South China Sea's "Gray Conflict" —
Simultaneous US and Chinese military exercises in the South China Sea, through which one-third of global trade passes, have pushed the risk of accidental conflict to its highest level since the Cold War. What happens here will directly impact the Taiwan Strait, semiconductor supply chains, crude oil prices, and Japan's national security.
── Understand in 3 points ─────────
- • The Chinese People's Liberation Army (PLA) has permanently deployed YJ-12B anti-ship cruise missiles (range 400km) and HQ-9B surface-to-air missiles (range 300km) on its artificial islands in the South China Sea (Subi Reef, Mischief Reef, Fiery Cross Reef). Since 2024, these islands have been fully equipped with hangars, radar facilities, and runways (3,000m class), functioning as de facto "unsinkable aircraft carriers."
- • The US Navy conducted at least nine "Freedom of Navigation Operations (FONOPs)" in the South China Sea in 2025. Carrier strike groups centered around the USS Ronald Reagan and USS Carl Vinson have alternately patrolled, regularly transiting areas claimed by China as its territorial waters.
- • In April 2024, the Philippines, through a US-Philippines "2+2" dialogue, added four new sites under the Enhanced Defense Cooperation Agreement (EDCA), opening a total of nine locations to US forces. Among these, Balabac Airfield on Palawan Island is only 160km from the Spratly Islands in the South China Sea.
── NOW PATTERN ─────────
The US-China confrontation in the South China Sea is trapped in a "spiral of conflict" from which neither side can retreat due to domestic political costs. This is compounded by "alliance strain," where the expansion of alliance networks increases escalation pathways for accidental clashes, and "power overreach," where China's excessive territorial claims deepen its international isolation.
── Probability and Response ──────
🟡 Basic 55% — Resumption of regular use of the US-China military hotline. "Routinized" (no footage released) responses by the China Coast Guard. Mention of "maritime safety" in a joint statement after Trump's visit to China. Formalization of South China Sea discussions at ASEAN Foreign Ministers' Meetings.
🔴 Pessimistic 30% — Intensification of physical obstruction by the China Coast Guard during resupply operations at Second Thomas Shoal. Statements from Philippine military officials saying, "Next time, we will respond with force." Increase in live-fire exercises by the Chinese military in the South China Sea. Unusual proximity of US carrier strike groups to the Spratly Islands.
🟢 Optimistic 15% — Leaked reports of "constructive dialogue" before Trump's visit to China. Temporary decrease in China Coast Guard activities around the Philippines. Reports of resumed military-to-military contact between the US and China. Public statements from Xi Jinping emphasizing "peaceful development" and "maritime cooperation."
📡 THE SIGNAL — What Happened
Why it matters: Simultaneous US and Chinese military exercises in the South China Sea, through which one-third of global trade passes, have pushed the risk of accidental conflict to its highest level since the Cold War. What happens here will directly impact the Taiwan Strait, semiconductor supply chains, crude oil prices, and Japan's national security.
- Military Deployment — The Chinese People's Liberation Army (PLA) has permanently deployed YJ-12B anti-ship cruise missiles (range 400km) and HQ-9B surface-to-air missiles (range 300km) on its artificial islands in the South China Sea (Subi Reef, Mischief Reef, Fiery Cross Reef). Since 2024, these islands have been fully equipped with hangars, radar facilities, and runways (3,000m class), functioning as de facto "unsinkable aircraft carriers."
- Military Activity — The US Navy conducted at least nine "Freedom of Navigation Operations (FONOPs)" in the South China Sea in 2025. Carrier strike groups centered around the USS Ronald Reagan and USS Carl Vinson have alternately patrolled, regularly transiting areas claimed by China as its territorial waters.
- Alliance Strengthening — In April 2024, the Philippines, through a US-Philippines "2+2" dialogue, added four new sites under the Enhanced Defense Cooperation Agreement (EDCA), opening a total of nine locations to US forces. Among these, Balabac Airfield on Palawan Island is only 160km from the Spratly Islands in the South China Sea.
- Military Clash Risk — On June 17, 2024, a Philippine Navy resupply vessel and a China Coast Guard ship collided at Second Thomas Shoal. One Philippine soldier suffered a severed finger, and the Philippine vessel was damaged. This was the most serious physical clash incident in recent years.
- Economic Impact — The annual trade value passing through the South China Sea is approximately $5.3 trillion (about 30% of global trade). Approximately 80% of Japan's crude oil imports and 30% of its LNG imports transit this area. If navigation safety is threatened, a surge in energy prices and an increase in insurance premiums will immediately occur.
