GLOBAL MARKETS-Asian equities edge up as Japan outperforms, dollar regains traction
* Dollar/yen up with funding deal to avert U.S. govt shutdown
* Festering border dispute risks being catalyst for flare-up
* Both sides building up, but India's main supply route a muddy trail
* India sees China as rival for power and resources in Asia
* Next Dalai Lama may come from India side of Tibetan Buddhist area
* China sees Dalai as separatist; followers view him as demigod
By Frank Jack Daniel
TAWANG, India, July 30 It has all the appearance of an arms race on the roof of the world.
Asia's two great powers are facing off here in the eastern Himalayan mountains. China has vastly improved roads and is building or extending airports on its side of the border in Tibet. It has placed nuclear-capable intermediate missiles in the area and deployed around 300,000 troops across the Tibetan plateau, according to a 2010 Pentagon report.
India is in the midst of a 10-year plan to scale up its side. In the state of Arunachal Pradesh, new infantry patrols started on the frontier in May, as part of a surge to add some 60,000 men to the 120,000 already in the region. It has stationed two Sukhoi 30 fighter squadrons and will deploy the Brahmos cruise missile.
"If they can increase their military strength there, then we can increase our military strength in our own land," Defence Minister A.K. Anthony told parliament recently.
Reuters journalists on a rare journey through the state discovered, however, that India is lagging well behind China in building infrastructure in the area.
The main military supply route through sparsely populated Arunachal is largely dirt track. Along the roadside, work gangs of local women chip boulders into gravel with hammers to repair the road, many with babies strapped to their backs. Together with a few creaky bulldozers, this is the extent of the army's effort to carve a modern highway from the liquid hillside, one that would carry troops and weaponry to the disputed ceasefire line in any conflict with China.
India and China fought a brief frontier war here in 1962, and Chinese maps still show all of Arunachal Pradesh within China's borders. The continuing standoff will test whether these two Asian titans - each with more than a billion people, blossoming trade ties and ambitions as global powers - can rise peacefully together. With the United States courting India in its "pivot" to Asia, the stakes are all the higher.
FIGHT AN INSURGENCY
"With the kind of developments that are taking place in the Tibet Autonomous Region, and infrastructure that is going up, it gives a certain capability to China," India's army chief, Gen. V.K. Singh, told Reuters the day before he left office on May 31. "And you say at some point, if the issue does not get settled, there could be some problem."
Indian analysts and policymakers went further in their "Non-Alignment 2.0" report released this year. It argues India cannot "entirely dismiss the possibility of a major military offensive in Arunachal Pradesh," and suggests New Delhi should prepare to fight an insurgency war if attacked.
"We feel very clearly that we need to develop the border infrastructure, engage with our border communities, do that entire development and leave our options open on how to respond to any border incursion, in case tensions ratchet up," Rajiv Kumar, one of the report's authors, said in an interview.
Indian media frequently run warnings of alleged Chinese plots, and both militaries drill near the border. In March, while China's foreign minister was visiting Delhi, the Indian air force and army held an exercise dubbed "Destruction" in Arunachal's mountains. Three weeks later, China said its J-10 fighters dropped laser-guided bombs on the Tibetan plateau in high-altitude ground-attack training.
Some policymakers play down the Arunachal face-off. Nuclear weapons on both sides would deter all-out war, and the forbidding terrain makes even conventional warfare difficult. A defence hotline and frequent meetings between top Chinese and Indian officials, including regular gatherings at the border, help ease the pressure. Bilateral trade, which soared to $74 billion in 2011 from a few billion dollars a decade ago, is also knitting ties.
From China's perspective, the border dispute with India doesn't rank with Beijing's other border or military concerns, such as Taiwan. Chinese Foreign Ministry spokesman Liu Weimin struck an optimistic tone.
"China and India are in consensus on the border issue, will work together to protect peace and calm in the border region, and also believe that by jointly working toward the same goal, negotiations on the border will yield results," Liu said.
Hu Shisheng, a Sino-India expert at the government-backed China Institutes of Contemporary International Relations, said the border dispute casts an oversized shadow in the Indian media - where the China threat is perceived to be strong. But any voices within the Chinese military that advocate seizing the region are weak, he said.
