The commercialization of the Chinese military is comprised of two distinct
phenomena. One is the commercialization of the People’s Liberation Army
(PLA), a policy articulated in 1984 allowing the Chinese armed forces to use
their resources in money-making ventures. The other is the commercialization
of the defense industries, whereby the companies/ministries under the State
Council that have traditionally been focused solely on providing weapons to
the armed forces have been allowed, since the early 1980s, to produce consumer
goods. My presentation today will analyze how the former—the commercialization
of the PLA—has affected Chinese military resources and capabilities.
The three main areas of effect to be examined include 1) PLA budgetary influences,
2) PLA non-budgetary influences, and 3) impact on defense industry production.
I will close with comments on the influence that PLA commercialization has had
on China’s sales of arms and related technology to key global hot spots,
an issue that, while unrelated to Chinese military capabilities, still poses
important significance to the United States.
PLA Budgetary Influences
Commercialization Profits
Given severe problems with data availability and reliability, we cannot confidently
estimate how profitable PLA Inc. has actually been. Observers have offered numerous
and sharply differing estimates of commercialization profit levels. Conservative
estimates hold that yearly profits from PLA commercialization are equivalent
to around 7.5% of the official defense budget; middle-ground estimates hold
the figure to be close to 35%; and the most generous estimates are as high as
100%. (Note: profits from arms sales are not included in these estimates. See
below.)
The existence of widespread corruption in PLA Inc. means, however, that not
all profit goes to boosting PLA resources. Perhaps 25-50% of commercialization
profits are never entered into the official books. Nevertheless, not all of
this corruption is wasted—perhaps as much as one-half of these unrecorded
monies are simply creative accounting by lower levels looking to meet pressing
logistical and other costs in face of years of Spartan funding from the center.
Taking these factors into account, the conservative, medium, and high estimates
of yearly PLA commercialization profits stated above fall to around 6, 28, and
75% of the budget, respectively, if one is attempting to measure the real impact
that PLA commercialization has had on the defense budget.
How Profits Are Spent
Looking beyond the guesstimated numbers, we can make a safe generalization that
PLA Inc. has likely not funded the purchase any large-scale purchases of advanced
military equipment from abroad. This is because commercialization profits have
been divided up by many different levels within the military system—the
enterprise, the overseeing unit, the regional and provincial military authorities,
the General Logistics Department (GLD), and perhaps even the central coffers—all
of which have faced a variety of pressing needs. Tai Ming Cheung, a knowledgeable
Hong Kong-based PLA-watcher, holds that commercialization profits have likely
been divvied up according to the following breakdown:
Enterprises: 20-40%
Units that own the Enterprises: 10-20%
Regional and Provincial Military Authorities: 10-20%
GLD: 40-60%
The above breakdown allows the following analysis: First, enterprise-reinvestment
clearly does not boost PLA fighting capabilities. Second, individual units and
even regional and provincial military authorities face many pressing logistical
needs, have very likely also used some of their profits to begin new commercialization
ventures, and are not likely able to afford or even be allowed to use their
earnings to import cutting-edge weapons from abroad. The GLD, in turn, also
is charged with providing a wide-range of logistics—including barracks
construction, food, uniforms, and the like—to all levels of the PLA despite
years of budget austerity. Thus perhaps as much as 75% of the GLD’s intake
is likely fed back into fulfilling such logistical needs. Thus, we can confidently
assume that a major percentage of commercialization profits are not used to
fund China’s large-scale arms-purchases from abroad.
One must note, however, that from the early 1990s on, the PLA was increasingly
successful in its attempts to close down or limit the commercial activities
at the lower levels via the creation of (or forcing companies to join) conglomerates
at the level of Group Army or equivalent; these efforts likely lead to an increase
in profit flows to the GLD, thereby somewhat increasing the percentage of commercial
profits that could theoretically have been spent on cutting-edge modernization
efforts during the commercialization period.
A possible exception is monies derived from China’s own arms sales abroad.
These profits are not included in the above profit estimates because it is difficult
to discern which arms sales are conducted by the PLA and which by the defense
industries. Regardless, the existence of a small number of arms sales agents
located relatively high in the chain of command in both the PLA and the defense
enterprises indicates a higher probability that monies could be turned over
to the GLD and/or state. Also important is that China’s arms sales provide
hard currency, a necessity for China’s own purchases from abroad (note
that a good portion of PLA commercialization profits are earned domestically
and thus contributed mostly only to renminbi holdings). Many observers hold,
however, that while PRC arms sales provided a startling additional 45%-55% to
the official defense budget in the mid- to late 80’s, earnings decreased
sharply thereafter, thus precluding this avenue as a major method of funding
China’s own arms purchases ever since.
