Editorial
The Chinese Military-Commercial Complex
By Dr. Gary K. Busch 3/12/08
Dec 3, 2008 - 2:19:20 PM

There seems to be a great misunderstanding of the nature of Chinese capitalism; the great engine of modernisation which is hailed as leading to the restructuring of the Chinese State and towards its eventual democratisation. The misunderstanding arises because there is only a dim perception in the international community that the large bulk of these Chinese companies are owned and operated by the Chinese military. They are corporations created in a similar structure to what might be called ‘zaibatsu’ in Japan or ‘chaebol’ in Korea. These ‘zaibatsu’ were large centrally-controlled vertical monopolies consisting of a holding company on top with a wholly-owned banking subsidiary providing finance, and several industrial and trading subsidiaries dominating specific sectors of a market, either solely, or through a number of sub-subsidiary companies. These are now international in scale. 

The influence of the Chinese military in the economic affairs of China has been extensive for the last three thousand years. They have always dominated the agricultural sector and, after the death of Mao Tse Tung, they have been the dominant force in Chinese industry and politics. There has been a long tradition of warlords in China especially from 1916 to the late-1930s, when the country was divided among military cliques, a division that continued until the fall of the Nationalist government in the mainland China regions of Sichuan, Shanxi, Qinghai, Ningxia, Guangdong, Guangxi, Gansu, Yunnan, and Xinjiang. In this period a warlord maintained his own troops loyal to him, dominated and controlled the agriculture and mining in his area or region; and acted as the de facto political power in that region. To maintain themselves they often fought with their neighbouring warlords and against any attempt by the Emperor or central government to control them. Some of the most notable warlord wars, post—1928, including the Central Plains War, involved nearly a million soldiers. The central government was weak and relied on the power and support of these fractious warlords. The central government provided a national civil service and a national administrative regime but was uniformly weak.

The defeat of the Kuomintang leadership of the ex-warlord Chiang Kai-shek in the wake of the Second World War left the ravaged China in the hands of the Chinese Communist Party led by Mao Tse-Tung. Mao was both the Chairman of the Chinese Communist Party as well as the Chairman of the Central Military Committee. His rule was personal, direct and disastrous. The Great Leap Forward and the Cultural Revolution led to the virtual self-destruction of China. Millions starved to death; many more were exiled or driven away from the cities. He was succeeded by Hua Guofeng who attempted to keep a tight control over the power structures of China, including the Central Military Committee. However, his power waned and control was transferred to the reformer Deng Xiaoping, who revolutionised the economy of China. Deng never held office as the head of state or the head of government, but served as the de facto leader of the People's Republic of China from 1978 to the early 1990s as the leader of the Communist Party of China (CPC).

Deng represented the second generation Chinese leadership and was instrumental in introducing    Chinese economic reform, also known as the socialist market economy and partially opened China to the global market. He is generally credited with pushing China into becoming one of the fastest growing economies in the world and by raising the standard of living.   Deng Xiaoping's ouster of Hua Guofeng was the moment when the market policies of economic reform began. This reform was carried on primarily by the military companies created in the various regions by the armies which controlled them.

It is not difficult to see why. The People’s Liberation Army (‘PLA’) controlled the security situation in its region. That meant it issued permits to enter or leave the region; it controlled the communications network in the region; it had the trucks and other transport under its control; and it was charged with maintaining order. It was, in fact, in charge. This was not controlled by one central PLA group but was under the control of the individual army for each region; some, like the 28^th Army and the 39^th Army were in economic hotspots and were able to thrive quickly. The Northern Army was quick to exploit its opportunities.

The opportunity arose in the wake of the civil disturbances of the Tiananmen Square uprising, when the Chinese Communist Party, under Li Peng, cracked down on China's democracy movement, ordering in the troops to battle the students. The PLA was ambivalent about this and seven retired senior military officers openly criticized the martial law order imposed by the Beijing government and called for the ouster of Premier Li Peng. In the march towards the capital at a village five miles southwest of Beijing, soldiers and peasants engaged in a brick- and rock-throwing brawl that injured as many as 40 people. The PLA did its duty but the populace were outraged and the authority of the Communist Party waned. The PLA realised it was free from the controlling hand of the Party and became agents of change; primarily corporate change, encouraged by Deng Xiaoping (retired but active).

They already had numerous companies under PLA control manufacturing goods for the defence sector. During Mao Tse-tung’s rule and the era of Sino-Soviet tensions, the military moved many of its factories inland in case of a possible attack on China. Manufacturing purely military products, such as arms, ammunition, as well as electronics, plastics and metals for military applications, these so-called "third-line" factories were built in remote mountain regions, far away from transportation routes and power sources. The factories bought supplies at subsidized costs from other factories, manufactured the weaponry and related products -- generally low-tech and low-quality -- and then sold them to the military at subsidized prices.

