Boston, MA -- (SBWIRE) -- 04/11/2014 -- China's establishment of an Air Defense Identification Zone (ADIZ) in November 2013 (discussed at length separately in this report) has significantly raised geopolitical tensions in the Asia-Pacific region, and risks creating a major backlash against Beijing. Tensions over the disputed Diaoyu/Senkaku Islands with Japan also remain a concern.

China's military modernisation programme is continuing unabated and it is pursuing export orders with countries in and out of NATO, although political pressure can close some avenues for Chinese materiel. For example, in Q214 Turkey was debating about whether to continue with a US$3.44bn contract for the Chinese HQ-9 air-defences ballistics from China Precision Machinery Import-Export Corp, which is on a US sanctions list. The win had signalled that Chinese companies are becoming competitive in the world market for advanced military systems (they have previously only dominated in the low end of the market). However, China's competitiveness is still very much based on being able to provide arms and equipment at lower costs than higher-quality, Western-sourced suppliers.

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In addition, there has also been an overall decline in exports from Russia amid long-standing tensions over Chinese replication of Russian arms technology. That the Chinese defence industry is becoming increasingly self-sufficient is evidence of this adaptability and new structural reforms within the aerospace and shipbuilding sectors should drive further improvements.

A territorial dispute with the Philippines continues to simmer. The ITLOS tribunal process could yet prove a major international embarrassment for China, but the hearings now look set to continue well into 2014. This gives China a window of opportunity to improve its image in Southeast Asia ahead of a possibly damaging verdict, especially if it drives meaningful progress towards the establishment of a new Code of Conduct for the South China Sea.

Beijing and Tokyo have continued to trade barbs over the disputed Diaoyu/Senkaku islands; the greatest risk is that China and Japan will deploy more aircraft and ships to the East China Sea, resulting in standoffs, collisions, or 'incidents' that cause fatalities.

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