Indirect Budget Effects
Important is to note, however, that PLA commercialization has worked to pad
the defense budget in less-obvious ways. PLA enterprises have provided, for
instance, jobs for demobilized servicemen and have also taught valuable skills
to enlisted soldiers, making them more competitive in the civilian job market
upon demobilization. This is important because Chinese sources have complained
of the high costs associated with resettling demobilized servicemen—many
of whom were sheltered by the PLA for decades and found themselves extremely
uncompetitive under Deng’s reforms. Commercialization has provided both
skills and jobs for demobilized servicemen, thus reducing settlement-related
costs for the military and/or state. Interesting is to note that the 1998 divestiture
order (see below) resulted in many military personnel opting to stay with the
company rather than return to their old duties—a form of voluntary, cost-free
demobilization from the PLA point of view.
From a longer-term budgetary perspective one can also argue that PLA commercialization
has provided the necessary funding to allow the PLA to downsize, a key precondition
for military modernization. First, without the central government’s okay
for the PLA to raise its own funds via commercialization, unlikely is that the
Chinese military would have agreed to the unprecedented scope and pace of the
downsizing/streamlining efforts that have occurred since the 1980s—including
demobilization and the reduction of military bases, equipment, and other resources.
Second, commercialization helped fund the actual process of moving these military
resources back into the state sector; this occured not only by providing the
dual-use training and jobs for demobilized soldiers as mentioned above but also
by helping to fund the privatization of military ports, bases, warehouses, and
transportation and communications infrastructure. Thus, by helping reduce the
bloatedness of the PLA, commercialization has helped provide the proper environment
for force modernization.
II. PLA Non-Budgetary Impacts
There are also a number of important issues regarding how commercialization
has affected PLA resources that are not directly related to budgetary concerns.
I argue that, in this area, PLA commercialization has actually had a drastically
negative impact on many PLA resources, which I divide below into the categories
of “hardware” and “software.”
Hardware
“Hardware” refers to transportation infrastructure, logistics equipment,
and natural resources that are indigenous to the PLA. Of these, I argue that
transportation and related resources have been hardest hit for two reasons.
First is that commercializating these resources requires very little in terms
of additional equipment, funding, or expertise: transporting consumer goods
by military rail/boat/airplane is no more complicated than moving military goods
by the same methods. Understandable is thus why such service-industry sectors
have proven to be the most profitable of all PLA enterprise-types. Second, this
type of infrastructure is pervasive across the entire military, resulting in
organizational units at all levels making active use of such resources. The
end result has been that a good deal of PLA infrastructure was being monopolized
for commercial purposes. Note that out of concern for this over-exploitation
of resources, the PLA had been forced to post regulations limiting such behavior,
with some units even demanding that proper monetary compensation be paid for
such commercial use of their resources.
Software
Military “software” refers to the quality and quality of the troop
base required to operate the hardware. The picture here is somewhat mixed. One
popular misconception is that PLA enterprises employ vast numbers of soldier-laborers.
Except for PLA construction activities, this is not true: the main labor base
for PLA Inc. is comprised of civilians, demobilized soldiers, and family members
of servicemen and servicewomen. PLA officers do serve in management positions,
however, with perhaps as much as half of all units running commercial enterprises.
Determining the actual rate of soldier participation in commercialization is
difficult: the PLA has warned as early as 1978 that no more than ten percent
of army troops should become involved in commercial activities, and in 1992
also banned all servicemen at the division-level and below from such pursuits.
The fact that such prohibitions are repeated announced means, however, that
these limits were probably being widely ignored. One important exception though
is the PLA’s elite or “fist” units have stayed away from commercial
pursuits.
The most serious problems involve other software issues such as troop morale,
intra-PLA unity, and civil-military relations. One such negative effect is due
to the fact that commercialization is inherently unprofessional. Another is
that the competition inherent in capitalism was working to pit PLA enterprise
against PLA enterprise. The biggest problem, however, has been due to corruption.
Commercialization-related corruption in the PLA, for a variety of reasons, has
been both rampant and insuppressible, affecting individuals, units, and departments
at all levels and in all services—including the very individuals and institutions
charged with combating PLA corruption in the first place. Such widespread and
continuous economic malfeasance has weakened troop morale and lead to civil-military
tension. Note that the 1998 divestiture order came about in part because a general
crackdown on smuggling had revealed PLA participation in two very serious cases.
