TAIPEI, Taiwan (TheStreet) -- Beijing's newest wave of landfilling in the disputed, resource-rich South China Sea along with a fresh keep-out warning to the U.S. raises the threat of new upsets, a boost for defense contracts.
The latest move, what defense media describe as construction of an islet 3,000 yards long and at least 200 yards across, anchor Beijing's claim to a 1.4 million-square-mile ocean and reminds growing Southeast Asia of its so far unstoppable expansion. China's 1.35 billion people after all need fish to eat and its $10 trillion economy needs the gas and oil that may lurk under the sea bed.
To protect its interests, Beijing has twinned its landfill work over the past three months with a Nov. 24 warning to the U.S. described by the official People's Daily paper as "Stay out of it." The U.S. is Southeast Asia's most powerful ally as both sides want China contained.
At some point, maybe this one, more aggressive Southeast Asian contenders in the ocean Vietnam and the Philippines will do more than shout back at China. They'll go on a weapons buying binge. Defense contractors aren't saying much at this point but can't possibly have their heads in the sand.
The Philippines, which tangled with China during a standoff at sea in 2012 and again this year with the arrest of 11 Chinese fishermen, is bracing for a fight.
"I believe on the part of our government, the Armed Forces of the Philippines modernization is a concrete example of a response to these challenges," says Jonathan Ravelas, chief market strategist with Banco de Oro UniBank in Manila.
New York-listed defense contractors Raytheon (RTN - Get Report) and Lockheed Martin (LMT - Get Report) , both likely to be sought after because of their business scale and experience overseas, declined to say whether they expected contracts from South China Sea nations. But that doesn't mean the secretive companies have declined to talk with Manila, which lacks China's military might.
The U.S. government pledged $40 million in military aid to the Philippines in December, suggesting that American companies are in the wings. It's clear why China's saying keep out.
Because of a post-Vietnam war ban, the U.S. cannot sell lethal weapons to Vietnam, though there's pressure in Washington to ease the rules, and last year Washington said it would give $18 million in aid to Hanoi. Eager to arm itself, Vietnam could also turn to Nasdaq-listed Japanese defense contractors Mitsubishi Heavy Industries (MHVYF) and Kawasaki Heavy Industries (KWHIY) as Tokyo relaxes its own historic ban on arms sales abroad.
Riots erupted in Vietnam and boat-ramming incidents off its east coast in reaction to China's placement of an oil rig in the seas in May. The two have reconciled since then, but China may be getting restless again, says Edward Friedman, China specialist and professor emeritus at the University of Wisconsin.
Along with Vietnam and the Philippines, normally quieter South China Sea claimants Brunei and Malaysia should also be evaluating their military hardware, says Scott Harold, political scientist with the think tank RAND Corp. To counter China, he says, the Southeast Asian claimants may need drones, surface-to-air missiles and landing craft for remote islets.
Contractors in Europe, India and South Korea could be open to selling arms, he adds. Indian state-owned Hindustan Aeronautics has worked with major Western peers, lending it global brand value. In South Korea, a rising star in defense, Southeast Asians could talk to Seoul-listed Korea Aerospace Industries. If shopping Europe, there's Nasdaq-listed BAE Systems (BAESY) .
"China's island-building activities could certainly accelerate the impetus to buy such capabilities, but they have long been recognized as important by countries watching China's overall build-up or modernization of its armed forces, and are not driven solely by the island-building efforts China has recently put forth," Harold notes.