References

"Zhu Rongji Discusses Matters of Vital Importance With Military -- Inside Story of Reorganization of China's Five Major Military Industry Departments" by Liu Xiaohua Hong Kong Kuang Chiao Ching No 305, 16 Feb 98 pp 20-23 [China: Article on Military-Industrial Shakeup : FBIS-CHI-98-065 : 6 Mar 1998]
CHINA'S STRATEGIC MODERNIZATION: IMPLICATIONS FOR THE UNITED STATES Mark A. Stokes [U.S. Army Strategic Studies Institute] -- September 1999
AN INTRODUCTION TO THE CHINESE DEFENSE INDUSTRY BY LT. COL. DENNIS J. BLASKO, U.S. ARMY - 22 January 1994
TOP TEN DEFENSE & TECHNOLOGY INDUSTRY INTERNATIONAL MARKET INSIGHT 18 August 1999
Other Approaches to Civil-Military Integration: The Chinese and Japanese Arms Industries Office of Technology Assessment March 27, 1995
Visit to Aerospace Related Institutes and Laboratories in the Peoples Republic of China, 25 Jun - 11 Jul 95 AOARD-LR-95-14 29 September 1995
Message to the Congress on the China National Aero-Technology Import and Export Corporation Divestiture of MAMCO Manufacturing, Incorporated February 1, 1990

Institutional Trends

Inheriting a Soviet-style state-owned economy, the development of Chinese government and economic institutions has been closely linked since the founding of the People's Republic in 1949. Until recently it was effectively impossible to discuss one without the other, as economic and political institutions were effectively one and the same. In recent years, however, distinctions between governmental agencies and industrial enterprises have become increasingly pronounced.

Since 1978, China has been experiencing a period of fundamental economic restructuring, involving a gradual transition from a planned economy to a socialist market economy. The Chinese economy has been gradually integrating itself into the global economic system, with changes undertaken in the following:

the structure of ownership through the introduction of individual, private and foreign capital ownership,
economic operations through the combination of planning and market mechanisms,
the decentralisation of decision-making.

The ultimate target of economic restructuring is the establishment of a socialist market economy by the end of this century, through, inter alia, the development of markets, a modern enterprise system, and comprehensive reforms of the financial, tax, banking, investment and planning systems.

China has a large, well-established infrastructure for the development and production of ballistic missiles. The China Aerospace Corporation (CASC) and its subordinate development, production and test facilities are responsible for ballistic missile production, and the China National Nuclear Corporation is responsible for nuclear weapons activities.

Large-scale Soviet aid in modernizing the PLA, which began in the fall of 1951, took the form of weapons and equipment, assistance in building China's defense industry, and the loan of advisers, primarily technical ones. Mostly during the Korean War years, the Soviet Union supplied infantry weapons, artillery, armor, trucks, fighter aircraft, bombers, submarines, destroyers, and gunboats. Soviet advisers assisted primarily in developing a defense industry set up along Soviet organizational lines. Aircraft and ordnance factories and shipbuilding facilities were constructed and by the late 1950s were producing a wide variety of Soviet design military equipment. Because the Soviet Union would not provide China with its most modern equipment, most of the weapons were outdated and lacked an offensive capability.

In 1958 the Communist Part of China launched the Great Leap Forward campaign under the new "General Line for Socialist Construction." The Great Leap Forward was aimed at accomplishing the economic and technical development of the country at a vastly faster pace and with greater results. The Great Leap Forward was an economic failure. In early 1959, amid signs of rising popular restiveness, the CCP admitted that the favorable production report for 1958 had been exaggerated.

Chinese dissatisfaction with the Soviet refusal to supply China with nuclear bomb blueprints contributed to the withdrawal of Soviet advisers in 1960. The ascension of Lin Biao and the complete withdrawal of Soviet assistance and advisers in 1960 marked a new stage in military development. The Soviet withdrawal disrupted the defense industry and weapons production, particularly crippling the aircraft industry. Although the military purchased some foreign technology in the 1960s, it was forced to stress self-reliance in weapons production.

The PLA played a complex political role during the Cultural Revolution. From 1966 to 1968, military training, conscription and demobilization, and political education virtually ceased as the PLA was ordered first to help promote the Cultural Revolution and then to reestablish order and authority.

