China builds own military industry
Spending second only to U.S. as private sector takes lead role
HONG KONG – When China turned to Russia for supplies of advanced weapons through the 1990s, it kick-started Beijing’s military buildup with an immediate boost in firepower.
It also demonstrated the failure of its domestic defence sector, which was still turning out obsolete 1950s-vintage equipment for the People’s Liberation Army from a sprawling network of state-owned arms makers. Now, after more than two decades of soaring military spending, this once backward industry has been transformed — China is creating its own military-industrial complex, with the private sector taking a leading role.
With Tiananmen-era bans on Western military sales to China still in place, an innovative and efficient domestic arms industry is crucial for Beijing as it assembles a modern military force capable of enforcing claims over Taiwan and disputed maritime territories.
China has locked horns recently with its southeast Asian neighbours over conflicting claims to strings of islets in the South China Sea. Tensions have also flared with Japan over uninhabited islands in the East China Sea, even as the United States executes a strategic military pivot toward the Pacific.
Well-funded defence groups have rapidly absorbed the technology and expertise needed to build complex weapons, freeing China from its former heavy reliance on Russian and other foreign equipment, Chinese and Western experts say.
“A country’s defence sector should reflect the strength of the country’s economy,” said Wu Da, a portfolio manager at Beijing-based Changsheng Fund Management Co Ltd, which invests in listed Chinese defence stocks.
But, he added, the sector is so shrouded in secrecy it’s been hard to assess how viable it is. “Some of the Chinese defence groups are already quite strong after so much military spending in recent years, but you don’t know exactly how well they are doing financially or technologically because China does not want others to know.” That could start to change. Beijing is enlisting the private sector to accelerate the rise of its best defence contractors, issuing new guidelines in July aimed at encouraging private investment in a sector traditionally sheltered from competition and public scrutiny.
Listed subsidiaries of top Chinese military contractors now intend to buy at least $3.15 billion in assets from their state-owned parents in the second half, according to their recent filings with the Shanghai and Shenzhen stock exchanges.
This would double the value of military related assets injected into these listed companies since 2007 with more in the pipeline, as Beijing presses ahead with an ambitious program to privatize most of a vast arms industry employing more than a million workers at more than 1,000 state-owned enterprises.
The long-term goal is to transform some of the leading contractors, such as China State Shipbuilding Corporation (CSSC), Aviation Industry Corporation of China (AVIC) and China Aerospace Science and Industry Corporation into homegrown versions of American giants Lockheed Martin and Northrop Grumman or Britain’s BAE Systems.
AVIC, which is aiming to quadruple its sales to $157.7 billion by 2020, plans to inject 80 per cent of its main businesses into some of its listed companies by the end of next year.
Beijing has made repeated calls to speed up listings of all but the most sensitive military businesses. The authorities have also promised to allow public bidding for unclassified and minor defence contracts in a sector that is likely to enjoy strong growth if China continues its sustained military buildup.
China’s top 10 defence groups with estimated combined assets of $315 billion have listed more than 70 subsidiaries, including more than 40 with defence-related businesses. About 25 per cent of the assets of the top 10 are now held in the listed companies, according to market analysts.
“A country’s defence sector should reflect the strength of the country’s economy.” WU DA PORTFOLIO MANAGER
Some of these stocks have been strong performers. Sustained military outlays and the expectation of asset injections have insulated them from the country’s current economic slowdown. They also tend to spike in price at times of increased tension between China and its neighbours over disputed territory.
The plan to buy more of their parent’s military related assets would allow these listed companies to raise extra funds for research and development, the companies say.
AVIC subsidiary Hafei Aviation Industry Co Ltd plans to issue shares this year to buy $520.5 million in assets from its parent, including helicopter manufacturing companies.
The growth of the domestic arms industry has allowed China to steadily reduce military imports. International arms transfer figures from the Stockholm International Peace Research Institute (SIPRI) show China’s defence imports fell 58 per cent between 2007 and 2011. In this period, China slipped to fourth place in the ranks of global arms buyers after holding top position in the five years to 2006. After double digit, annual increases in outlays over most of the last 20 years, China’s military spending is now second only to the United States.