Thank you, Mr. Chairman and members of the US-China Commission, for inviting me to testify today. In my allotted time, I would like to discuss the current situation of the Chinese military’s withdrawal from commercial operations, known generally as “divestiture.” To structure my remarks, I have prepared a list of the top five myths of PLA divestiture.

The Top Five Myths of PLA Divestiture

1. Divestiture was a surprise or unexpected

While the divestiture announcement was immediately picked up by Western and Chinese media and portrayed as a dramatic reversal of policy, divestiture was not a sudden decision at all. Jiang Zemin reportedly first floated the idea of military "eating imperial grain" (chi huangliang, i.e. be funded solely by the government) in 1990, but it was judged to be impractical. In the absence of divestiture, the PLA
underwent over six years of rectification and consolidation campaigns in the military enterprise system, and divestiture should in many ways be seen as the logical culmination of that effort. Moreover, the July 1998 meeting was not even the first divestiture announcement. A decision to divest had actually been made over a year earlier in May 1997, though the major transfers were not set to begin until three years later in May 2000. One important prefatory move, the withdrawal of the preferential tax rates enjoyed by PLA enterprises (local companies previously paid 33 percent while PLA enterprises paid only 9 percent), had been implemented in early 1998, and the PLA had reportedly drawn up a plan for divestiture at least six months in advance of the July 1998 announcement.

Thus, Jiang's order represented only an acceleration of the divestiture timetable. The complete reasons are not entirely known, but there are at least two competing stories. One rumor claims that divestiture was initiated by an angry Jiang Zemin upon receiving an account of the excessively corrupt activities of six PLA and People's Armed Police companies, the most egregious of which involved oil smuggling that was bankrupting the country's two geographical oil monopolies. Indeed, there were widespread reports of rampant smuggling by the military during the Asian economic turmoil in early 1998, allegedly depriving the government of hundreds of billions of renminbi of customs revenue and worsening deflation.

A second version of the story actually begins with Zhu Rongji. According to cited U.S. intelligence sources, Zhu Rongji angered the PLA at the 17 July 1998 meeting of the anti-smuggling work conference by accusing the General Political Department's Tiancheng Group of rampant corruption. In particular, he singled out a case in which the company had avoided paying RMB50 million in import and sales taxes after purchasing a shipment of partially processed iron ore from Australia. "Every time our customs officials tried to snare these bastards, some powerful military person appeared to speak on their behalf," Zhu allegedly charged at the closed-door meeting. As anger and resentment spread through the PLA leadership, Jiang Zemin allegedly appeared at the conference four days later to lend his support to Zhu, confirming that "some units and individuals" in the PLA were involved in smuggling. According to this account, Jiang thereupon announced the divestiture order.

2. The PLA opposed divestiture

Contrary to the conflictual civil-military scenario put forward by many observers in the Hong Kong media, the evidence instead suggests that the divestiture in principle was largely supported by a corruption-weary military leadership. They generally agreed with the political, military and economic rationales for divestiture. On the political front, divestiture was aimed at curtailing corruption within the ranks. The civilian leadership argued that as long as the military operated in the commercial economy, it was subject to "negative influences." Jiang Zemin reportedly spoke of the preventing the military from "changing color" and of keeping the military "pure." At a military level, divestiture was designed to return the PLA to its primary professional mission: preparing for war. Finally, from an economic perspective, there was recognition that the military was terribly adept at running commercial operations.

A key condition for military acquiescence to divestiture, however, was an assurance from the civilians that the PLA would receive a sufficiently generous compensation package for handing over its businesses. Indeed, sources in Beijing indeed confirm that the faultlines in the divestiture process could be drawn between supporters, including the senior military leadership and the combat units, and those who have resisted the ban, especially members of the logistics and enterprise management structure, military region commands, and military district commands that stood to lose their primary source of legal and illegal income.

3. Divestiture ended on 15 December 1998

In fact, the official handover date was the beginning of the difficult phase of divestiture. In relative terms, the divestiture work from July - December 1998 was the easy part. After 15 December, military and civilian officials sat down to the protracted negotiations over asset valuation, which is still ongoing almost three years later.

4. The PLA is no longer involved in the economy

Reportedly, 2,937 firms belonging to the PLA and People's Armed Police were transferred to local governments, and 3,928 enterprises were closed. The big loser was the General Logistics Department, which saw more than 82 percent of its enterprises transferred or closed. One-third of the companies and their subsidiaries were retained by divestiture offices at the central level, while the remaining two-third were transferred to divestiture offices at the local level.

The remaining 8000-10000 enterprises, most of which were the smaller, subsistence-oriented enterprises at the local unit level, remained in the military. The reforms were also "suspended" in some sectors, especially civil aviation, railway and posts and telecommunications, because of the "special nature" of these industries. For example, the Air Force's China United Airlines was permitted to continue operating. Other notable exceptions included the fifty-six numbered factories previously under the control of the GLD's Xinxing Group, which remained under the administrative control of the General Logistic Department's pared-down Factory Management Department (formerly the larger Production Management Department), and Poly Group, which was divided between the General Equipment Department (arms trading elements like Poly-Technologies), and COSTIND.

In a sense, divestiture brings the PLA full circle. The pattern of the campaign, ranging from the transfers of its high-profile commercial enterprises to the retention of its lower-level farms and industrial units, suggests that the military has essentially returned to the pre-1978 "self-sustaining" economy. Thus, the widespread conclusion that the PLA has been "banned" from business is far too simplistic. The military will continue to operate a wide variety of small-scale enterprises and agricultural units, with the goal of supplementing the incomes and standards of living for active-duty personnel and their dependents at the unit level. Profit and international trade, however, will no longer be critical features of the system. Moreover, the military leadership hopes that the divestiture of profitable companies will greatly reduce the incidence of corruption and profiteering in the ranks, and thereby refocus the PLA on its important professionalization tasks.

5. The divested enterprises are out of PLA control

The political reality of divestiture is that the PLA still retains important ties to its former enterprises. Military officers who ran enterprises before divestiture were given a choice between returning to active duty or retiring from the military to run the companies as a civilian. Other enterprises were divested to the relatives of military officials and local commanders. In other words, many of the PLA's former enterprises are merely one step removed from their previous status.

The Current Situation

Most likely, the next few years will witnesses repeated "mop-up" campaigns on the part of the central leadership and significant resistance and foot-dragging on the part of local military officials, repeating the pattern of earlier rectifications. An audit in early 1999 revealed that the military had kept back some 15 percent of its businesses, necessitating the extension of some deadlines until August 1999. As late as May 2000, a top-level meeting on divestiture all but admitted that the military continues to shield some assets from the process, stating that the withdrawal of the military from business activities had only been "basically completed.”

