervention was evaporating quickly. Congressional leaders would have none of it. Congressional feeling was carefully stoked by some astute media management by Bland, Michael & Judd, PR adviser and chief lobbyist for the Communist Party. With a couple of telephone calls to leading Washington and West Coast think tanks Judd pointed out that the various institutions' China experts' continued access to China might be helped if they adopted a balanced approach to the South China Sea gambit. At the same time others at the firm were making sure that talk show hosts knew the right experts from whom to seek comment. Throughout the day the White House switchboard was inundated with telephone calls, mostly from citizens opposed to any intervention. Messages via less public points of access also started arriving from the chairmen and chief executives of some of the nation's leading companies, Boeing and Microsoft in Seattle, General Motors in Detroit, Compaq in Houston, and others. By the time the President was readying himself for a public engagement that evening he had pretty well made up his mind that the US would try and stay out of the conflict and seek to play the role of `honest broker'.

The presidential motorcade drew up outside the severely classical entrance to the National Gallery. It had been built by a banker to house his collection, which he had generously donated to the nation. I. M. Pei, the Chinese/ American architect, had designed a dramatic glass and poured-concrete extension to the main gallery but even that had failed to soften the severity of the building. The party at the National Gallery was one of those Washington events. The diplomatic corps rubbed shoulders with the cream of the Senate, the House as well as the administration. When Makoto Katayama, the Japanese Ambassador, first sighted Bradlay he was deep in conversation with the senators from Kansas and Washington state, a Long Beach, California congressman, and the chief Washington representative for Bland, Michael & Judd. With such a coalition there could be only one topic of conversation: China. These states were so enmeshed with the Chinese economy — aerospace in California and Washington, wheat in Kansas — that their representatives were sometimes referred to as the Congress's China clique. Katayama circulated as diplomats do on such occasions awaiting his opportunity to engage Bradlay.

Just then Katayama noticed a third secretary from the Japanese embassy making his way through the crowd. At the same time a White House aide was working his way towards the President. Both officials met their objectives at the same time. Katayama listened as the embassy official told him about the UN Security Council vote. As expected the Chinese had exercised their veto. There would be no UN condemnation of China's actions in the South China Sea. What was worse, however, was how the other members of the Council had voted. A smattering of African and South Pacific nations who sat on the Council by rotation had abstained. They were beneficiaries of Chinese military aid. Britain and France were prepared to condemn the Chinese but Japan's permanent representative at the UN had observed a certain reluctance on the part of the US to embrace the toughest language put up by London and Paris. Russia had abstained. In the end, however, the US had sided with its Atlantic partners.

As Katayama considered what he was hearing, another of Bradlay's aides approached. The President, he said, would like to talk to him. An ante-room in the museum was being prepared. When the President was due to leave he would make as if he was doing so, but stop by the anteroom on his way out. Could the Ambassador be waiting for him there? Katayama was more than pleased. He had not relished the task Tokyo had set: sounding out Bradlay at a public function.

The meeting, having been arranged in such an ad hoc fashion, lacked the usual formality that attends a meeting between the President of the United States and the Japanese Ambassador. For a start it was held in English, a language Katayama knew frighteningly well, although he affected to be a poor student. The encounter got off to a good start with Bradlay warmly shaking Katayama by the hand, but soon deteriorated when the Ambassador pressed Bradlay on what the United States would do about China's behaviour in the South China Sea.

`Well, Mr Ambassador, it seems as though we are back to the bad old days of the Cold War at the UN. As I think you already know, the Chinese representative vetoed a resolution at about the time we both arrived at this reception. It was no surprise to us. Indeed, we were less keen than our allies that we should attempt such a manoeuvre. China was always going to veto it.'

`Quite,' said Katayama.

`I spoke with the Prime Minister this morning,' Bradlay said. `I appreciate the concerns you must have.'

That was the opening Katayama wanted. `Indeed, sir. I am asked by Tokyo to convey your assurance that the United States intends to live up to its treaty obligations.'

The President stopped. He replied: `Well, Mr Ambassador, you know as well as I do that our mutual security treaty which has served both parties well s drawn up during the Cold War, when the threat posed by Russian and Chinese Communism was at its height. Russia has changed. China has changed. The world has changed. We must change with it. Tell your government that I give the highest priority to settling this crisis in the Pacific in a peaceful way.'