- Legal Framework — The 2016 Hague arbitration ruling completely rejected China's historical claims based on its "nine-dash line," but China continues to ignore the ruling as "a piece of paper." This legal vacuum is one of the root causes of military tension.
- Multilateral Exercises — RIMPAC (Rim of the Pacific Exercise) in 2025 saw the participation of 29 countries, making it the largest ever. Separately, joint maritime patrols by the US, Japan, and the Philippines have been regularized since 2024, conducted monthly in the South China Sea.
- China Coast Guard Law — The China Coast Guard Law, enacted in 2021, includes provisions allowing the use of weapons against foreign vessels in areas claimed by China as sovereign. This provides a legal basis for China Coast Guard vessels to engage in paramilitary actions, making it a core tool for "gray zone" tactics.
- Underwater Capabilities — China has deployed at least six Type 094 ballistic missile nuclear submarines (SSBNs) at Yulin Naval Base on Hainan Island. The deep waters of the South China Sea (over 4,000m deep) are strategically vital as patrol areas for SSBNs, making the South China Sea a nuclear deterrence sanctuary (Bastion) for China.
- AUKUS — Under AUKUS Pillar One, Australia is expected to acquire 3-5 US-made Virginia-class attack nuclear submarines by the early 2030s. These will significantly enhance anti-submarine warfare capabilities in the South China Sea, potentially threatening China's SSBN sanctuary.
- Philippine Coast Guard — The Philippines is rapidly strengthening its coast guard capabilities with the provision of patrol vessels (97m class) from Japan. In 2025, multiple instances were recorded on video showing Philippine Coast Guard patrol vessels withstanding water cannon attacks from the China Coast Guard.
- Taiwan Linkage — The Chinese military is increasingly linking its exercises in the South China Sea and the Taiwan Strait. In the "Joint Sword-2024B" exercise in October 2024, simultaneous naval and air force exercises were conducted around Taiwan and in the northern South China Sea, demonstrating two-front operational capability.
The South China Sea has not been called "Asia's powder keg" just recently. However, the level of tension in early 2026 is qualitatively different from any point in the past half-century. To understand why, we need to delve into four historical layers.
**Layer 1: Origins of Territorial Claims (1947–)** China's "nine-dash line" (originally the "eleven-dash line") dates back to a boundary drawn on a map by the Republic of China government in 1947. During the Cold War, this claim had no practical significance. The Chinese navy lacked blue-water capabilities, and the islands in the South China Sea were effectively uninhabited rock formations. However, in 1974, China forcibly seized the Paracel Islands from Vietnam (South Vietnam). In 1988, the Johnson South Reef Skirmish occurred with Vietnam, resulting in the deaths of 64 Vietnamese soldiers. At this point, the South China Sea transformed from "a place to assert claims" to "a place where blood is shed."
**Layer 2: Economic Awakening and Maritime Strategy (1990s–2010s)** China's rapid economic growth transformed the security of sea lanes for energy and raw material transport into a matter of vital importance. Approximately 80% of China's crude oil imports pass through the Malacca Strait and the South China Sea. The recognition of the "Malacca Dilemma" — that the US could choke China's economy by blockading the Malacca Strait — is a fundamental driver accelerating the militarization of the South China Sea.
At the same time, an estimated 11 billion barrels of oil and 190 trillion cubic feet of natural gas are believed to lie beneath the South China Sea. Fishery resources are also worth $12 billion annually, making jurisdiction over the South China Sea a matter of economic survival for surrounding nations.
**Layer 3: Artificial Island Construction and Militarization (2013–2020)** Coinciding with the inauguration of the Xi Jinping administration, China embarked on an unprecedented project of large-scale reclamation of reefs in the South China Sea. Between 2013 and 2016, seven reefs, including Subi Reef, Mischief Reef, and Fiery Cross Reef, were transformed into artificial islands, creating a total of approximately 13 square kilometers of artificial landmass. Xi Jinping promised President Obama in 2015 that China had "no intention to militarize," but this promise was immediately broken. Runways, radar facilities, anti-ship missiles, and surface-to-air missiles were deployed one after another, and by 2020, these artificial islands had become de facto military fortresses.
Decisive during this period was the 2016 Hague arbitration ruling. In this case, brought by the Philippines, the tribunal completely rejected China's historical claims based on the nine-dash line and ruled that China's artificial island construction violated international law. However, China rejected the ruling as "a piece of paper." The fact that the judgment of the most authoritative court under the international legal order was completely ignored definitively showed that the South China Sea issue cannot be resolved through legal frameworks.