After Mao's death in 1976, the new leadership encouraged the military plants to begin exploring civilian uses for their products and to engage in the broader liberalizing economy. The most nimble managers were free to exploit new markets for their goods. During the early 1980s, the PLA's share of the national budget declined, spurring it to look to other sources for cash, especially hard currency. The higher organizational levels of the PLA created trading companies like China Xinxing, China Poly and China Songhai to take advantage of the opening of China's economy to the international market.

They formed banks, holding companies and international trading companies like Everbright to market these goods worldwide. Now the PLA runs farms, factories, mines, hotels, brothels, paging and telephone companies and airlines, as well as major trading companies.

The number of military-run business exploded during the boom of the late 1980s. The "third line" factories opened branches in the coastal areas, earning increasingly high profits from the manufacture of civilian goods. Even the lowest levels of the PLA set up production units. In fact the PLA had a largely captive audience of Chinese who had never really had the chance to acquire personal goods produced in China before. In addition to their international arms sales, their production of consumer goods for the domestic market soared.

The government first attempted to regulate PLA business activities in 1989 with a series of decrees, among them a prohibition on active military personnel concurrently holding positions at commercial enterprises. The reforms were intended to keep management of PLA enterprises under the control of senior military leaders and prevent lower-ranking officers from becoming involved in the daily functioning of the military companies. In the wake of the rejection of the Party in 1989 these government strictures fell away. The government tried again the early 1990s, when the central leadership of the military took steps to coordinate the production of the vast number of military factories by tying the plants together under "group companies." The groups, acting like conglomerates, have been fairly successful in centralizing management and production, running the trading companies and expanding the groups' business operations. The PLA now acts as a state within a state, with its power growing substantially in the latest wave of Chinese economic expansion.

Many of the PLA companies have become firmly enmeshed in the global economy. According research done by David Whelker (Multinational Monitor), “in pursuit of hard currency, many of the companies have listed themselves on capital markets in Hong Kong and elsewhere, opened representative offices in overseas markets, solicited foreign companies for joint ventures and partnerships in China and emphasized exports.” The so-called red chips, companies listed on the Hong Kong exchange but which are in fact mainland Chinese firms, are the hottest stocks on the market. Hong Kong is the PLA's favoured stock exchange because of its loose disclosure guidelines. China Poly Group has two listed companies: Continental Mariner Company Ltd. and Poly Investments Holdings Ltd. Both Continental Mariner and Poly Investments have a large number of subsidiary companies in mainland China, Hong Kong and tax havens like Liberia, the British Virgin Islands and Panama. China Carrie's listed company in Hong Kong is Hongkong Macau Holdings Ltd. China Carrie also owns HMH China Investments Ltd. on the Toronto Stock Exchange and HMH Gold Mining on the Australian Stock Exchange. 999 Enterprise Group, another company controlled by the PLA General Logistics Department, operates Sanjiu Pharmaceuticals Group, the largest pharmaceuticals manufacturer in China. 999 recently listed on the Hong Kong exchange. 

Smaller military enterprises, like the Songliao Automobile Company owned by the PLA Shenyang Military Region, have also listed in the domestic Chinese markets.

China Poly Group is a commercial arm of the Chinese People's Liberation Army (PLA) General Staff Department. The PLA General Logistics Department operates China Xinxing. The PLA General Political Department owns and operates China Carrie. The Northern Army Group runs NORINCO and the PLA Navy runs China Songhai.

These are not small operations. As early as 1994, with $382 million worth of import-export trade, China Poly Group was the fifty-ninth largest import-export company in China, according to China State Statistical Bureau. China Xinxing ranked 170th with $159 million, China Carrie ranked 203rd with $137 million, and China Songhai ranked 395th with $71 million.

Foreign companies looking for a foothold in China like partnering with the PLA because of the stability it can offer to any long-term project. Companies with military partners get the added security of knowing that the top "management" of many of the PLA companies are from the ranks of the "princelings," the children and relatives of senior Chinese Communist Party officials. These influential princelings assure that the business operations of the PLA will have the government connections that are so important in China's corrupt system. In the case of China Poly, chair Wang Jun and president He Ping act as brokers between the government and the military. Wang Jun is the eldest son of the late Vice-President Wang Zhen. He Ping is the son-in-law of the late Deng Xiaoping. Wang Jun's brother, Wang Bing, is the chair of the PLA Navy Helicopter Company. China Carrie's president is Ye Xuanning, the second son of late PLA Marshal Ye Jianying.

