China and its neighbors

Today, we turn to risk #7 in our series of posts on Eurasia Group’s Top Risks for 2012 and answer the most common questions we’ve gotten about it.

Here’s a summary:

China — Regional tension: A string of U.S. foreign-policy successes in Asia — and the damaging of China’s brand in the region — have emboldened China’s neighbors. The risk in 2012 is that Vietnam or the Philippines may test just how far U.S. security assurances will take them, provoking China into a maritime dispute. China has its own set of challenges in 2012, raising the risks of miscalculation and escalation.

Q- Why are China’s neighbors feeling more assertive?

A- The U.S. had a very good year in Asia in 2011, while China’s reputation suffered from an overly aggressive regional posture in 2010. The U.S. made gains in Asia on both security ties and economic diplomacy; it persuaded Japan to enter the Trans-Pacific Partnership trade talks, secured the stationing of 2,500 U.S. Marines in Australia; and will send 24 F-16 fighter jets to Indonesia and new coastal combat ships to Singapore. China’s neighbors welcome the U.S. presence, because they recognize the importance of economic ties with China but don’t want to become overly dependent on Beijing either economically or politically.

Q- How might China’s neighbors push their interests against Beijing?

A- The South China Sea is the most likely arena of confrontation. Some of China’s neighbors, particularly Vietnam and the Philippines, are eager to pursue oil and gas interests in areas that Beijing considers Chinese territorial waters, and the risk is that they will miscalculate that a heightened U.S. security presence will give them backing to do so. They may encourage oil and gas exploration in disputed territory or take a more aggressive posture against Chinese fishing interests or other Chinese vessels in contested waters.

Q- Why will it be harder to predict China’s response to provocation in 2012?

A- There will be a lot going on within China’s borders in 2012. China is focused on a once-in-a-decade leadership transition and has not resolved internal debates over its role on the world stage. The leadership vacuum and jockeying for power during the transition means China’s response to provocations will be unpredictable — perhaps even aggressive. The 2008-2009 financial crisis and resulting souring of confidence in the Western economic model led some Chinese leaders to push for a more aggressive foreign policy, which Beijing adopted in Asia in 2010. Dai Bingguo, the Communist Party’s highest ranking foreign-policy official, resisted this push with a reaffirmation that China wants peaceful development and is not interested in challenging U.S. primacy. But Dai is retiring from government this year, and his replacement is unlikely to wield comparable influence with China’s increasingly diverse set of foreign-policy actors and interests — even if he shares Dai’s views.

Asia is fraught with volatility and uncertainty in 2012. Investors and corporations should pay attention-the risks of misperceptions and unforeseen tensions in Asia are on the rise.

Next up, the dramatic twists and turns along Egypt’s road toward democracy.