**Layer 4: Frontline of Great Power Competition (2020–Present)** The structural deterioration of US-China relations — trade wars, technological decoupling, and the sharpening of the Taiwan issue — elevated the South China Sea from a mere territorial dispute to the "frontline of great power competition." The United States strengthened "Freedom of Navigation Operations" as a core component of its Indo-Pacific strategy and dramatically increased joint exercises with allies (Philippines, Japan, Australia, United Kingdom).
Since 2024, relations, particularly with the Philippines, have qualitatively changed. President Marcos Jr. reversed the pro-China stance of the previous Duterte administration by 180 degrees, significantly strengthening the military alliance with the United States. The expansion of EDCA sites, the regularization of US-Philippines-Japan trilateral patrols, and the hardening of anti-China public opinion within the Philippines — these changes are fundamentally altering the geopolitical balance in the South China Sea.
And in early 2026, the Trump second-term administration's "peace through strength" doctrine and Xi Jinping's "great rejuvenation of the Chinese nation" narrative are colliding head-on in the South China Sea. The structure where neither country can retreat — because the domestic political costs of doing so are too immense — is what makes the current crisis more dangerous than at any point in the past.
The delta: What qualitatively changed in the South China Sea in 2026 is that the limits of "gray zone tactics" began to become apparent. As the Philippines started adopting a strategy of immediately releasing footage of clashes at Second Thomas Shoal to international media, China's "low-intensity pressure" began to incur international public opinion costs. Simultaneously, the regularization of US-Philippines-Japan trilateral patrols creates a structure where accidental clashes automatically escalate into multilateral issues. This structurally increases the risk of "managed tension" transforming into "unmanageable escalation."
🔍 BETWEEN THE LINES — What the Reports Aren't Saying
Officially, the narratives of "freedom of navigation" and "defense of sovereignty" are in conflict, but the essential point of contention lies elsewhere. For China, the South China Sea is truly indispensable for securing the patrol areas of its SSBNs (ballistic missile nuclear submarines) deployed at Yulin Base on Hainan Island. If the deep waters of the South China Sea are exposed to foreign anti-submarine warfare capabilities, the survivability of China's nuclear second-strike capability would be fundamentally threatened. In other words, this is not an issue of fishing rights or oil resources, but a struggle over a nuclear deterrence sanctuary. This is also why Australia's acquisition of submarines through AUKUS provokes China so much — the stealth of Virginia-class submarines qualitatively enhances the ability to track Chinese SSBNs. This "nuclear dimension" never appears in any official statements.
NOW PATTERN
Spiral of Conflict × Alliance Strain × Power Overreach
The US-China confrontation in the South China Sea is trapped in a "spiral of conflict" from which neither side can retreat due to domestic political costs. This is compounded by "alliance strain," where the expansion of alliance networks increases escalation pathways for accidental clashes, and "power overreach," where China's excessive territorial claims deepen its international isolation.
Intersection of Dynamics
These three dynamics — the spiral of conflict, alliance strain, and power overreach — do not operate in isolation but form self-reinforcing loops that amplify each other.
China's **power overreach** (maintaining maximum claims over the nine-dash line) pushes neighboring countries into the US camp, accelerating the **expansion of alliance networks**. This alliance expansion is perceived by China as a threat of "encirclement," justifying further military power projection — i.e., further overreach. As a result, the **spiral of conflict** accelerates, intensifying military activities by both sides and increasing the risk of accidental clashes.
What is particularly dangerous is that these three dynamics simultaneously create a "no exit" situation. To stop the spiral of conflict, one side needs to retreat, but the domestic political costs are too high to do so. Stopping alliance expansion would mean losing the means to deter China's overreach, and stopping overreach would undermine Xi Jinping's political legitimacy.
This "triple lock" structure means that tensions in the South China Sea are unlikely to ease in the short term. Rather, 2026, when the Trump administration's "peace through strength" doctrine and Xi Jinping's "core sovereignty" rhetoric collide head-on, is the period with the highest risk that this structural tension will cross the threshold of "managed competition" through accidental incidents — clashes, water cannon attacks, and abnormal aircraft approaches.