Written Testimony

The Saga of PLA Divestiture

On 22 July 1998, at an enlarged session of the Central Military Commission, CMC Chairman Jiang Zemin gave a speech in which he called for the dissolution of the military-business complex, asserting:

To make concerted efforts to properly develop the army in an all-around manner, the central authorities decided: The army and the armed police [wu jing] should earnestly screen and rectify [qingli] various commercial companies operated by their subordinate units, and shall not carry out any commercial activities in the future...Military and armed police units should resolutely implement the central authorities’ resolution and fulfill as soon as possible the requirements that their subordinate units shall not carry out any commercial activities in the future.¹

Jiang then sought to consolidate the decree by publicly releasing the announcement through the party’s extensive propaganda apparatus. That night, Jiang’s speech at the meeting was broadcast on the CCTV Evening News, which has the highest rating in China and is closely watched by other Chinese media for cues about important stories. Observers took special note of the fact that the Chinese leader was shown flanked by the top brass of the PLA, implying at least tacit consent to the decision by the military. The next day, the Party’s official newspaper, People’s Daily, ran a banner headline, declaring “PLA Four General Departments Convened in Beijing to Carry Out the Decision of the Anti-Smuggling Meeting,” with the subtitle “Chairman Jiang Talked Seriously About Divestiture.”² The announcement was then publicly seconded in subsequent days by key members of the military and civilian leadership, including the de facto head of the PLA, General Zhang Wannian, Chief of the General Staff General Fu Quanyou (23 July),³ General Logistics Department Director Wang Ke (24 July),⁴ General Political Department Director General Yu Yongbo (25 July),⁵ and General Armament Department Director General Cao Gangchuan (26 July),⁶ as well as Politburo Standing Committee member Hu Jintao.⁷ From the media barrage, it appeared that the decision might actually have the political momentum to dislodge the Chinese military from its difficult Catch-22.

While the divestiture announcement was immediately picked up by Western and Chinese media and portrayed as a dramatic reversal of policy, the reality of the situation was much more complicated. Divestiture was not a sudden decision at all. Jiang Zemin reportedly first floated the idea of military "eating imperial grain" (chi huangliang, i.e. be funded solely by the government) in 1990, but it was judged to be impractical. In the absence of divestiture, the PLA underwent over six years of rectification and consolidation campaigns in the military enterprise system, and divestiture should in many ways be seen as the logical culmination of that effort. Moreover, the July 1998 meeting was not even the first divestiture announcement. A decision to divest had actually been made over a year earlier in May 1997, though the major transfers were not set to begin until three years later in May 2000. One important prefatory move, the withdrawal of the preferential tax rates enjoyed by PLA enterprises (local companies previously paid 33 percent while PLA enterprises paid only 9 percent), had been implemented in early 1998, and the PLA had reportedly drawn up a plan for divestiture at least six months in advance of the July 1998 announcement.⁸

Thus, Jiang's order represented only an acceleration of the divestiture timetable. The complete reasons are not entirely known, but there are at least two competing stories. One rumor claims that divestiture was initiated by an angry Jiang Zemin upon receiving an account of the excessively corrupt activities of six PLA and People’s Armed Police companies, the most egregious of which involved oil smuggling that was bankrupting the country’s two geographical oil monopolies.⁹ Indeed, there were widespread reports of rampant smuggling by the military during the Asian economic turmoil in early 1998, allegedly depriving the government of hundreds of billions of renminbi of customs revenue and worsening deflation.¹⁰

A second version of the story actually begins with Zhu Rongji.¹¹ According to cited U.S. intelligence sources, Zhu Rongji angered the PLA at the 17 July 1998 meeting of the anti-smuggling work conference by accusing the General Political Department’s Tiancheng Group of rampant corruption.¹² In particular, he singled out a case in which the company had avoided paying RMB50 million in import and sales taxes after purchasing a shipment of partially processed iron ore from Australia. “Every time our customs officials tried to snare these bastards, some powerful military person appeared to speak on their behalf,” Zhu allegedly charged at the closed-door meeting. As anger and resentment spread through the PLA leadership, Jiang Zemin allegedly appeared at the conference four days later to lend his support to Zhu, confirming that “some units and individuals” in the PLA were involved in smuggling. According to this account, Jiang thereupon announced the divestiture order.

These accounts of the decision to divest the PLA of its enterprises raise a fundamental analytical question: how did the PLA and the CCP work their way out of what could only be described as the fiscal and political Catch-22 of military commercialism? Contrary to the conflictual civil-military scenario put forward by many observers in the Hong Kong media, the evidence instead suggests that the divestiture in principle was largely supported by a corruption-weary military leadership. They generally agreed with the political, military and economic rationales for divestiture. On the political front, divestiture was aimed at curtailing corruption within the ranks. The civilian leadership argued that as long as the military operated in the commercial economy, it was subject to "negative influences." Jiang Zemin reportedly spoke of the preventing the military from "changing color" and of keeping the military "pure." At a military level, divestiture was designed to return the PLA to its primary professional mission: preparing for war. Finally, from an economic perspective, there was recognition that the military was terribly adept at running commercial operations.

A key condition for military acquiescence to divestiture, however, was an assurance from the civilians that the PLA would receive a sufficiently generous compensation package for handing over its businesses. Indeed, sources in Beijing indeed confirm that the faultlines in the divestiture process could be drawn between supporters, including the senior military leadership and the combat units, and those who have resisted the ban, especially members of the logistics and enterprise management structure, military region commands, and military district commands that stood to lose their primary source of legal and illegal income.¹³

The heart of the bargain between the PLA and the civilian leadership therefore centered on financial compensation - in this case two separate financial deals. The first was the one-time transfer of the PLA’s divested enterprises. Reportedly, the financial burden for these enterprises, including their weighty social welfare costs and debts, was to be placed upon local and provincial governments rather than the central government, though no money was to change hands. This devolution of responsibility from the center to the localities was seen by many as yet another attempt by Zhu Rongji to restore some measure of macro-level economic authority in China by forcing the lower levels of the system to assume greater financial responsibility for the economic units in their area.