These international Chinese military companies are very rich and powerful. Some have entered into very controversial projects. A good example is the Hutchison-Whampoa, Hutchison Port Holding (HPH). HPH is a huge, multibillion-dollar company which has set up operations in ports all around the world. From Panama to the Philippines, an arm of Hutchison-Whampoa, Hutchison Port Holding (HPH), has become the world’s largest seaport operator, embedding itself in strategic seaports all across the globe. In fact
now Hutchison holds the exclusive contract to operate the Panama Canal.

Hutchison-Whampoa has spread everywhere. It has a base in Tanzania where it runs Tanzania International Terminal Services Ltd. In the Western Hemisphere it has seaport services in Buenos Aires, Argentina; Freeport, the Bahamas; Veracruz, Mexico; and at both ends of the Panama Canal. HPH’s latest acquisition involved taking over eight Philippine ports. New ports in Mexico, Argentina, Saudi Arabia, Pakistan, Tanzania and Thailand make Hutchision-Whampoa the world’s largest private port operator with 23 cargo berths, bringing its worldwide total of ports to a staggering 136.

Other ports include Jakarta, Indonesia; Karachi, Pakistan; India (where the company runs the cellular phone services); Burma; China; and Malaysia. There are port operations in Britain at Harwich, Felixstowe (Britain’s largest port), and Thamesport, and in the Netherlands at Rotterdam. The company is bidding to set up in South Korea’s largest port, Pusan, and is already in Kwangyang, another South Korean port.

According to a US government report "The Panama Ports Company is 10 percent owned by China Resources Enterprise [CRE], which is the commercial arm of China's Ministry of Trade and Economic Co-operation.” In its investigation into China's attempts to influence the 1996 U.S. presidential campaign, the U.S. Senate Government Affairs Committee identified CRE as a conduit for ‘espionage - economic, political and military - for China.’ Committee Chairman Senator Fred Thompson said that CRE has ‘geopolitical purposes. Kind of like a smiling tiger; it might look friendly, but it's very dangerous.’”

The company is headed by a Li Ka-Shing, the chairman of Hutchison Whampoa Ltd. Intelligence sources say he has deep connections with the Chinese Communist government. According to that report "Li has invested more than a billion dollars in China and owns most of the dock space in Hong Kong. In an exclusive deal with the People's Republic of China's communist government, Li has the right of first refusal over all PRC ports south of the Yangtze river, which involves a close working relationship with the Chinese military and businesses controlled by the People's Liberation Army.” 

"Li has served as a middle man for PLA business dealings with the West. For example, Li financed several satellite deals between the U.S. Hughes Corporation and China Hong Kong Satellite [CHINASAT], a company owned by the People's Liberation Army. In 1997 Li Ka-Shing and the Chinese Navy nearly obtained four huge roll-on/roll-off container ships, which can be used for transporting military cargo, in a deal that would have been financed by U.S. taxpayers.”

According to the Thompson Committee, Hutchison Whampoa's subsidiary, HIT, has "business ventures with the China Ocean Shipping Company (COSCO) which is owned by the People's Liberation Army.” COSCO, which failed in a notorious attempt to lease the former U.S. Naval base in Long Beach, Calif., has been criticized for shipping Chinese missiles, missile components, jet fighters and other weapons technologies to nations such as Libya, Iraq, Iran and Pakistan.

In 1996, the U.S. Customs Service seized a shipment of 2,000 automatic weapons aboard a COSCO ship at the port of Oakland, California. The man identified as the arms dealer, Wang Jun, is the head of China's Polytechnologies Company, the international outlet for Chinese weapons sales. Jun also sits on the Board of CITIC, China International Trust and Investment Corporation, the chief investment arm of the Chinese central government. It is also the bank of the People's Liberation Army, providing financing for Chinese Army weapons sales and for the purchase of Western technology. Li is also a board member of CITIC.

Li is a busy man indeed. In New Zealand, the newspapers announced that Wellington’s electricity network was sold to Asia’s richest man, Li Ka-Shing. His company Cheung Kong Infrastructure bought the Wellington power grid from Vector for $785 million.  Many have wondered why the Government has allowed Wellington’s power grid, which covers the Wellington Central Business District, Porirua, and the Hutt Valley to be sold to China, after refusing to allow a minority stake by Canadian investors in Auckland Airport on the basis that it’s a “strategic asset”. Prime Minister Helen Clark has stated that the Wellington power network does not involve “sensitive land” and is not a “strategic asset”. Many are asking why a PLA-owned company is allowed to control the lifeline not only of Wellington commerce and technology, but, the Government itself, Security Intelligence HQ, defence, government departments, etc.