In 1969 Lin Biao launched an extensive "war preparations" campaign; military training was resumed, and military procurement, which had suffered in the first years of the Cultural Revolution, rose dramatically. Military preparedness was further advanced along China's frontiers and particularly the Sino-Soviet border when the thirteen military regions were reorganized into eleven in 1970.

The PLA emerged from the more violent phase of the Cultural Revolution deeply involved in civilian politics and administration. PLA units did not withdraw fully from these duties until 1974. Following the sudden death of Lin Biao in 1971, the military began to disengage from politics, and civilian control over the PLA was reasserted.

Along with the reassertion of civilian control over the military and the return to military duties came a shift of resources away from the defense sector. Defense procurement dropped by 20 percent in 1971 and shifted from aircraft production and intercontinental ballistic missile development to the modernization of the ground forces and medium-range ballistic missile and intermediate-range ballistic missile development.

By the mid-1970s concerns among Chinese leaders about military weakness, especially vis-à-vis the Soviet Union, resulted in a decision to modernize the PLA. Following Premier Zhou Enlai's January 1975 proclamation of the Four Modernizations as national policy, the military modernization program, codified in Central Directive No. 18 of 1975, instructed the military to withdraw from politics and to concentrate on military training and other defense matters. Factional struggles between party moderates and radicals in 1975 and 1976, however, led to the dismissal of Deng from all his posts and the delay of military modernization until after the death of Mao Zedong. Within a month of Mao's death, military leaders headed by Minister of National Defense Ye Jianying cooperated with party chairman Hua Guofeng to arrest the Gang of Four, thus ending a decade of radical politics.

The Chinese leadership resumed the military modernization program in early 1977, but the re-ordering of priorities in the Four Modernizations relegated national defense modernization from third to fourth place (following agriculture, industry, and science and technology). In July 1977, with the backing of moderate military leaders, Deng Xiaoping reassumed his position as PLA chief of general staff as well as his other party and state posts. Deng vigorously promoted military modernization, the further disengagement of the military from politics, and the shift in national priorities to economic development at the expense of defense.

In 1977-78 military and civilian leaders debated whether the military or the civilian economy should receive priority in allocating resources for the Four Modernizations. The military hoped for additional resources to promote its own modernization, while civilian leaders stressed the overall, balanced development of the economy, including civilian industry and science and technology. By arguing that a rapid military buildup would hinder the economy and harm the defense industrial base, civilian leaders convinced the PLA to accept the relegation of national defense to last place in the Four Modernizations. The defense budget accordingly was reduced. Nonetheless, the Chinese military and civilian leadership remained firmly committed to military modernization.

In late 1978 China initiated a policy of integrating civilian and military industry more closely in order to promote overall civilian economic development. This policy entailed civilianizing the machine-building ministries to make the defense industry more responsive to civilian control and needs; increasing defense industry production of civilian goods, particularly consumer goods; and transferring technology from the more advanced defense sector to the civilian sector of the economy. Production of civilian goods totaled 6.9 percent of total defense industry output in 1975. In 1980 it rose to 18 percent, and by 1985 it had jumped to 41.8 percent of total output. Chinese officials predicted that by 1990 about 80 percent of defense industry output would be civilian goods. The large excess capacity of the defense industry, resulting from declining orders from the PLA, made possible the rapid growth in civilian output. The defense industry manufactured a wide variety of goods for civilian use, including motor vehicles, optical equipment, television sets, electrical appliances, pharmaceuticals, and medical instruments and prostheses. Many of these products were consumer goods in high demand. For example, in 1985 the Ministry of Ordnance Industry manufactured 500,000 motorcycles, representing two-thirds of total motorcycle output, as well as 250,000 cameras, 450,000 bicycles, and 100,000 refrigerators.

Following the formulation of regulations and mechanisms for such transfers, defense industries began transferring technology to civilian industries on a large scale in the mid-1980s. Technology transfers provided defense enterprises with additional, lucrative sources of income and furnished civilian enterprises with a wide range of useful, advanced technology to modernize production. For example, the Ministry of Astronautics disseminated aerospace technology to light industry and to the petroleum, chemical engineering, machine-building, textile, communications, medical, and electronics industries.