The second negotiation focused on the annual budget increases to make up for lost enterprise revenues, with the goal of consolidating Jiang’s earlier decree to the military to “eat imperial grain” rather than rely on business for revenue. Before the divestiture was completed, Hong Kong sources reported that the PLA would receive between RMB15-30 billion per year, with the exact time frame subject to negotiation.¹⁴ Two months later, the same author reported that the PLA would receive RMB50 billion as compensation for its lost enterprises.¹⁵ The Wall Street Journal quoted U.S. diplomats as saying the government offered about $1.2 billion but the military demanded $24 billion. Sources at the GLD claimed in December 1998 that the PLA would receive between RMB4-5 billion in additional annual compensation, complementing continued double-digit budget increases.¹⁶

For local units, however, the prospects of a lucrative budget deal must be have been bittersweet, since it required them to buy into what might be called “the trickle-down theory of PLA economics.” Whereas units previously had relatively direct control over enterprise finances, they now had to place their faith in the notion that the budget funds would trickle down through the system from Beijing to their level. Previous experience with the Chinese military bureaucracy did not inspire confidence that this would come to pass. To ameliorate these concerns, the military leadership took steps in the fall of 1998 to improve the standard of living for the rank and file. The principal measure was an increase in the salaries of servicemen by an average of an additional 10-25%, depending on rank and location.¹⁷ One lieutenant general in Beijing reportedly received a raise of RMB400 per month, while two senior colonels claimed increases of 20% from 1700RMB to 2040RMB.¹⁸ Overall, the average soldier in the PLA was reportedly expected to receive an additional RMB100 per month.¹⁹

Phase One: Organization and Strategy

Organization of the divestiture effort actually preceded Jiang’s 22 July speech. On 20 July 1998, Jiang chaired a meeting of the Politburo and reportedly asserted that “the military cannot run businesses any more or the tool of the proletariat dictatorship would be lost and the red color of the socialist land would change.” General Zhang Wannian, Vice-Chairman of the CMC, convened a meeting on 21 July to set up a military leadership small group, and in that meeting a set of two milestones were reportedly established: by the end of 1999, all businesses would sever their links with the military and starting from 1999, the military would rely entirely on the government budget.

Immediately after Jiang’s 22 July speech, the four General Departments convened a meeting to implement the decision, discussing the issue from 23-26 July.²⁰ The four directors and political commissar Li Jinai attended the meeting, which established a special task force to oversee divestiture. The four general departments eventually selected 30 cadres to staff the office of the military’s leading small group. The participants also drafted a preliminary plan, and began to lay out policies for dealing with issues such as displaced workers, debts and credits, and real estate.

At the same time, a top-level, civilian-led leading group was reportedly established, with Jiang Zemin’s chosen successor Hu Jintao as the head, and other party, government, and military leaders, including Zhang Wannian, and Luo Gan, as members.²¹ Hu's appointment served an important prelude to his official appointment as vice-chairman of the Central Military Commission at end of October 1999.²² Despite Hong Kong media stories to the contrary, there does not appear to have been any major cleavages in the top civilian leadership over divestiture.²³ One well-informed observer relates that Jiang and Zhu were closely united on the issue, with Jiang providing the political clout and Zhu providing economic instructions to his subordinates at the State Economic and Trade Commission as to the specifics of the separation.²⁴ Over the next few weeks, corresponding leadership small groups at lower levels of the system, including military units and State Economic and Trade Commission branches, were also established.

During the summer, the divestiture process was delayed significantly by the massive flooding, in which the military played a heroic role. By 6-7 October, the situation had sufficiently stabilized for Central Committee, State Council and Central Military Commission to convene the “Divestiture of Military, People’s Armed Police, and Law Enforcement Organs Work Meeting,” aimed at producing a detailed plan for the separation of enterprises from units.²⁵ At that meeting, a new temporary organization was created, known as the “National Office for the Handover of Enterprises Under the Army, People’s Armed Police, and Law Enforcement Organs.”²⁶ The office of this leading group was staffed primarily by personnel from the State Economic and Trade Commission. The following eighteen organizations were also involved: the four General Departments, the People’s Armed Police Headquarters, officials from the Politics and Law Department of the State Development and Planning Commission, the Commission on Science, Technology and Industry for National Defense (COSTIND), the Ministry of Public Security, the Ministry of Inspection, the Ministry of Civil Affairs, the Ministry of the Treasury, the Ministry of Personnel, the Ministry of Labor and Social Security, the Ministry of Foreign Trade and Economics, the People’s Bank, the General Tax Bureau, the Industrial and Commerical Bureau, and the Ministry of State Security. The Handover Office was tasked with the promulgation of detailed regulations governing the handover and takeover of military enterprises, the organization and coordination of divestiture, and oversight over lower-level offices. The national office was also given responsibility for the divestiture of ministry-level enterprises.²⁷ Similar offices were also set up by the State Economic and Trade Commissions of provinces and autonomous regions to take charge of the takeover of enterprises based within their geographic purview.

On 9 October, after a series of work conferences, the four General Departments of the PLA again convened another meeting, entitled the “Divestiture of Military and People’s Armed Police Work Conference.”²⁸ Also in attendance were representatives of the CMC General Office, military region headquarters, and military district headquarters. At this meeting, detailed plans regarding the handover of military firms were prepared. The guiding principle of this effort, as defined by the Central Committee was: “turning over enterprises first, consolidating them later.”²⁹ Accordingly, the work teams were sent to the units to get a proper accounting of the units’ legal and illegal commercial activities. Information on illegal activities was used to prepare cases for the military’s discipline inspection commission, while data on the legal enterprises were used to give the military leadership a clear picture of the extent and financial viability of the military-business complex. Specifically, the work teams sought to assess the number of enterprises that required transfer, the number of enterprise employees involved in the process, and the asset/debt values of the enterprises. This first phase was completed by mid-October 1998. One official government assessment of the asset value of enterprises owned by the military was roughly RMB50 billion (US$6.02 billion).³⁰

Phase Two: Formal Registration and Asset Valuation

The second phase of the divestiture, begun in late October 1998, involved the formal registration and assessment of assets of the enterprises, followed by the expected official transfer of these enterprises to Handover Offices at the state, provincial, autonomous district, and municipality level.³¹ The 16 character slogan for this phase was “comprehensive combing, good planning, discretionary treatment, and step-by-step implementation.”³² In general, stable enterprises were to be transferred to the governments, while profitable companies were to be placed underneath the SETC offices. In addition, a considerable number of banking, security, and trading companies that were poorly managed and operated, together with those industrial enterprises that have suffered serious losses were expected to be reorganized or closed down altogether.³³

More specifically, divestiture affected each of the six parts of the PLA's business empire in different ways. The original divestiture order explicitly targeted commercial enterprises (jingying xing qiye), mandating that all of these businesses should be either handed over to civilian authorities or closed down. For the other five parts of the system, the leading groups have been forced to adopt a series of gradual policies:

• Units meeting logistics needs ("baozhang xing qiye" providing "houqin fuwu"), including repair shops, munitions factories, and uniform factories, were partially divested, with some businesses handed over to civilian authorities and others retained by the military. The guiding rationale asserts that the military does not need to make all of these things itself, and should be able to outsource some of this production.