Smuggling by the armed forces was costing the central government a fortune in
terms of lost taxes and this competitive advantage enjoyed by PLA smugglers
was harming domestic companies, including almost bankrupting China’s two
state-run oil monopolies.
The Impact of Divestiture
Most of these non-budgetary effects should disappear, however, given the recent
divestiture program. A note on divestiture is thus needed. The original order
to disassemble PLA Inc. was extremely thorough, with a few initial exceptions
(including 56 subsidiaries of Xinxing Co. that produced goods for the PLA, a
three-star hotel for each major department, and agricultural ventures for lower
levels). There have been, of course, many efforts from within the PLA to hold
on to their enterprises, and the center has shown increased willingness to allow
a wider range of activities—including construction and some services—due
to resistance from the military. The main body of PLA Inc. has collapsed, however,
with only a much-reduced shell remaining. The vast majority of the commercial
activities that still continue are unsanctioned and thus more limited in both
breadth and depth and therefore will not result in the handover of any substantial
amount of cash to the GLD that could be used for cutting-edge modernization
efforts.
III Impact on Defense-Industrial Production
Despite PLA divestiture, however, there exist two very important issues related
to commercialization that are worthy of attention. The first concerns dual-use
technology transfers that could help modernize defense industrial production.
This is perhaps the main channel through which Chinese military commercialization
may impact Chinese military capabilities. First, PLA Inc. lasted almost
two decades, providing the PLA with a large window of opportunity to gain dual
use technology. Moreover, while PLA enterprises have now been mostly divested,
the defense industries under the State Council are still very much engaged in
foreign trade and thus can provide an avenue for technology acquisition. Despite
divestiture, moreover, the PLA can just as easily still employ front companies
or place agents in legitimate companies in order to seek dual-use technology.
The question of the degree to which commercialization-related technology transfers
may affect PLA capabilities cannot be adequately addressed, however, without
an understanding of the overall development of the Chinese defense industry—including
an understanding of the types of defense technologies that are needed by China
and what ability the defense industries have to master these technologies and
integrate them into weapons platforms.
IV Proliferation Issues
A second and clearly pressing issue for the US concerns how commercialization
affects Chinese sales of weapons and related technology around the globe, especially
to such hot spots as South Asia and the mid-East. Note that the PRC has in the
past blamed the existence and continuation of such sales on the institutional
fragmentation created in part by PLA commercialization. Under the divestiture
program the PLA has reportedly moved the arms-sale department previously under
the Poly Group (which had been staffed by children of high-ranking military
officials) to the control of the new General Armaments Department. The PRC has
also passed various export control regulations on military goods and technologies,
including the 1994 Foreign Trade Law, the 1997 Regulations on Export Control
of Military Items, and the 1998 Export Control Law on Dual-Use Nuclear Goods
and Related Technologies. Whether or not such reforms can stop the profit-inspired
sale of arms and technology to regions of concern to the US remains to be seen,
and is an area requiring continued US vigilance.
* * *
Level One:
GLD:
• GLD Trading Corp.
• Huijiang [GLD sales promotion office in Hong Kong]
• San Ding Trading
• † Sanjiu (999) Enterprise Group (Pharmaceuticals, Securities and
Investment, Real Estate, Electronics, Contact Lenses, and Motorcycles)
• Southern (Nanfang) Pharmaceutical Group/Corp.
• Sunwin (Sun Win) Ltd.
• Wuhuan Enterprise Management Group (Military supplies)
• Xinxing Corp. (Food, Clothing, Construction Materials, Fuels, Vehicles,
and Boats)
• Zonghe Technology Corp. (strategic missiles, military satellites communication)
GPD:
• Ark Holdings Ltd.
• Carrie/Kaili Corp. (Communications Equipment, Power Production, Leather,
Paper, Publications, Contractual International Engineering Projects, and Tourism)
• China Tiancheng Corp/Group (Coal Mining and Real Estate)
• HMH China Investment Ltd.
• HMH Gold Mining
• Hongkong Macau International Holdings Ltd.
GSD:
• Bureau of Military Equipment and Technology Corp. (BOMETEC)
• China Electronics System Engineering Company (Co). (CESEC) (Communications
and Electronics Technology and Equipment)
• China Polytechnologies Inc./China Poly Group Corp. (Armaments,
Real Estate/Construction, Tourism, Restaurants, Entertainment, Advertising,
Futures Trading, Transportation, and Photo Studios)
• China Telecom Great Wall Mobile Telecom (J.V. with China Telecom) (Communications)
• China Huitong Corp. (Telecommunications, Hotels, Tourism, and Industrial
Production)
• China Fuli International
• China Zhihua Corp. (Communications Equipment, Computers, Image Processing
Equipment, and Navigation Equipment)
• Continental Mariner Ltd. (Owned in part by China Poly Group)
• Ping He Electronics Co./Ping He Import/Export Co. (Military Technology)
• Yuhe Machinery Plant (?)