The transformation of China's defense establishment into a system capable of independently sustaining modern armed forces was one of the major goals of the military modernization program. In the late 1970s and 1980s, defense spending remained relatively constant despite the shift in resources in favor of overall economic development. Reforms focused on reorganizing the defense research-and-development and industrial base, more closely integrating civilian and military science and industry, and selectively utilizing foreign technology. China sold arms for hard currency to provide additional funds for defense industries. The PLA continued to play its role in economic development by participating in selective construction projects, providing dualuse training, and producing most of its food needs.

The PRC's top priority through the early 1980s remained the development of its military capabilities. Commercial development was slighted as the best available Chinese resources were directed toward the development of the country's defense industries. With the rise of Deng Xiaoping, however, the Chinese shifted their focus toward a more broad-based industrial-development program.

Organizational Development

The PLA played a role in economic development practically from its inception. Beginning in the late 1930s and early 1940s, when the party was headquartered in Yan'an, the Red Army raised its own food. After 1949 the PLA became involved in economic reconstruction tasks--building railroads and factories, reclaiming wasteland, digging irrigation canals, establishing state farms, and participating in disaster relief operations. The PLA accepted its role as a force in economic construction and devoted segments of its structure, such as the Engineering Corps, Railway Engineering Corps, Capital Construction Engineering Corps, Signal Corps, and Production and Construction Corps, to building up the national infrastructure. However, PLA regional- and main-force units played a much smaller role in aiding the civilian economy.

The evolution of China's defense industrial sector has gone through several stages:

1949-1965 - Formation

The initial formative period ran from from 1949 through 1965. China's military industrial production and management system was modeled on the Soviet planned economy system. The beginning in 1956 was characterized by the drafting and implementation of the 12-Year Plan for the Development of Science and Technology. An aviation industry committee was established in April 1956 to make policy decisions on the defense industry. It was replaced in 1958 by the Commission of Science and Technology for National Defense [COSTIND] under the direction of of Marshal Nie Rongzhen. A commission of industry for national defense under Marshal He Long was established in April 1959. And a General Office for Defense Industry [GODI] was set up under Senior General Luo Ruiqing in November 1961.

In 1963 a new 10-Year Plan was proposed as the 12-Year Plan was essentially accomplished (in only 7 years). COSTIND was disbanded in September 1963, and its responsibilities were taken over by the GODI, which under the leadership of Zhou Enlai was responsible for organizing and coordinating the development of atom and hydrogen bombs. Defense industrial production was the responsibility of a single Heavy Industry Department. Subsequently the State Council established a set of what came to be known as Ministries of Machine-Building [initially termed Ministries of Machine Industry - MMI and also termed Machine-Building Industrial Departments - MBID] responsible for special weapons scientific research and production:

1st Ministry of Machine-Building - ??
2nd Ministry of Machine-Building - nuclear
3rd Ministry of Machine-Building - aeronautics
4th Ministry of Machine-Building - electronics
5th Ministry of Machine-Building - ordnance
6th Ministry of Machine-Building - shipbuilding
7th Ministry of Machine-Building - astronautics
8th Bureau of Machine-Building Industry - ??

A network of factories was built in the interior of the country under the assumption that a full-scale war was likely. These included six scientific research institutes under the MMB 3, seven scientific research institutes under the MMB 6, 10 under the MMB 4, and 14 under the MMB 5. These institutes were initially affiliated with the Defense Ministry, and then came under the industrial departments. This period witnessed the rapid development of China's defense industry, with the number of scientific research institutes reaching 38 with a staff of 80,000.

1967-1976 - Cultural Revolution

From 1967 to 1976, the "Cultural Revolution" seriously affected military industrial activities. Repeated changes in the leadership and organization of units had a negative impact on the operations of the military industry. The GODI was replaced by the Leading Group for Defense Industry, headed by Qiu Huizuo, in December 1969. But in December 1973, the Leading Group was abolished and the GODI was restored, under the leadership of Fang Qiang. In 1967 COSTIND exercised military control over the research institutes the Military-Industrial Departments, and conferred military designations on 18 units. The Scientific Research Institute 6 of the MMB 3, and the Scientific Research Institute 7 of the MMB 6 came under the Air Force and Navy respectively, though in 1974, the above units were transferred back to their original industrial departments. In 1975 General Machine-Building Bureau 8 was established with responsibility for the overall planning and management of research and production of tactical guided missiles.