• Farms (nongchang), covering several million mu of land, have been completely retained.

• Fee-for-service businesses (youchang fuwu), such as hospitals and research facilities (keyan danwei), were retained because the facilities have excess capacity and highly advanced equipment not generally found in the civilian sector. In the case of hospitals, the military alone cannot provide enough patients to make efficient use of these resources. By serving the public, they can raise their level of expertise and earn a relatively insignificant amount of money for the military at the same time.

• Welfare businesses (fuli xing qiye), including factories set up to provide employment to military dependents (also known as jiasu gongchang), were partially divested, with some closed and others, particularly those in remote areas where relatives have no other options for employment, retained.

• Cover operations (yanhu qiye), including enterprises providing cover for intelligence gathering, national security, foreign affairs, and united front operations, were partially divested.

The top-level leading group decreed that all military enterprises should be dealt with in one of three ways. The first option was "handover" (yi jiao) to civilian authorities. This applied to commercial operations and hotels, though not to guesthouses (zhaodaisuo). Most enterprises were to be handed over to local authorities. Some were handed over to the central government, specifically to the State Economic and Trade Commission (Jingmaowei). Local authorities were not to provide any compensation, which was supposed to come from the central government in the form of a lump sum. Military employees of these enterprises could choose to return to the military or to stay with the enterprise. Not surprisingly, lower ranking military employees tended to stay with the enterprise, while higher ranking employees tended to return to the perquisites of the military. The second option was closure (chexiao) of the enterprise. There were many reasons for closure, including commercial non-viability, heavy debts, or the location of the enterprise within the perimeter of a military installation, which meant that the business could not be handed over to the civilian authorities without creating a security problem. The third and final option was retention (baoliu), which was generally applied to those enterprises meeting specific military needs (baozhang xing qiye).

Not surprisingly, the divestiture encountered some resistance among military units reluctant to part with their enterprises during this second phase. Some departments reportedly attempted to fold their enterprises under subordinate institutions that were not being screened by the central authorities.³⁴ Others tried to shield their profitable enterprises while willingly sacrificing their bankrupt enterprises. In cases where the enterprise was using the label of “military enterprise” (jundui qiye) as a convenient cover for tax reductions and privileged access to transport or raw materials, individuals or units tried to have the enterprises re-classified as non-military enterprises. A significant number of enterprises were reportedly transferred to the control of relatives of military officers or de-frocked military officers, meaning that these enterprises retained their unofficial links to their former units. Some of this backsliding was considered so serious that the office of the military leading small group in the first half of December 1998 was forced to dispatch four work groups of 30 members each to inspect the larger units.

Even some of the divestiture transfers themselves involved elements of illegality. One of the military's highest profile enterprises, the five-star Palace Hotel in Beijing, attracted interest from numerous civilian companies.³⁵ Eventually, the General Staff Department sold their joint venture stake in the hotel to a state enterprise, China Everbright Group, Ltd., which was looking to expand its hotel assets. According to the PRC Joint Venture Law, however, the remaining co-owners, Hong Kong's Peninsula Group (which managed the hotel) and Japanese construction company Kumagai Gumi, should have enjoyed the right of first refusal of the army's shares. Instead, Peninsula got to approve the transfer only after it was arranged. Ironically, therefore, a process designed to reduce the incidence of illegality among the armed forces was itself provoking illegal behavior. Moreover, the deal may even be detrimental to Peninsula Group. In 1997, China Everbright set up its own hotel management firm, and might take over from Peninsula when the latter's management contract comes up for re-extension in 2002.

The emerging details of the second phase also aroused resentment among the central, provincial, and municipal bureaucrats, who were being “forced” to take over the PLA’s many large and bankrupt enterprises.³⁶ The transfer of these enterprises to government offices was seen by many as another component of Zhu Rongji’s strategy to re-centralize macro-level decisionmaking authority and extract more resources from the provinces, many of which were perceived to have benefited disproportionately from reform at the expense of central coffers. For the local governments, however, these enterprises were simply another burden. The factories were particularly unattractive to the civilian governments, who would be saddled with the fiscal costs of free social services (education, housing, health care, etc) for thousands of unemployed or underemployed workers. Furthermore, local officials would assume responsibility for finding new jobs for these workers, adding to their already weighty burden in this area. Some of the problems were addressed at a critical “transfer work meeting” convened on 29 November.

15 December 1998: Official Handover

By December 15, 1998, the government officially announced the end of the second phase. Reportedly, 2,937 firms belonging to the PLA and People’s Armed Police were transferred to local governments, and 3,928 enterprises were closed.37 The big loser was the GLD, which saw more than 82 percent of its enterprises transferred or closed. A partial list of the enterprises can be found in Table 1 below.

Table 1. Partial List of Divested PLA and PAP Enterprises

One-third of the companies and their subsidiaries were retained by divestiture offices at the central level, while the remaining two-third were transferred to divestiture offices at the local level. Profitable regional military conglomerates, such the Jinling Pharmaceuticals Group in the Nanjing MR, were placed directly under the direction of the regional commission.48 By contrast, the ten mid-sized firms and forty small-sized firms of the Strategic Rocket Forces, whose businesses had not been terribly profitable, were given to their local governments.⁴⁹

The commercial elements of China’s most profitable military conglomerates, such as Xinxing, Songliao, and Sanjiu (999), were not handed over to local governments for reorganization, but were instead placed directly under the control of the State Economic and Trade Commission in Beijing.50 Eventually, it was thought that these large companies would be independent, state-owned conglomerates. As an example, the experiences of Xinxing in this process are representative of the fate of these big firms.51 Because Xinxing contained enterprises engaged in both military and non-production, its handover was very complicated. In the end, fifty-six numbered factories, which produced machines, logistics materials, clothes, and hats for the PLA, were kept under military control, but the trade group was transferred to the SETC. The ten specialized firms owned by Xinxing were reduced to seven after divestiture, with Xinxing Foundry retained by the military and two other firms transferred to chemical groups. At the same time, three new firms, including the General Logistics Construction Company that built the Military Museum, the new CMC Building, and the Beijing 301 Hospital, were added to Xinxing, restoring the number of firms to ten.