The closest historical analogy is not pre-World War I Europe, but the Cold War Berlin Crisis. Both sides are nuclear powers, and direct large-scale military conflict would mean mutual destruction and is thus avoided, but "low-intensity confrontation" becomes constant, and the risk of accidental escalation chronically persists. The South China Sea is becoming the "Berlin Wall" of the 21st century — a symbol of conflict, and simultaneously a place where implicit rules for containing that conflict within manageable bounds are gradually forming. However, unlike Berlin, the South China Sea lacks a clear "wall," and the boundary itself is disputed, making management more difficult.
📚 PATTERN HISTORY
1914: From the Sarajevo Incident to World War I
Escalation through chained alliance involvement
Structural similarity with the present: A bilateral incident expands into an uncontrollable major war due to the automatic activation mechanism of multilateral alliances. The ambiguous activation conditions of the US-Philippines Mutual Defense Treaty in the South China Sea harbor similar risks.
1962: Cuban Missile Crisis — US-Soviet Nuclear Standoff
Direct confrontation between great powers maximizes the risk of accidental conflict
Structural similarity with the present: In a direct confrontation between nuclear powers, accidental incidents and miscommunication, rather than rational judgment, pose the greatest risk. Just as the US-Soviet hotline was established after the crisis, confidence-building measures are essential between the US and China, but currently, they are largely non-functional.
2001: EP-3 Incident — US-China Military Aircraft Collision off Hainan Island
Accidental military contact escalates into a diplomatic crisis
Structural similarity with the present: A US Navy EP-3 reconnaissance aircraft and a Chinese J-8 fighter jet collided in the airspace over the South China Sea. The Chinese pilot died, and the US aircraft made an emergency landing on Hainan Island, where its 24 crew members were detained for 11 days. The current frequency of close encounters is dozens of times higher than in that era, dramatically increasing the probability of similar incidents.
2012: Scarborough Shoal Standoff — Philippines vs. China
Accumulation of faits accomplis through gray zone tactics
Structural similarity with the present: The standoff, which began when the Philippine Navy apprehended Chinese fishing vessels at Scarborough Shoal, was supposed to end with a "simultaneous withdrawal" agreement mediated by the US. However, China remained after the Philippines withdrew, and Scarborough Shoal has since been under de facto Chinese control. The lesson that "the side that adheres to the agreement loses out" is a direct cause of the Philippines' current unyielding stance.
Patterns from History
These four historical precedents consistently demonstrate the principle that "in military confrontations between great powers, the risk of accidental incidents triggering escalation increases proportionally with the number of actors involved and the frequency of contact."
Sarajevo in 1914 is an example of a bilateral incident escalating into an uncontrollable major war due to an automatic alliance activation mechanism, structurally similar to the ambiguous scope of application of today's US-Philippines Mutual Defense Treaty. The Cuban Missile Crisis in 1962 showed how direct confrontation between nuclear powers can transcend the limits of rational judgment, and the 2001 EP-3 incident is a real-world example of an accidental collision in the South China Sea itself directly leading to a diplomatic crisis.
And Scarborough Shoal in 2012 demonstrated how China's successful gray zone tactics instilled a "retreat means defeat" learning effect in both sides. The aggregation of these historical patterns means that the greatest danger in the South China Sea is not a "planned war" but an "unplanned conflict" — accidental contact, miscommunication, and errors in judgment by on-scene commanders. Considering the frequency of contact and the number of involved countries in 2026, this risk is higher than at any point in the past.
🔮 WHAT'S NEXT
**Sustained Managed Competition — Normalization of "Cold Peace"** The most likely scenario is that tensions in the South China Sea persist at a high level but do not escalate into a large-scale military conflict. The premise of this scenario is that both the US and China are nuclear powers and rationally recognize the catastrophic costs of direct military confrontation. Specifically, the following patterns will repeat throughout 2026: Water cannon attacks and physical contact will sporadically occur between the China Coast Guard and the Philippine Coast Guard, but without leading to lethal use of force. The US military will continue FONOPs, and the Chinese military will respond with "tracking and monitoring" each time, but direct confrontation between warships will be avoided. US-Philippines-Japan trilateral patrols will be regularized, and China will issue protest statements but avoid physical obstruction. During Trump's visit to China (scheduled for March 31, 2026), some form of "management framework" — reactivation of military hotlines, informal agreement on codes of conduct to prevent accidental clashes — may be discussed. However, fundamental territorial issues will be shelved, and "stability without resolution" will continue. Financial markets will have already priced in this "cold peace," and the South China Sea risk premium will remain limited.
Implications for Investment/Action: Resumption of regular use of the US-China military hotline. "Routinized" (no footage released) responses by the China Coast Guard. Mention of "maritime safety" in a joint statement after Trump's visit to China. Formalization of South China Sea discussions at ASEAN Foreign Ministers' Meetings.