1976-1982 - Post-Cultural Revolution

With the end of the Cultural Revolution the defense industry gradually resumed normal operations. The GODI became a part of the Army in September 1977, and a commission of science, technology, and equipment of the Central Military Commission [CMC] headed by Zhang Aiping was established in November. In 1982 the Commission of Science for National Defense, the GODI, and the Commission of Science, Technology, and Equipment of the CMC were merged into the State Commission of Science, Technology, and Industry for National Defense headed by Chen Bin. Its incumbent director is Lieutenant General Cao Gangchuan.

Beginning in 1978, Chinese leaders set out to transform the defense industries, which had a huge excess capacity and were criticized for having a "golden rice bowl" (rich but always begging for more). To utilize this excess capacity better and to break down the barriers between military and civilian industry, the machinebuilding ministries were reorganized, and civilians were appointed to manage them. The General Machine-Building Bureau 8 was upgraded to a ministry, headed by Jiao Ruoyu, in July 1979. And in 1981, the MMB's 7 and 8 combined into a unit, which was called MMB 7. One of the first indications of the move toward greater emphasis on more efficient use of resouces was the replacement begining in the late 1970s of the leadership of the MMBs, previously composed of senior military personnel, with civilian administrators.

1982-1997 - Deng Xiaoping

In January 1982, Deng Xiaoping promulgated the 16-character principle of "combining military and civilian strength, integrating wartime and peacetime needs, giving priority to military items, and maintaining the army by producing civilian goods." With reform proceeding , the military industrial system underwent a major change. With the approval of the State Council and the CMC, the GODI and the MMB's 3, 4, 5, 6, and 8 set up import-export companies integrating industry with trade, and subsequently MMB 2 and 7 established similar arrangements.

MMB 2 - China Nuclear Energy Industry Corporation
MMB 3 - China National Aero-Technology Import and Export Corporation
MMB 4 - China National Electronics-Technology Import and Export Corporation
MMB 5 - China North Industries Group [NORINCO]
MMB 6 - China Shipbuilding Trading Corporation
MMB 7 - China Great Wall Industry Corporation
MMB 8 - China National Precision Machinery Import and Export Corporation

The New Times Company set up by the GODI had overall responsibility for the overall plan for import and export of military technology and equipment. Subsequently COSTIND established the China Yanshan science and technology corporation, and the China Xinxing Corporation was established by the PLA General Logistics Department. In 1984 these corporations began promoting Chinese weapons, actively seeking technology transfer and coproduction agreements with Western defense companies at international defense exhibitions.

A major problem with the defense industry was that production enterprises and scientific research units were organized into separate systems, with few linkages between the two. Defense industrial units were the first ones subject to administrative reform. In 1982, under the "Decision on the Scheme for Carrying Out Institutional Reform of Ministries and Commissions Under the State Council" adopted by the 23th session of the Fifth NPC Standing Committee, the MMB 6 was officially reorganized into a China state shipbuilding corporation, the MMB's 2, 3, 4, 5, and 7 were retained, but the six scientific research institutes under the MMB 3 and the 20 scientific research institutes under the MMB 5 were disbanded. The MMB's 2, 3, 5, and 7 also formed subsidiary corporations, forming the existing military industry management system. Ministeral-level units relating to the defense industry were changed into corporations (the original machine-building industry departments [MBID] 2, 3, 5, 6, and 7 under the State Council became corporations). The civilianized, renamed ministries and their responsibilities consisted of the:

MMB 2 = Ministry of Nuclear Industry -- nuclear weapons;
MMB 3 = Ministry of Aviation Industry / Aeronautics -- aircraft;
MMB 4 = Ministry of Electronics Industry -- electronics;
MMB 5 = Ministry of Ordnance Industry -- munitions and armaments;
MMB 6 = China State Shipbuilding Corporation -- naval construction.
MMB 7 = Ministry of Space (Astronautics) Industry -- ballistic missiles and space systems;

And in 1983, in an effort to remove the special treatment of the military in the allocation of scarce resources the various Chinese organizations and committees charged with oversight of defense production were consolidated under the Commission for Science, Technology and Industry for National Defense (COSTIND).

In November 1984 the government decided to transfer some military facilities to civilian control or joint militarycivilian use. These facilities included airfields, ports, docks, railroads, depots and warehouses, and recreational areas. The devolution of these facilities to civilian control helped to alleviate problems that plagued the civilian economy.