All of the large-size firms were subject to a broad set of rules. The central government would still control the nomination of the leadership of large-size firms, groups, and major enterprises of important industries. In terms of accounting and budget, the Ministry of Treasury would manage the financial affairs of those firms managed by the central government. All firms were required to participate in local social insurance schemes according to geographic divisions.

The remaining 8000-10000 enterprises, most of which were the smaller, subsistence-oriented enterprises at the local unit level, remained in the military.⁵² The reforms were also “suspended” in some sectors, especially civil aviation, railway and posts and telecommunications, because of the “special nature” of these industries.⁵³ For example, the Air Force’s China United Airlines was permitted to continue operating.⁵⁴ Other notable exceptions included the fifty-six numbered factories previously under the control of the GLD’s Xinxing Group, which remained under the administrative control of the General Logistic Department’s pared-down Factory Management Department (formerly the larger Production Management Department), and Poly Group, which was divided between the General Equipment Department (arms trading elements like Poly-Technologies), and COSTIND.

Phase Three: The Real Bargaining Begins

A Handover Office Work Meeting was held 28 December 1998 at the Jingfeng Hotel in Beijing.⁵⁷ The meeting, chaired by Handover Office Director Sheng Huaren, was attended by the CEOs of the 148 large-size PLA and PAP enterprises handed over to the SETC Handover Office. According to Sheng, these 148 enterprises and groups included 903 factories and subsidiaries, all of which had also been relinquished to the national office, and other military enterprises, which had been given to local handover offices. While these moves were significant in their scale and scope, the Central Committee’s guidance cited above also suggested that the opening two phases of the divestiture were only the beginning of a much longer, and more protracted process of allocating and restructuring thousands of troubled enterprises. According to Qin Chaozheng, the director of the Economic and Trade Commission of the Hebei Provincial Government:

It will be an arduous task to turn these enterprises over to proper units for their management and to standardize their operation. More than half of these enterprises are poor in management. It is necessary to further improve their management mechanisms and turn them into legal and competitive entities that are suitable to the market economy and that are able to conduct management independently.⁵⁸

The first task for the third phase of the divestiture process involves going through the accounts of all PLA enterprises, which must be squared before these enterprises are allowed to become fully civilianized or merged with civilian firms. It is expected that this process will take at least 2-3 years, depending the on the number of major corruption cases that are generated. The asset evaluation was to be performed by accounting agencies designated by the SETC.⁵⁹ Some initial results of the third phase have already been publicized. Among many examples, the PLA’s 9791 Cement Factory was turned over to local authorities in Tongchuan City on 30 March 1999 and renamed the “Shaanxi Provincial Lishan Cement Plant.”⁶⁰ In March 1999, it was also announced that 150 large enterprises formerly owned by the military and the armed police were being transformed into state-owned corporate groups.⁶¹ Xinxing, for example, remains as an independent, non-military entity, controlling one of the General Logistics Department’s largest construction units. The top-level management of the large enterprises is being selected and appointed by the central government, especially the Ministry of Finance, which was placed in charge of supervising the assets of these enterprises. By contrast, nearly all of the smaller enterprises have been handed over to local authorities. Regardless of size, however, all enterprises are being required to transfer their credit liabilities, as well as participate in the medicare insurance programs on behalf of their employees. Those that failed to offset their debts would be overhauled, shut down or acquired by other, viable companies.

Exempted from Divestiture: PLA Telecoms

Military commercial telecommunications ventures were one sector singled out for special exemptions. Interviews in Beijing strongly suggest that PLA telecoms in general was given a "get-out-of-jail-free" card from the central leadership, because the resulting information technology acquisition was seen as an essential contributor to the C4I revolution currently underway of the PLA. To manage the post-divestiture operations, the PLA created two communications groups.  Reportedly, the first is dedicated exclusively to internal military traffic at high levels of security.  The second leases capacity of existing networks to civilian operators.  In the latter case, the PLA was considered to be de-linked if they did not directly enroll individual subscribers (i.e., deal directly with "the public"), yet they could lease to operators who did enroll customers (i.e., cable companies). While radio paging was abandoned (e.g., CITIC/Pacific bought the Bayi radio paging business in Guangzhou) and many companies had to break their high-profile links with foreign companies, the China Electronic Systems Engineering Company (CESEC) in particular was not only allowed to stay in business but in some cases expand its operations.

One illustrative case of the new ambiguous status of PLA telecommunications, however, involves a fiber optic network previously managed by the Guangzhou Military Region. At the end of 1998, the network’s managing unit, the Office of Telecom Support for Economic Construction (OTSEC), was nominally transferred over to the Guangdong provincial government as part of the divestiture process. By all accounts, the transfer appears to be a legal ruse to allow the PLA to continue to be engaged in commercial telecom activities. The office remains essentially military and it still oversees much of the military telecom network in the Guangzhou MR, as well as the optical fiber network. The OTSEC is still actively negotiating with a large number of Chinese and foreign companies to lease surplus PLA telecoms networks and to build an updated high speed data and voice transmission network. In February 2000, Hong Kong-based CITIC Pacific purchased the fiber network itself from the PLA to be the cornerstone of its new network rollout. It is said that CITIC spent over 2 billion RMB buying the unused fiber from the military. An $80 million purchase of optical equipment from Lucent will expand the capacity of the existing 16,000km of fiber and extend it to over 30,000km nationwide.
Perhaps the most salient example of the uncertain legal and regulatory status of continuing PLA telecommunications ventures involves the "Great Wall" CDMA cellular project owned by the General Staff Department Communications Department’s commercial arm, CESEC. In accordance with divestiture, CESEC sold its 20% share in the Nanjing-based satellite joint venture holding company with KPN Royal Dutch Telecom, but retained initial control of the four trial CDMA networks in Beijing, Tianjin, Xi'an, and Shanghai.

In 1999, CESEC's civilian partner in the deals, China Telecom, was ordered out of the projects, so that the networks could prepared for handover to China Unicom, the weak number two telecom player which is betting on CDMA to help it gain a respectable market share against the larger GSM networks run by China Telecom. As quickly as this arrangement was offered, however, the central authorities reversed themselves, and announced that the PLA would be retaining ownership of the networks. There are many competing reasons why the transfer fell through. China Telecom did not want Unicom to get Great Wall's CDMA networks, since the combined CDMA assets of the two players posed a greater threat to the dominant market share enjoyed by China Telecom's GSM networks. Unicom did not want to be bothered with Great Wall's overhead, which included significant personnel, housing, pension, and other social welfare costs. Moreover, the Great Wall system is a narrow-band 2nd generation CDMA standard, and Unicom wanted to move to the broadband 3rd generation standard.

