REPORTER: Adrian Brown

LT GENERAL DUANE THIESSEN, US MARINE: I want to meet you. Can I shake your hand, how are you?

Twenty years after they quit their bases in the Philippines, the Americans are back doing their best to win hearts and minds in South East Asia once more.

US OFFICER: It's an honour for me to be here. I look forward to being here with you as often as possible.

The Pacific and this particular South East Asia is very much now on Washington's radar and with tensions rising over the disputed Spratly Islands which are just off the coast here, these joint US-Philippines exercises point to an unspoken strategy - to contain China.

The concern, the tensions over what is happening in this part of South East Asia right now is of course benefiting the arms industry. The territorial dispute with China at its heart means that many of China's neighbours are now busy ramping up their defences. And it's happening here in nearby Malaysia in an almost surreal Olympic Games like event.

MAN: The US, Vietnam, Yemen and Malaysia.

Malaysia's Prime Minister, Abdul Razak is basking in the spotlight of a gathering where deals worth millions of dollars will be sealed.

ABDUL RAZAK, MALAYSIAN PRIME MINISTER: Allow me to take this opportunity to welcome all of you to this beautiful island Langkawi.

High ranking military delegations have come from across the region along with those representing major international defence contractors.

MAN: Thank you, honourable Prime Minister.

Their focus - defence in a region now experiencing a significant shift in the balance of power.

MAN: Ladies and gentlemen, welcome.

The occasion is the opening of LIMA. It stands for Langkawi International Maritime and Aerospace Exhibition, one of the biggest in South East Asia.

MATI HINDREKUS, MBDA: The range here shows air to air and air to ground weapons, there’s a much greater range....

Mati Hindrekus, used to market sunglasses. Proof perhaps that a good salesman can move anything.

MATI HINDREKUS: It's a game changer as far as air combat is concerned.

He is showing me the very latest in precision guided missile technology. Replicas of what NATO forces used to such devastating effect in Libya last year.

MATI HINDREKUS: A high precision weapon which is a must nowadays because collateral damage is something we cannot allow. So this weapon is highly accurate.

With the economies of Europe and the US still in trouble, the big arms manufacturers have had to find new markets. And much of that new business is now coming from Asia, where economic growth remains strong.

REPORTER: Is this now the most important market in the world for you, right here in South East Asia?

VICTOR KOMARDIN, ROSOBORON: Yes. In quantity, yes, for sure. There is more - most of the countries we trade with Asian countries.

Victor Komardin represents Rosoboron Export, a major Russian arms manufacturer. He says business for his country in Asia has never been better.

VICTOR KOMARDIN: This year we will make $10 billion. Last year it was $9 billion - Previous seven, previously five. Yes, yes.

REPORTER: How important is the market in South East Asia to you right now?

MATI HINDREKUS: The Asian market is a growth market for us. Various countries in the region are recognising the need to modernise and upgrade their fleet of ships and their aircraft.

Many countries at the arms fair are nervous about China's military rise. Officially it will spend more than $106 billion on defence this year, which represents an 11% increase. And that increase comes amid worsening sovereignty disputes with some of its neighbours. One such clash is occurring here in the resource rich South China Sea.

China now claims sovereignty over most of it including a group of largely uninhabited islands called the Spratlys. The problem is that the Philippines and four other countries also have claims on these islands, atolls and sand banks which could also be home to large oil and gas reserves.

With their old ally the US back in the region, the Philippines is now daring to stand up to China. Malaysia too has upped the ante about by recently acquiring three second-hand French submarines.

REPORTER: Is the purchase of the submarine and the acquisition of more fighter planes in part a response to China's growing military might?

DR AHMAD ZAHID BIN HAMIDI, MALAYSIAN DEFENCE MINISTER: No, we have planned - we have planned the purchase of submarines earlier. In fact...

REPORTER: Before you became worried about China?


Malaysia's defence minister didn't want to discuss China's military expansion, in particular its growing maritime ambitions in the hotly disputed waters of the South China Sea.

REPORTER: But on the perceived threat posed by China, is Malaysia concerned, because some of your neighbours are?

DR AHMAD ZAHID BIN HAMIDI: We would rather discuss it bilaterally and multilaterally in order to avoid any misunderstanding from the claimant country.

But as countries in South East Asia try to understand the reasons for their giant neighbour's military expansion, the spending on arms goes on. As well as submarines, Malaysia is also in the market for new war planes. The consortium behind the Typhoon Euro Fighter is hoping to clinch a deal.

REPORTER: Why do you suppose countries in South East Asia are choosing to spend more on defence now?

ALAN GARWOOD, GROUP BUSINESS DEVELOPMENT DIRECTOR BAE SYSTEMS: I think there is obviously some regional concerns that they have to face.


ALAN GARWOOD: China is obviously a concern for some governments in this region.

Back in the Philippines, the military hasn't the funds for a full upgrade of its weapons. It still has no fighter planes but it's most senior Commander here says his country is prepared to fight if it has to.

REPORTER: You once said - and you will correct me if I'm wrong - you would fight China with a sword. Do you still stand by that?

LT. GENERAL JUANCHO SABBAN, PHILLIPINE MARINES, WESTERN COMMAND: Of course. We might lose one battle but we will never lose the war of self-determination and sovereignty.

If it ever came to conflict between China and the Philippines, the US is obligated to protect its ally.

LT. GENERAL DUANE THIESSEN: The US and the Philippines have a mutual defence treaty. OK? That mutual defence treaty guarantees that we get involved in each other's defence. And that is self-explanatory.

China's warned that such military exercises are stoking the prospects for conflict in the South China Sea. Just as those war games were wrapping up, two Chinese warships arrived in Hong Kong. In language with echoes of the Cold War, one of China's top admirals had this warning for countries who dared to contest China's sovereignty in the waters just south of this harbour.

REAR ADMIRAL LI SHIHONG (Translation): As everybody knows, the island belongs to China. It's a Chinese territory. It is non-negotiable. We have to follow the decisions from our central government. As soon as the orders are given, we will go out and perform our duties.

It is not war, but it's not peace, either. Another neighbour has also been clashing with China in these contested waters. These pictures were taken from a Vietnamese coastguard vessel last year as it rammed what the Chinese claimed was a fishing boat. These increasing skirmishes are partly why Vietnam is keen to upgrade its maritime defences. It got the hard sell at the LIMA defence exhibition in Malaysia from contractors pushing the latest in offshore patrol craft. But the delegation was careful to sidestep questions about why they want to modernise their fleet now.

REPORTER: You will repel it?


REPORTER: Do you think there could be a war?

DELEGATE: I don't think so.

REPORTER: You think you can solve it?

DELEGATE: Because all the concerning parties are committed to solve problem by diplomacy and peaceful methods.

No-one seriously believes it will come to war in the South China Sea, but the diplomacy has not worked so far. And the arm’s buying spree is by countries worried about what China is doing here shows no sign of slowing.





Original Music Composed by VICKI HANSEN
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