Shanghai Garrison Command:
• Yunfeng Industries Co. (Real Estate, Automobile Repair, Transport,Storage,
Pharmaceuticals, Chemicals, Hardware, Electrical Equipment, and Building Materials)
Level Two:
PLAAF:
• China Anda Aviation
• China United Airlines (Cargo and Passenger Flights, Ground Transportation,
Hotels, Catering, and Souvenir Outlets)
• Lantian Industrial Corp.
• Tianma Enterprises
PLAN:
• China Ocean Shipping Company (Shipping)
• China Songhai Industrial and Commercial Corp./China Songhai (Industries)
Corp./Group (Industrial Production, Foreign Trade, and Shipping)
• Xinghai Corp.
Second Artillery:
• Changrong
• China Tianlong Industrial and Commercial Corp. (Not Confirmed)
• Shanhaidan Corp. (Pharmaceuticals)
Level Four:
(7 Military Regions)
Beijing MR:
• Huabei Enterprise Corp. (Industrial, Agricultural, Mining, and other
Commercial Operations)
Shenyang MR:
• Northeast Jincheng Industrial and Commercial Corp.
• Songliao Enterprise Group/Songliao Vehicle Group (Vehicle Production
and Repair)
Nanjing MR:
• Huadong Industrial/Enterprise Corp.
Chengdu MR:
• Southwest Great Wall Economic Development Corp.
Lanzhou MR:
• Northwest Industrial and Trading Group (Industrial goods and farm products)
Jinan MR:
• Shandong Dongyue Corp.
• Shandong Feiyang International Economics and Technology Enterprise
Guangzhou MR:
• Cuicum Enterprise United Group (Industrial and Agricultural Products)
• Guangzhou Science and Technology Development Corp.
• J&A Securities (Hong Kong-based Joint venture with the Ministry of
State Security)
• Jiahe United Development Company (Hotels, Electronic Components, Vehicle
Parts,
Building Materials, and Agricultural Products)
• Nanfang Hainan Industrial and Commercial Corp.
• Southern Industrial and Trading Corp. (Joint Venture between Jiahe and
British Standard Charter Bank) __ (Exports of Textiles, Pharmaceuticals, Chemicals,
Petrochemicals, Farm Produce, and Light Industrial Products)
(24 Group Armies:)
• Changcheng Group (42nd GA)
• Changcheng Huihua Industrial Corporation (42nd GA)
• Luyan Enterprise Group (28th or 63rd GA) (Factories and Coal Mines)
• Taihang Enterprises Group
People’s Armed Police:
• Beijing Sources Development Co. Ltd.
• China Anhua Development Corp. (Holding Company for PAP enterprises—Foreign
Trade)
• Jingan Import/Export Corp. (Small Arms and Riot Control, Security, and
Firefighting Equipment)
• Wankun (Wan Kun) Development Ltd.
(Military Districts:)
Sichuan MD:
• Sichuan Bashu Enterprise Group
Xinjiang MD:
• Xiyu Company (Tourism, Import and Export )
* Enterprise break-down as existed before the 1999 divestiture order. Appendix
drawn from Andrew D. Marble, “The Impact of Defense Conversion on PLA Resources:
Implications for Chinese Military Capabilities” (Department of Political
Science Ph.D. Dissertation, Brown University 2002) and derived in part from
“Military and Organizational Structure of the PLA and Their Primary Companies,”
additional written testimony submitted by Jeffrey Fielder of the Food &
Allied Service Trades Dept./AFL-CIO to the Senate Foreign Relations Committee
Hearing, “Commercial Activities of China’s People’s Liberation
Army (PLA),” 6 November 1997, US Government Printing Office 1998, 25-32;
, esp. Chapter 4; and Zehnxing Liu “Zhonggong zhongyang jinzhi jundui jingshang
zhi pouxi (An analysis of the PRC central leadership's prohibition of PLA commercialization)”
Gongdang wenti yanjiu (Studies in Communism) 25, no. 2 (1999), 33.
† Mulvenon notes that while reporting to the GLD, Sanjiu is officially
independent of any PLA organizations.