Before resuming its CDMA business, however, CESEC had to solve a big problem. Divestiture explicitly prohibited the PLA from dealing directly with customers, so they needed a new partner that could serve as an "interface." Eventually, CESEC appeared to partner with ChinaSat, the satellite communications company spun off from China Telecom. Since Great Wall was the name of the now defunct JV between CESEC and China Telecom, the Great Wall joint venture was formally superceded by a company called China Century Mobile Communications Company, whose investors reportedly include CESEC, ChinaSat, the Beijing Municipal Government, Datang Group, and Beijing Zhongguancun Technology Development Ltd. The latter company, which plans to invest US$6 million in Century Mobile once it is approved by the central government, is itself owned in part by two of China’s best known companies, Founder Group and Legend Group Holdings, the country’s biggest computer maker. Additional technical support (and perhaps a small share of equity investment) will likely be provided by the Chinese Academy of Telecommunications Technology, a research institute under the Ministry of Information Industry. CESEC’s role in Century Mobile is also multi-faceted, undercutting earlier reports that ChinaSat would be the de facto operator of the networks with CESEC as a passive investor. Instead, it appears that CESEC has retained its primary role as the designer, builder and integrator of communications networks. As stated by one official from Shenzhou Great Wall Communications Development Center, the PLA company overseeing the trial CDMA network in Beijing: “Other companies will invest in the network, and we will build it.”⁵⁵

The first public hint of these new developments appeared in late December 1999, when Samsung and a company named Hebei Century Mobile Communications began construction of a new CDMA network serving 11 cities in Hebei province. In a press release only circulated in Korea, Samsung heralded the opening of the Hebei 133 CDMA mobile telephone network. The Korean company reportedly supplied US$31 million of mobile systems equipment, including 11 mobile switching centers (capable of servicing 200,000 subscribers) and 165 base stations, and expected more than US$200 million in follow-up orders. By February 2000, this network reportedly had attracted 15,000 subscribers.⁵⁶

The Great Wall/Century Mobile case is a striking illustration of the continuing role of the PLA in commercial telecoms operations, and certainly suggests that telecommunications was exempted from divestiture. At the very least, it suggests that the civilian leadership is willing to turn a blind eye to the activities, because of their side benefits for the military's own communications system. Divestiture, therefore, was not a blanket condemnation of the military's participation in business, but instead was a process capable of making logical exceptions, especially when it threatened to throw the baby out with the bathwater. At the same time, the PLA telecommunications networks continue to operate in a hazy, inchoate gray area, with neither central approval nor rebuke. At an 18 July 2000 cabinet meeting, for instance, State Council "Document No.40" was reportedly issued, ordering the military once again to turn the Great Wall networks over to China Unicom as well as the 10MHz of frequency in the 800MHz band that the military was using for its CDMA systems. For more than a month, the military allegedly resisted the command, hoping to retain some or all of the networks and frequencies for its own secure communications. Given past reversals of similar policies, there is legitimate reason to question whether the transfer will ever take place.

Divestiture Problems: Resource Allocation and Discipline

As the divestiture entered 1999, however, some serious bureaucratic and political conflicts began to surface. Overall, they can be divided into two categories: resource allocation and discipline. Each of these disputes has important implications for our assessment of the final success or failure of the divestiture process.

In terms of resource allocation, recent trends suggest that the PLA’s compensation, especially in the area of the official budget, is going to be far less than the military expected. In March 1999, the Minister of Finance Xiang Huaicheng announced the military budget for the new fiscal year in his annual work report:

In line with the CPC Central Committee request, central finances will provide appropriate subsidies to the army, armed police force, and political and law organs after their severance of ties with enterprises. In this connection, this year's defense expense will be 104.65 billion yuan, up 12.7 percent from the previous year because of the provision of subsidies to the army and of regular increases.⁶²

Outside observers immediately noticed the meagerness of the figure, both in relative and absolute terms. At a relative level, the 12.7% increase was not significantly higher than the 12% increase of the previous year, calling into question the notion that the fiscal priority of the PLA had been augmented. Even in absolute terms, the increase of RMB13.65 billion between 1998 and 1999 was not that much larger than the RMB10.43 billion increase between 1997 and 1998, and reportedly included only a RMB3 billion compensation for the loss of business income. Where was the additional RMB15-50 billion reported in the Hong Kong media? Why did the military receive only RMB3 billion extra when even the official China Daily newspaper pegged the estimated annual profits and taxes of the enterprises at RMB5 billion (US$602 million)?⁶³

There are several plausible explanations for this budgeting outcome. The first, and most difficult to prove, is that that PLA was sufficiently compensated with off-budget funds that are not calculated into the official budget. Given the Byzantine nature of the Chinese budgeting process, we may never have a definite estimate of any off-budget compensation. The second explanation is that the PLA did not have as much as leverage in the divestiture process as it or outsiders thought, allowing the civilian leadership to get the military out of business “on the cheap.” The third possibility, supported by a loud chorus of PLA grumbling and complaining, is that the military was “duped” by the civilian leadership, the latter of whom had implicitly promised a higher level of compensation. Indeed, there is some evidence to suggest that the RMB 3 billion of compensation is based on the conservative profit estimate of RMB3.5 billion (on total revenue of RMB150 billion) that the PLA gave to Zhu Rongji before the divestiture announcement in July. This low estimate was very much in line with previous PLA estimates by the General Logistics Department, which consistently undervalued the profit of the military enterprise system in order to lessen the central tax burden of the commercial units. If the above story is true, then the major source of the PLA’s animus may be that it was hoisted by its own petard. At the time of writing, however, it is difficult to judge which of these three explanations is correct, but the fact remains that vocal elements within the PLA appear to be significantly dissatisfied with the compensation package, above and beyond the usual bureaucratic rapaciousness for ever greater resources.

Apart from budgets, additional resource allocation disputes have arisen over distribution of enterprise assets in the post-divestiture environment. According to one well-informed observer, there have been some serious differences over levels of asset compensation because of the escalating costs of debts and liabilities incurred by enterprises.⁶⁴ Many firms were poorly managed with incomplete accounting records and borrowed from multiple creditors. The firms’ relationships with banks needed to be clarified, and licenses needed to be re-registered. Another problem involved personnel. When military officers and workers were transferred to the localities, their healthcare and insurance had to be transferred as well, created unwanted social welfare burdens for the new owners.