Hutchinson-Whampoa is not alone. PLA companies are active in supplying Iran with a large amount of dual-use components. Several government-owned Chinese companies are "proliferators of weapons of mass destruction" (WMD) according to the Bush administration, and the administration has taken legal actions against these companies. They are accused of selling advanced missile and WMD technology to Iran.

The Department of the Treasury issued a Press Release in 2006 saying that the US had frozen the assets of the three top Chinese military firms. "The companies targeted today have supplied Iran's military and Iranian proliferators with missile-related and dual-use components," said Stuart Levey, Under Secretary for Terrorism and Financial Intelligence (TFI). The Chinese companies are Beijing Alite Technologies Company, Ltd. (ALCO), LIMMT Economic and Trade Company, Ltd., China Great Wall Industry Corporation (CGWIC), and China National Precision Machinery Import/Export Corporation (CPMIEC).

The U.S. representative office of CGWIC is G.W. Aerospace, Inc., which is located in Torrance, Calif. "The Chinese firms have provided, or attempted to provide, financial, material, technological, or other support for, or goods or services in support of, the Aerospace Industries Organization (AIO), the Shahid Bakeri Industrial Group (SBIG) and/or the Shahid Hemmat Industrial Group (SHIG)," AIO, a subsidiary of the Iranian Ministry of Defence and Armed Forces Logistics, runs Iran's missile program. SBIG, an affiliate of AIO, is also involved in Iran's missile programs. SBIG produces the Fateh-110 missile and the Fajr rocket systems. The Fajr missiles are a series of North Korean-designed weapons produced under license by SBIG. Both systems are capable of being armed with chemical warheads.

There was an effort by the Chinese Government to try and rein in some of these companies but to no avail. More than a year after the Chinese military was ordered to disband its octopus-like business empire (1999) and return to the barracks, its influence over the nation's economy continues. During 1999, some PLA high-profile investments, such as Beijing's five-star Palace Hotel, were handed over to central government shareholders with great public fanfare. And at least 150 large, profitable enterprises were grabbed up by the central government. Most, however, stayed with the PLA.

By the mid-1990s, the so-called PLA Inc. included over twenty thousand companies in everything from agribusiness to electronics to tourism to arms exports. In 1998, because of concerns about corruption and discipline, the leadership ordered the PLA to divest itself of its profit-oriented businesses in exchange for increases to the military budget, and shortly thereafter declared the divestiture a success. But the PLA has not completely withdrawn from the economy, nor have divested firms completely severed their ties with the PLA.

These issues are best illustrated by the example of Poly Technologies, founded in the 1980s by the son of a PLA marshal, and currently headed by the son in law of Deng Xiaoping. Before 1998, Poly was one of the major exporters of weapons and technology from China. It had several U.S. subsidiaries involved in technology acquisition, and representative offices in Rangoon, Bangkok and Islamabad. Its employees were implicated in the 1996 attempt to smuggle AK-47s into the U.S. The effects of the divestiture order on Poly are not entirely clear. Its arms-trading entities are believed to have been retained by the newly created General Armaments Division of the PLA, where they are not easily subject to civilian control.

Now known as China Poly Group, the divested Poly has diversified into a broad conglomerate, active in tourism, infrastructure construction and real estate (It has even brokered a deal to buy Bombardier jets for China’s PLA run airline). China Poly Ventures Company, a Poly subsidiary, is believed by U.S. intelligence to have transferred production technology for Pakistan Ghauri medium range ballistic missile in 1999, and possibly later. Newly independent firms have strong economic incentives to continue arms sales, since their management is now responsible for profit and loss for the enterprise. Many managers of Poly and firms like it are former military officers or family members, who retain close ties to high government officials, which makes these enterprises difficult to control. On the other hand, divestiture probably weakened bureaucratic relationships which enabled proliferation activities in the past. For example, Poly is believed to have influenced defence production and procurement entities to over-supply the PLA arsenal, with Poly then selling the surplus abroad at reduced prices. It is unlikely that Poly and firms like it will continue to exercise such influence, which will make their arms exports less profitable. It was Poly Industries who were the suppliers of the arms for Mugabe which were seized in Durban, aboard a COSCO (Chinese Overseas Shipping Company – a PLA company) vessel.