The guerrillas looked for all the world as if they were wearing black pyjamas. On closer inspection they were armed with the deadly attributes of highly trained assassins sub-machine-gun with silencer, knives, a wire garrotte. There were eight in all and they clung to the shadows as they passed through the virtually empty streets of Xiatung, a village some 7 kilometres across into Chinese territory from the Vietnamese border. Between the jungle fringe on the outskirts of the village and their objective — the compound housing of the Party Secretary and the Head of Public Security — they had encountered only two Chinese. One, an alcoholic vagrant, the other, a woman on her way home, were killed efficiently and cleanly, their bodies dragged deep into the shadows to hide them.

It was nearly midnight and the moon was obscured when they came upon the compound at Huaihai Avenue where the village leadership lived. The entrance to the compound, 200 metres ahead, was guarded by one dejected-looking guard in the sloppy green uniform of the People's Liberation Army. He didn't even have time to lift his weapon to firing position before three rounds of silenced automatic gunfire ripped into his chest. They placed him inside his sentry box and moved through the open gate. Not a soul stirred. On gaining entry to the compound they spilt into two groups: one would take care of the Party Secretary and the other the Head of Public Security. They knew where the officials lived and moved with speed and economy of action towards their objectives.

The Xiatong Daily reported that both men put up a stout fight against their assailants. The truth, however, was more prosaic. The Party Secretary, a Mr Zhou Hua, lay asleep when the guerrilla leader came into his bedroom. His wife woke first and lived long enough to see her husband die before she too was gunned down. The Head of Public Security, Mr Sun Ping, was reading when he heard a knock at his door. To his horror he admitted four Vietnamese guerrillas. The leader, speaking rough Chinese, told him to kneel. He begged for his life before it was taken.

The eight left as they came: unseen and til the morning, when the full horror of their actions was discovered noticed. However, throughout the towns and villages along the SinoVietnamese border om Zhelang from the west and Xiatong to the east Vietnamese guerrillas unleashed a series of `pinprick' operations that struck terror in the hearts of local populations and a desire for retribution in China's leaders 2,200 kilometres to the north.

The New World was the pride of Shell's fleet. Its Liberian-registered owner, New World Transport, was a company jointly owned by Shell Transport Maritime and Consolidated Navigation. Built by Hyundai at its Ulan complex in Korea six years earlier, it had cost nearly $60 million. It was the second of two sisters incorporating the latest `Double-Vee' (double hull) design for very large ships, developed by Hyundai Heavy Industries, Korea's biggest conglomerate in collaboration with Monaco-based Consolidated Navigation SA, which enabled a deeper than usual forward double bottom to better absorb a hull impact, and additional ballast tanks to reduce hogging and sagging in rough seas. It was a mammoth vessel some 334 metres long, with a breadth of 59 metres and a depth of 31.50 metres. It had been designed to enable three grades of oil to be transported simultaneously. In all, it was carrying 270,000 tonnes of oil, which its giant seven-cylinder diesel engine (capable of 34,650 b.h.p.) managed to move through the water at a stately 15 knots.

The New World was bound for the Shell refinery near Tokyo. It had taken on its cargo of oil at the Saudi Arabian Ras Tanura terminal in the Persian Gulf, and sailed straight across the Indian Ocean to the Andaman Sea and through the Malacca Straits. It had entered the South China Sea 70 hours earlier, and was sailing at 16g 49 N, 117g 66 E, about 200 nautical miles to the west of the island of Luzon.

The Master, an Englishman in his late forties, had just looked up at the ship's clock on the bridge. He was weary. All day he and his crew had been noting the position of Chinese naval vessels in the South China Sea. They were used to the scream of the engines of high-performance military jets passing overhead. They had also spotted submarine periscopes. He was hoping for at least a couple of hours' sleep. He took a fix with the ship's Global Positioning System (GPS) and noted it in the log. The Master spoke to Shell in the Hague, to confirm his instructions to keep sailing. His Belgian first officer was being woken up. The Master would wait for the BBC World Service radio news at midnight and then hand over the watch until 0300. As the news headlines were being broadcast, the night sound was shattered by automatic weapons fire. Bullets smashed the reinforced glass in the wheelhouse.