In other cases, there is intra-military bargaining over the fate of individual assets. One of the most public examples of this was the dispute between the Beijing Military Region and the General Armaments Department over the fate of the Huabei Hotel in central Beijing.⁶⁵ Under the rules of the handover, military units at the bureaucratic rank of military region, which also covers the new GAD, are allowed to keep only one three-star hotel. Before divestiture, the Beijing Military Region controlled two three-star hotels, including the Huabei, which it agreed to hand over to the SETC Handover Office. Since the GAD is a new organization and therefore had no hotels, it reportedly coveted the Beijing command’s extra hotel. Thus far, however, the military region headquarters has declined to transfer the hotel to the General Armaments Department, igniting an unresolved bureaucratic struggle within the top military and civilian leaderships.

The second major set of problems resulting from divestiture involved discipline issues, mainly corruption and profiteering. While the data in this area remains anecdotal, there is some evidence to suggest that the civilian leadership has aggressively pursued discipline investigations involving corruption in PLA enterprises, much to chagrin of PLA officers who feel that the effort is gratuitous and harmful to the public reputation of the military.66 Susan Lawrence of the Far Eastern Economic Review reports from well-placed Chinese sources that the SETC Receiving Office has a list of 23 company executives at the rank of major-general or above who have fled the country since the divestiture was announced.67 Seven of these officers are from the Guangzhou Military Region, which handed over more than 300 enterprises, and another five are from PLA headquarters. Among the latter is Lu Bin, former head of the General Political Department’s Tiancheng Group, who was arrested overseas and extradited in January. Other arrestees include a senior colonel who was the head of one of the PLA’s top hotels, the Huatian, which is located in Changsha. As the various receiving offices continue to process the assets and books of some of the shadier PLA enterprises, one can only expect the numbers of disciplinary investigations to increase.

Conclusion

In a sense, divestiture brings the PLA full circle. The pattern of the campaign, ranging from the transfers of its high-profile commercial enterprises to the retention of its lower-level farms and industrial units, suggests that the military has essentially returned to the pre-1978 “self-sustaining” economy. Thus, the widespread conclusion that the PLA has been “banned” from business is far too simplistic. The military will continue to operate a wide variety of small-scale enterprises and agricultural units, with the goal of supplementing the incomes and standards of living for active-duty personnel and their dependents at the unit level. Profit and international trade, however, will no longer be critical features of the system. Moreover, the military leadership hopes that the divestiture of profitable companies will greatly reduce the incidence of corruption and profiteering in the ranks, and thereby refocus the PLA on its important professionalization tasks.

At this point, of course, it is too soon to judge the long-term impact of this divestiture on the PLA. While participation in business had spawned endemic levels of corruption, an honest assessment would also admit that the military-business complex made positive contributions by subsidizing an underfunded military, improving the material life of the rank-and-file, and creating jobs for cadre relatives. Despite these benefits, however, the military and civilian leadership in the end decided that the disadvantages of commercialism outweighed the advantages, particularly with the prospect of professional tasks like the liberation of Taiwan and potential military conflict with the United States on the horizon.

What will the short- to medium term future hold for the divestiture process? Most likely, the next few years will witnesses repeated “mop-up” campaigns on the part of the central leadership and significant resistance and foot-dragging on the part of local military officials, repeating the pattern of earlier rectifications. An audit in early 1999 revealed that the military had kept back some 15 percent of its businesses, necessitating the extension of some deadlines until August 1999. As late as May 2000, a top-level meeting on divestiture all but admitted that the military continues to shield some assets from the process, stating that the withdrawal of the military from business activities had only been "basically completed" (emphasis added).68 Nonetheless, it is critical not to downplay the importance of what has already occurred. There is significant evidence to suggest that the divestiture has ended the legal participation of the PLA in commercial activity, perhaps closing one of most unique and interesting chapters of the post-Mao revolution.

Notes

1. “Jiang Orders PLA-Owned Firms to Close,” Xinhua Domestic Service, 22 July 1998, in FBIS-CHI-98-204, 23 July 1998.

2. See People’s Daily, 23 July 1998, p.1.

3. “Fu Quanyou on Supporting Jiang’s Anti-Smuggling Drive,” Xinhua Domestic Service, 23 July 1998, in FBIS-CHI-98-206, 25 July 1998.

4. Cao Haili, “The Chinese Army Has Sailed Out of the Business Sea,” Caijing, January 1999, pp.1-16.

5. “Yu Yongbo Calls on Army to Cease Business Operations,” Xinhua Domestic Service, 26 July 1998, in FBIS-CHI-98-208, 27 July 1998.

6. “General Armament Department to Fight Smuggling,” Xinhua Domestic Service, 26 July 1998, in FBIS-CHI-98-209, 28 July 1998.

7. Wu Hengquan, Liu Zhenying, and Wang Jinfu, “Hu Jintao Speaks on Banning PLA Businesses,” Xinhua Domestic Service, 28 July 1998, in FBIS-CHI-98-209, 28 July 1998.

8. Cao Haili, p.3.

9. Personal communication with Tai Ming Cheung, 12 November 1998.

10. Cao Haili, p.2.

11. This account is taken from Susan Lawrence’s excellent article “Bitter Harvest,” which can be found in the 29 April 1999 issue of Far Eastern Economic Review, pp.22-26.

12. Ibid.

13. Personal communication with Tai Ming Chueng,

14. The RMB15 billion number comes from Kuang Tung-chou, “Premier Promises to Increase Military Funding to Make Up For ‘Losses” After Armed Forces Close Down All Its Businesses,” Sing tao jih pao, 24 July 1998, p.A5, in FBIS-CHI-98-205, 24 July 1998. For the RMB30 billion figure, see Willy Wo-Lap Lam, “PLA Chief Accepts HK47 Billion Payout,” South China Morning Post, 9 October 1998.

15. Willy Lo-Lap Lam, “PLA to Get HK28 Billion for Businesses,” South China Morning Post, 3 August 1998.

16. The author would like to thank Dennis Blasko for this information.

17. “Military Reportedly Raises Pay to Avoid Discontent,” Ming pao, 23 January 1999, p.15, in FBIS-CHI-99-023, 23 January 1999.

18. Interviews in Beijing, February 1999.

19. Kuang Tung-chou, “Beijing To Comprehensively Raise Servicemen’s Remuneration,” Sing tao jih pao, 25 November 1998, p.B14, in FBIS-CHI-98-349, 15 December 1998.

20. The account of this meeting can be found in Cao Haili, p.5.

21. “Military Meets Resistance in Enforcing Ban on Business,” Ming pao, 9 September 1998, p.A16, in FBIS-CHI-98-253, 10 September 1998.

22. “Hu Jintao Appointed CMC Vice-Chairman,” Xinhua, 31 October 1999.