The second wing of arms production in China is the civilian defence industry. This can be further divided into the state-owned and the private sector, each of which is probably involved in international arms sales in a slightly different way. The five major state-owned defence industry conglomerates have no formal links to the PLA, and are controlled by China’s State Council through the Commission of Science, Technology and Industry for National Defence (COSTIND). Protected from competition for political and security reasons, the state-owned defence industrial complex is a bloated and inefficient sector, which employs about 10% of China’s total industrial workforce.

According to Canadian Security Intelligence Report 84, the best-known defence conglomerate is NORINCO, the corporation formed out of the former ordinance ministry (Fifth Ministry of Machine Building). It now has 800 000 employees working in over 200 subsidiaries, including 11 in the U.S. While it now also produces civilian products, its arms-related products include armoured vehicles, howitzers, mortars, rocket launchers, anti-aircraft weapons, anti-tank missile systems, small arms, ammunition, explosives, and nuclear, biological and chemical protection systems.

“NORINCO and its subsidiaries have long been of security concern.” As early as 1984, the firm was named in documents relating to attempts to smuggle military related high-tech items from the USA to China. Three employees of NORINCO were sentenced to jail terms in China in the case of smuggled AK-47s to the US in the late 1990s. NORINCO continues to engage in sales of conventional weapons abroad. In March 2000, it sold US $65.9 million in arms including anti-personnel shells and assault rifle grenades to the government of Zimbabwe. Recently announced upgrades to Pakistan’s T-59 Al Zarrar tank were the result of cooperation with NORINCO. More recently, on 23 May 2003, the U.S. State Department issued a two-year ban on imports of products from NORINCO and subsidiaries to the United States, charging that the entity had sold rocket fuel and missile components to the Shahid Hemmat Industrial Group, the Iranian government agency in charge of developing and producing ballistic missiles. The ban will affect at least US$200 million in goods, and, according to CIA estimates, as much as five times that figure if U.S. customs can identify all of NORINCO subsidiaries, which export everything from toys and shoes (Wal-Mart is a major purchaser) to auto parts and aluminium heat sinks for computers. Other firms in this category, such as China Precision Machinery Import-Export Corporation, and China Great Wall Industrial Corporation, are among those currently sanctioned by the U.S. for illegal transfers of weapons, dual-use material and technology to Iran.

NORINCO has been consecutively ranked among top 225 world largest international engineering project contractors; including railway and highway construction, power plant, energy exploitation and telecommunications. NORINCO has accomplished a number of projects such as Tehran subway and electrified railway in Iran, highway and hydropower plant in Ethiopia, digital switching exchanges in Pakistan, and Century Bridge in Haikou, China. NORINCO has maintained strong competitive edge in such fields as optronic products, sport arms & equipment, vehicles, logistic service, packing products, and microelectronics. NORINCO is the largest exporter of optoelectronic products, and one of the largest retail sellers of automobiles in China. It enjoys unique advantages in the logistic of hazardous goods and professional advantages in optical cold processing, development of flexible circuit board, and manufacture of tinplate containers. This is all in addition to its defence business.

The PLA also operate ‘private’ companies. Besides state-owned defence producers, China also has private companies involved in defence production, such as the telecom firm Huawei. With offices in Cuba, Iran, and Burma, Huawei has been a major supplier of dual-use telecom equipment. In 2001, its Indian subsidiary was accused of tailoring a commercial order for the Taliban regime in Afghanistan. Also in 2001, Huawei supplied Iraq with fibre optics to link its radar and anti-aircraft systems, triggering U.S. and U.K. bombings. Private defence firms often also enjoy the shielding of powerful patrons. Huawei was founded by a former PLA officer, and benefitted from early sales to the PLA. But it also receives state support in the form of tax privileges and state-sponsored credit because it has been designated a “national champion” of new technology. Its supporters have included top general Yang Shangkun and head of the China International Trade and Investment Corporation, Wang Jun (also president of Poly). Unlike state-owned defence producers, private firms are more likely to be profitable. A further level of complexity in their proliferation activity is that foreign firms seeking to do business with them may try to shield them from U.S. sanctions.

What Does It Mean?

There are a number of governments, intelligence agencies and political parties which are nervous of the spread of the PLA-owned companies around the globe. There is a particular concern about the PLA’s involvement in the ports, telecommunications and energy businesses. Recently incidents of cyber warfare from China has been traced to PLA-based institutes and corporations. Throughout Africa, and increasingly in Latin America, Chinese military and security personnel are operating under corporate cover and are, unless some egregious act takes place, operating with immunity. The takeover of key ports (Panama, Freeport, etc.) gives the Chinese military and advantage it would not have had if these companies were merely private enterprises. There is not very much anyone can do about this and it is making people very nervous.