"China's military could take the territory by force, but maintaining the gains in the long term would be exceptionally difficult," Hu said, noting the tough terrain.
Yet with both nations undertaking massive naval modernisations and brushing up against each other's interests across South Asia and in the South China Sea, the festering dispute risks being the catalyst for a violent flare-up, some security analysts say.
STRING OF PEARLS
For thousands of years, Chinese and Indian empires were kept apart by the Himalayas. After years of fast economic growth, the rivals now have the resources to consolidate and patrol their most distant regions.
India is starting to feel fenced in by Chinese agreements with its neighbours that are not strictly military but could be leveraged in a conflict.
Indians sometimes refer to these as a "string of pearls," which includes China's force deployments in Tibet, access to a Myanmar naval base, and Chinese construction of a deepwater port in Hambantota, Sri Lanka, and another in Gwadar, Pakistan.
Some in the Chinese government worry that India is becoming part of a U.S. strategy to contain China. The United States has sold $8 billion in weapons to India, which is spending about $100 billion over 10 years to modernize its military.
The two nations are unlikely to go to war, but have no choice but to add to their military strength on the border as they gain clout, a senior Indian official with direct experience of Sino-Indian relations told Reuters.
"It is the currency of power," he said. In the border negotiations, "we are ready to compromise, but up to a point."
The road to Tawang, a centre of Tibetan Buddhism by the border, is one of India's most strategic military supply routes. Growling convoys of army trucks bring troops, food and fuel through three Himalayan passes on the 320-kilometer (199-mile) muddy coil to camps dotted along the disputed border.
On a road trip in late May and early June, Reuters found much of the 14,000-foot-high road to be a treacherous rutted trail, often blocked by landslides or snow, despite years of promises to widen and resurface it.
At its start in the insurgent-hit tropical plains of Assam state, the Tawang road is guarded by soldiers armed with Israeli rifles and shoulder-mounted rocket launchers who sweep for roadside bombs. Near the end - a tough two-day drive - is the 300-year-old white-walled Tawang monastery.
In the higher reaches, the army convoys struggle along rock-walled valleys to bases near the McMahon Line, the border agreed to by India and Tibet in a 1914 treaty and now the de facto frontier with China. It is the only way in. Supplies are taken to even remoter army posts by 50-mule caravans on three-day treks.
Along the tortuous road, soldiers can be seen shooting at targets on a firing range. Rows of ammunition sheds behind barbed wire dot the landscape on a chilly plateau shared with yaks.
New fuel depots and small bases are springing up. In addition to deploying extra troops, missiles and fighter jets in Arunachal, India plans to buy heavy-lift choppers to carry light artillery to the mountains.
China rules restive Tibet with an iron hand, and tightly restricts visits by foreign media, making independent assessments of the military presence in the region hard. But all signs indicate much more sophisticated infrastructure on the Chinese side of the border.
During the last government-organised visit to Tibet, in 2010, a Reuters journalist saw half a dozen Su-27 fighters, some of the most advanced and lethal aircraft China owns, operating from Lhasa's Gonggar airport. China has been building or extending airports across vast and remote Tibet, all of which have a dual military-civilian use.
Meanwhile, residents on the Indian side of the border report the Chinese have built smooth, hard-topped roads stretching to Tibet's capital of Lhasa. Chinese border posts, like India's today, were once only reachable by horse or mule. Now they are connected by asphalt.
Beyond the frontier, the Chinese improvements include laying asphalt on a historic highway across the region of Aksai Chin, which is claimed by India. The construction of the Xinjiang-Tibet national highway 50 years ago shocked India and contributed to the 1962 war.
China's rails are improving, too: Beijing opened a train line from Tibet to the region in 2006, and an extension is planned into a prefecture bordering Arunachal.
In a 2010 cable released by Wikileaks, a U.S. diplomat concluded that infrastructure development in Lhoka prefecture, which according to China includes Tawang, was in part to prepare a "rear base" should a border clash arise.
For years, India deliberately neglected infrastructure in Arunachal Pradesh, partly so it could act as a natural buffer against any Chinese invasion. That policy was dropped when the extent of development on China's side became clear.