**Limited Escalation from Accidental Clash — "EP-3+" Scenario** The second most likely scenario is an accidental military clash occurring around Second Thomas Shoal, Scarborough Shoal, or the Paracel Islands, resulting in casualties. This is a modern version of the 2001 EP-3 incident, but in the era of social media and real-time footage, escalation management becomes significantly more difficult. Hypothetical scenario: A Philippine Navy resupply vessel and a China Coast Guard ship collide, resulting in multiple casualties on the Philippine side. Footage immediately spreads on social media, igniting anti-China sentiment within the Philippines. President Marcos, pressured by domestic public opinion, considers invoking Article 5 of the US-Philippines Mutual Defense Treaty. The US expresses "deep concern" while carefully assessing the level of military response. China asserts "legitimate law enforcement in its sovereign waters." In this scenario, after an acute crisis lasting 48-72 hours, de-escalation would be sought through diplomatic channels. However, crude oil prices would temporarily surge by 10-15%, and Asian stock markets would record a 5-8% decline. Japan's defense policy would see an accelerated "southwestern shift," with missile deployments to the Sakishima Islands brought forward. In the long term, this incident could prompt the reconstruction of military communication channels between the US and China, but simultaneously, pressure on ASEAN nations to "choose sides" would intensify.
Implications for Investment/Action: Intensification of physical obstruction by the China Coast Guard during resupply operations at Second Thomas Shoal. Statements from Philippine military officials saying, "Next time, we will respond with force." Increase in live-fire exercises by the Chinese military in the South China Sea. Unusual proximity of US carrier strike groups to the Spratly Islands.
**Diplomatic Breakthrough — Realization of Partial De-escalation** This scenario is unlikely but cannot be entirely ruled out. Trump's visit to China starting March 31, 2026, could be a turning point, leading to an agreement on a partial de-escalation mechanism in the South China Sea. Trump's "deal-oriented" diplomatic style and Xi Jinping's urgent need for domestic economic stabilization could open a window for limited compromise. Specifically, a "package deal" including the following elements is envisioned: (1) Agreement on an incident prevention mechanism in the South China Sea (expanded application of CUES: Code for Unplanned Encounters at Sea), (2) An informal agreement where China tacitly allows "humanitarian" resupply to Second Thomas Shoal, (3) Linkage with trade issues (gradual tariff reductions) — where the US lowers some tariffs on China in exchange for Chinese concessions in the South China Sea. However, the realization of this scenario requires Xi Jinping to suppress domestic nationalist sentiment, and Trump to overcome criticism of being "weak on China." The political costs are high for both, and even if an agreement is reached, its implementation would be fragile. Even in the most optimistic case, the South China Sea territorial dispute itself would not be resolved; it would merely be a "managed détente."
Implications for Investment/Action: Leaked reports of "constructive dialogue" before Trump's visit to China. Temporary decrease in China Coast Guard activities around the Philippines. Reports of resumed military-to-military contact between the US and China. Public statements from Xi Jinping emphasizing "peaceful development" and "maritime cooperation."
Notable Triggers
- President Trump's visit to China — Will the South China Sea be included in the summit talks with Xi Jinping?: March 31 – April 2, 2026
- Philippines' regular resupply operations to Second Thomas Shoal — Will the China Coast Guard's response escalate?: March – April 2026 (conducted monthly)
- RIMPAC 2026 preparation and invitation status — Continued exclusion or reinstatement of China's invitation?: June – August 2026
- ASEAN Foreign Ministers' Meeting — Strength of the Chairman's Statement regarding the South China Sea: July 2026 (scheduled)
- China's integrated military exercises in the Taiwan Strait and South China Sea — Changes in scale and frequency: Throughout 2026 (especially before and after Taiwan-related political events)
🔄 TRACKING LOOP
Next Trigger: President Trump's visit to China, March 31 – April 2, 2026 — Whether South China Sea tension management mechanisms (reactivation of military hotlines, expanded application of CUES, etc.) are included in the summit talks with Xi Jinping will be the first watershed determining the level of tension in the latter half of 2026.
Continuation of this pattern: Tracking Theme: South China Sea "Gray Zone Conflict" Escalation Pathways — The next milestone is Trump's visit to China (March 31, 2026), followed by the Second Thomas Shoal April resupply operation, RIMPAC 2026 (June-August), and the ASEAN Foreign Ministers' Meeting (July).
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