China Has a New Navy -- and It's Making the Neighbors Nervous

That headline alone was enough to send chills down the spines of American military strategists -- and of China's immediate neighbors, too -- when we first learned of China's progress in putting the Liaoning (PLAN CV-16) into service a few years back.

In short order, we began seeing reports of how Japan was building two new aircraft carriers (technically, "helicopter destroyers") to respond to China's perceived threat. And hearing how South Korea, India, Taiwan -- really, everybody who is anybody in Southeast Asia -- had embarked upon multibillion-dollar military spending plans in an attempt to keep pace with the Chinese military buildup.

Problem is, China is already the world's second biggest military spender. It's hard for smaller neighbors to keep up. Faster than you could blink, reports began filtering out that China was building a second aircraft carrier.

Then a third.

A fourth.

And even a nuclear aircraft carrier.

But now comes the most disturbing revelation of all. According to DefenseNews.com, not only is China building a fleet of aircraft carriers at breakneck speed, it's also learning how to use them effectively.

America's George Washington Carrier Strike Group at sea. Photo source: Wikimedia Commons.

Question: What's bigger than an aircraft carrier?

You see, an aircraft carrier all by its lonesome is little more than the biggest target on the ocean. To operate effectively, a carrier must travel with escorts -- multiple warships that encircle and protect the carrier from harm. In the U.S. Navy, for example, a standard carrier strike group consists of the carrier itself, a guided missile cruiser (for air defense), and three or four guided missile destroyers (to fend off opposing surface combatants and submarines). Add ammunition and refueling ships (for the escorts), and maybe a nuclear submarine or two, and your average carrier strike group quickly balloons from a one-ship operation to a task force upward of 10 warships. Add in the cost of building all these support ships, and a full-fledged carrier strike group can easily cost two to three times the cost of the aircraft carrier itself -- $30 billion, or thereabouts.

It's a staggering sum. But China, with an annual defense budget of upward of $200 billion, appears ready to pay it. As DefenseNews reported last week, China recently commissioned its fifth Lanzhou-class guided missile destroyer. It's well on its way to building a warfleet consisting of 14 Lanzhou- and Kunming-class guided-missile destroyers and six new "Type 055" guided-missile cruisers -- enough to provide escorts for all four carriers China is currently known to be constructing

According to defense analysts at AMI International, this fleet could be built in its entirety as early as 2024 -- at which point, China's navy will outnumber the fleets of Japan and South Korea, combined.

What it means to investors

Here at The Motley Fool, we're as interested as anyone else in keeping up with developments in the military sphere. But what we really enjoy is figuring out how these developments might affect investors' portfolios.

With that in mind, perhaps the single most important quote contained in DefenseNews' report is AMI's (understated) observation that regional countries will interpret China's latest military naval buildup as a "significant threat to stability." Left unsaid is that China's neighbors will almost certainly respond to this threat by buying warships of their own.

AMI has previously estimated that Asian and Pacific nations will spend $200 billion on submarines and surface warships between now and 2032. That would represent roughly 25% of all naval military spending around the globe during this time period. It stands to reason that with a pot of potential profits this big, America's defense contractors will want to win their share of the upcoming military shipbuilding contracts -- indeed, they may already be benefiting.

The USS George Washington was saved by the bell -- and by Congress. Photo source: U.S. Navy.

Take Congress' recent decision to spend $843 million having Huntington Ingalls  refurbish and refuel the aircraft carrier USS George Washington -- rather than mothball the warship. This was almost certainly due in part to the U.S. Navy's desire not to actively assist China in closing the "aircraft carrier gap." The Navy's decision to emphasize antiship and antisubmarine weapons systems in building a more robust version of its Littoral Combat Ship (LCS) -- a plan that could yield upward of $16 billion in incremental revenues for military shipbuilders Lockheed Martin (NYSE: LMT  ) , General Dynamics (NYSE: GD  ) , andAustal (NASDAQOTH: AUTLY  )  -- probably also owed something to China's naval expansion.

Meanwhile, as far as "arming up the neighbors" goes, it's these last three companies that probably have the most to gain from the naval arms race now brewing in the Pacific. In an effort to spread out the costs of developing the LCS, both Lockheed and the General Dynamics-Austal team have developed versions of the warship specifically designed for sale to international customers. And with LCS being one of the most affordable warships now being built for the U.S. fleet, it's these LCS variants that are most likely to appeal to China's cash-strapped neighbors.

Any way you slice it, the prospect for China sparking an arms race in the region is likely to pay dividends to investors in U.S. military shipbuilders.

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First launched in 1945, the USS Tusk was decommissioned and sold to Taiwan in 1973. Now called theHai Pao, it currently comprises 25% of Taiwan's submarine fleet. Photo: Wikimedia Commons.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.