In 2008, Prime Minister Manmohan Singh made his first trip to Arunachal and promised $4 billion to build a 1,700-kilometer (1,055-mile) highway joining the valleys of the state as well as a train line connecting to New Delhi. These would also make troop movements easier.
Around the same time, former army chief Gen. J.J. Singh was appointed governor of the state and is ramping up infrastructure, power and telecom projects.
"Never before in the history of this region has such a massive development programme been conducted here," he said, sipping tea at his residence.
Singh, who spent much of his army career in Arunachal, said India and China both realise "there is enough place and space for both of us to develop. A very mature and pragmatic approach is being taken by both."
But despite 15 rounds of high-level talks, the border issue looks as knotty as ever. Indian media often whip up anger at Chinese border incursions, played down by both governments as a natural result of differing perceptions of where the border lies. India's defence minister told parliament 500 incursions have been reported in the last two years.
Unable to match China's transport network, India's focus is now on maintaining more troops close to the border.
"India struggles to build up infrastructure," said Ashley Tellis of the Carnegie Endowment for International Peace, who has written extensively on the India-China relationship. "They have been trying to do this for the past six or seven years now, and it is progressing far more slowly than they would like. What they have done in the interim is build up the troop strength."
COURTING THE LAMAS
One of main irritants in India-China relations, and a key part of China's claim to Arunachal, is Tibetan Buddhism. Beijing claims a centuries-old sovereignty over Arunachal and the rest of the Himalayan region.
India hosts the Dalai Lama and his Tibetan government-in-exile. When the Dalai Lama fled Chinese rule in Tibet in 1959, his first stop was the Buddhist monastery in the Arunachal town of Tawang near the border. Three years later, China occupied the fortress-like hilltop monastery in the 1962 war before withdrawing to the current lines.
In the 17th century, Tawang district was the birthplace of the sixth Dalai Lama. Deified as his latest incarnation, the current Dalai Lama visited the monastery in 2009 and has hinted his next reincarnation will be born in India. Some say in Tawang.
Tibetan Buddhists see the Dalai Lama as a living god; China sees him as a separatist threat. Many in the Indian security community worry that instability in Tibet after his death could endanger India.
So, New Delhi is wooing the locals. The intermingling of the Indian army and the Tawang monks is striking. War memorials on the road are built in the style of Tibetan Buddhist stupas, with prayer wheels and flags. Soldiers frequently visit the temple, and advise the lamas about troop movements and developments on the border.
Lobsang Thapke, a senior lama at the monastery, says India's troop buildup has made the monks feel safe, but that India was far from matching China's road-building prowess.
"From our side, we have to go through a lot of difficulty," he said in a carpeted room above the main hall, where child monks chanted morning prayers. "They (India) have not black-topped. Gravelling has not been done."
ANGER AND ANXIETY
The Indian footprint here isn't always welcome. India's new wealth is seen in the multi-storey hotels mushrooming between traditional wood-and-stone houses in town, and new Fords and Hyundais on the hilly streets.
But anger is rising about a lack of jobs and perceptions that government corruption is rampant. Student movements have organised strikes in the state capital.
Hotel worker Dorjee Leto says educated young people like himself feel forgotten by India. There is almost no mobile phone coverage, power cuts that last days, and just that long muddy road to the outside world.
Anxiety over China, however, outweighs the irritation with India, says Leto, who like most in Tawang is a follower of Tibetan Buddhism.
"It's a fear, because already China has annexed Tibet. We feel part of India, we are used to India," he said. (Additional reporting by Satarupa Bhattacharjya in New Delhi; Biswajyoti Das in Arunchal Pradesh; Michael Martina and Ben Blanchard in Beijing; editing by Bill Tarrant and Michael Williams)
* Dollar/yen up with funding deal to avert U.S. govt shutdown
May 1 Gold fell on Monday after the dollar edged up as U.S. congressional negotiators hammered out a deal on a spending package to keep the federal government funded through September. FUNDAMENTALS * Spot gold dropped 0.3 percent to $1,264.06 per ounce, as of 0236 GMT. * Gold, last week, saw its biggest weekly percentage fall since the week of March 10, ending about 1.2 percent lower. * U.S. gold futures eased 0.2 percent to $1,265.20 an ounce.