23. Willy Wo-Lap Lam, “Problems Between CCP, Army,” South China Morning Post, 20 October 1999, p.19.

23. Personal communication with Tai Ming Cheung, 9 September 1999.

24. Cao Haili, p.5.

25. Han Zhenjun, “Military Business Said ‘Disconnected’ By 15 December,” Xinhua Domestic Service, 28 December 1998, in FBIS-CHI-98-362, 28 December 1998.

26. “Work of Disengaging Armed Forces and Armed Police From Their Enterprises to Be Completed in Mid-December – Over Ten High Officials Absconded With Money,” Ming pao, 7 December 1998, p.A12, in FBIS-CHI-98-353, 19 December 1998.

27. Cao Haili, p.5.

28. Yang Xinhe, “Hebei Takes Over Military Enterprises,” Xinhua Hong Kong Service, 12 December 1998, in FBIS-CHI-98-350, 16 December 1998.

29. “Separation of Army From Business Done,” China Daily, 21 March 1999, p.1.

30. Willy Wo-Lap Lam, “PLA Cashes In Its assets,” South China Morning Post, 29 July 1998.

31. Cao Haili, p.5.

32. “Work of Disengaging Armed Forces,” p.A12.

33. “Military Meets Resistance,” p.A16.

34. Lam, “PLA Cashes In.”

35. This account is taken from Matt Forney, "A Chinese Puzzle: Unwinding Army Enterprises: Who Gets Them, And What to Pay?" Wall Street Journal, 15 December 1998; and Matt Forney, "Chinese Army's Exit from Businesses Leaves Partners Guessing at Next Move," Wall Street Journal, 21 May 1999, p.A9.

36. “Military Meets Resistance,” p.A16.

37. “March Out of Business Sea: PLA and Armed Police Carrying Out the Decision of Divestiture,” Shidai chao, March 2000.

38. Yang Xinhe, “Hebei Takes Over Military Enterprises,” Xinhua Hong Kong Service, 12 December 1998, in FBIS-CHI-98-350, 16 December 1998.

39. “Guangdong Military Hands Over Enterprises,” Zhongguo xinwen she, 30 November 1998, in FBIS-CHI-98-337, 3 December 1998. A different source relates that 368 of these firms, located in Guangzhou, Shenzhen, Zhuhai, Shantou, Huizhou, and Shaoguang, belonged to the Guangzhou Military Region, the South Sea Fleet, the Guangzhou MR Air Force, the Guangdong Military District, and the Guangzhou People’s Armed Police Headquarters. The other 22 enterprises located in Guangdong were owned by the Beijing, Jinan, Lanzhou, and Chengdu Military Regions, as well as firms owned by the Navy’s Guangzhou Maritime Academy. See Cao Haili, p.6.

40. Jiangsu units also dissolved 194 enterprises, with RMB 360 million in assets. Jin Weixin, “The Jiangsu Forces in the Nanjing Military Region Turn Over All Army-Run Enterprises, Stressing Politics, Considering the Overall Order, and Acting in Line With High Standards and Strict Requirements,” Nanjing Xinhua Ribao, 10 February 1999, pp.1,3, in FBIS-CHI-1999-0222, 10 February 1999. See also “Jiangsu Troops Hand Over Enterprises to Localities,” Xinhua Domestic Service, 27 November 1998, in FBIS-CHI-98-337, 3 December 1998.

41. Cao Haili, p.13.

42. “Shenyang ‘Theater of Operations’ Transfers Enterprises,” Beijing Central People’s Radio Network, 25 November 1998, in FBIS-CHI-98-337, 3 December 1998.

43. Bu Yuntong, “Hainan Armed Forces Hand Over Enterprises,” Xinhua Domestic Service, 29 November 1998, in FBIS-CHI-98-337, 3 December 1998.

44. This number refers only to the divestiture of Yunfeng Industries. See “PLA Garrison Turns Major Business Over to Shanghai,” Xinhua, 21 November 98.

45. “Tianjin Hands Over All Military-Run Businesses,” Xinhua, 8 December 1998, in FBIS-CHI-98-342, 8 December 1998.

46. Liu Yi, “Jiangxi Military Hands Over Commercial Firms,” Xinhua Domestic Service, 26 November 1998, in FBIS-CHI-980337, 3 December 1998.

47. This number refers only to Lanzhou MR AF enterprises. See Lanzhou wanbao, 20 January 1999.

48. Jin Weixin, “The Jiangsu Forces in the Nanjing Military Region Turn Over All Army-Run Enterprises, Stressing Politics, Considering the Overall Order, and Acting in Line With High Standards and Strict Requirements,” Nanjing Xinhua Ribao, 10 February 1999, pp.1,3, in FBIS-CHI-1999-0222, 10 February 1999.

49. Cao Haili, p.9.

50. First rumors of Songliao’s transfer began to appear in late July. See Christine Chan and Foo Choy Peng, “Jiang Demand Threatens PLA Business Empire,” South China Morning Post, 24 July 1998.

51. This account is taken from Cao Haili, p.9.

52. Personal communication with Tai Ming Cheung, 24 January 1999.

53. “Separation of Army From Business Done,” p.1.

54. China United Airlines survived divestiture because many remote towns protested that the shutdown on the airline would cut them off from the rest of the country.

55. Conversation with knowledgeable journalist in Beijing.

56. Matt Pottinger, “China’s Military Building Mobile Phone Empire,” Reuters, 15 February 2000.

57. The account of this meeting is taken from Cao Haili, p.6.

58. “Hebei Takes Over Military Enterprises,” Xinhua, 12 December 1998

59. Cao Haili, p.6.

60. Shaanxi Daily, 12 April 1999.

61. “Separation of Army From Business Done,” p.1.

62. PRC Finance Minister Xiang Huaicheng, “Report on the Execution of the Central and Local Budgets for 1998 and on the Draft Central and Local Budgets for 1999,” Xinhua Domestic Service, 18 March 1999, in FBIS-CHI-1999-0320, 18 March 1999.

63. “Separation of Army From Business Done,” p.1.

64. Personal communication with Tai Ming Cheung, 9 September 1999.

65. Susan Lawrence, “Bitter Harvest,” FEER, 29 April 1999, p.24.

66. Ibid.

67. Ibid.

68. Wang Yantian and Yin Hongzhu, "CPC Central Committee, State Council, Central Military Commission Hold TV, Telephone Meeting on Work of Withdrawing Military, Armed Police, and Political and Legal Organs from Business Activities," Xinhua Domestic Service, 25 May 2000.