In 1986 the Ministry of Machine Building, which produced civilian heavy machinery and industrial equipment, and the Ministry of Ordnance Industry were consolidated into the new State Machine-Building Industry Commission as a way to strengthen the unified management of the national machine-building and weapons enterprises. Further changes in defense industry structure occurred in 1986 and 1987, when inland defense enterprises were either relocated closer to transportation links or cities, closed down, or transferred to local civilian control and production.

In 1987 China adopted a new contractual system for weapons research, development, and production. It was not clear from available information how this contract system would affect the role of the NDSTIC as the coordinating body for defense science and industry. Previously, the NDSTIC controlled procurement funding, reviewed proposals for weapons requirements funneled through the General Staff Department's Equipment Subdepartment, and coordinated with defense industries to produce the needed equipment. Under the new system, the state divided defense research and development funds into three categories: military equipment research, basic and applied sciences research, and unidentified technological services. The first type of appropriation went to military arms and services, which signed contracts with research institutes or enterprises to develop and manufacture the required weapons. The contract system involved the PLA, which had been removed to a large extent from such activities, in the development and manufacture of the weapons it would use. The second category of funds was devoted to basic research and applied science to help modernize the defense industry. The third category went to technological services necessary for research programs. This reform was another measure designed to integrate military and civilian industry by placing the military production of defense industries within the framework of the planned-commodity economy. The new system further sought to provide the military with better equipment at a minimum cost, to force the defense industry to upgrade weapons designs and improve production, to improve the management of weapons research and development through state application of economic levers, to promote cooperation between research institutes and factories, and to increase the decision-making powers of the enterprises.

By 1987 the National Defense Science, Technology, and Industry Commission [NDSTIC] was the coordinating body for military research and development and industrial production. The NDSTIC reported to the party Central Military Commission's National Defense Industries Committee and the State Council's Leading Group for Science and Technology. The NDSTIC supervised weapons research and development, coordinated military production of defense industries, and controlled funding for weapons procurement. The establishment of the NDSTIC was a reform measure designed to break down the barriers between civilian and military research and development and industry. Military science and industry previously had been secretive, segregated, and privileged sectors, having material, financial, and personnel resources superior to those available to the civilian sector. The creation of the NDSTIC was one measure by which Chinese leaders hoped to facilitate the transfer of technology between the military and civilian sectors. The NDSTIC, in particular through its trading arm, China Xinshidai Corporation, coordinated procurement of foreign technology for military purposes.

Even after a decade of economic reform and liberalization, the state continued to own and manage the "commanding heights" of the Chinese economy, particularly heavy industry. The basic framework of government institutions remained based on the planned economic system. Problems arising from this framework included the absence of a separation of government functions from those of enterprises in order to maintain the direct involvement in production and management of enterprises by the government. Over time this led to indistinct responsibility for policymaking, as the government took upon itself matters belonging to enterprises, establishing a large number of special economic management departments resulting in duplicate departments and functions. As a result, it was difficult to give scope to the role of market in the allocation of resources. The mechanism of direct management over enterprises by special economic departments was increasingly ill-suited to the requirements of building a modern enterprise system.

As noted by Luo Gan, state councilor and secretary general of the State Council in a speech on the Plan for Institutional Restructuring of the State Council delivered at the First Session of the Ninth National People's Congress on 6 March 1998:

"Many problems which should have been resolved by legal means or through social intermediary organs have also been taken up by the government through the establishment of government management organs, with the result that the government has undertaken excessive social responsibilities, affairs, and contradictions. The government has taken up the management of many affairs which it should not have managed, is not in position to manage, or actually cannot manage well. As a result, the government cannot concentrate on dealing with matters that should be dealt with."

Failure to separate government function from that of enterprises generated red tape and bureaucracy and encouraged corruption and other unhealthy tendencies. Under the reforms announced in early 1998, the functions of the government will be separated from that of enterprises. The government would its function to macroeconomic regulation and control, social management, and public services while returning the responsibility for production and operation to enterprises.

At the sector level, most military industrial enterprises are involved in both military and commercial production as China has emphasized the exploitation of defense facilities for overall national economic growth. The Torch Program is a leading government effort promoting the shift of scientists and engineers from traditional projects to those with greater commercial potential. By the mid-1990s it was reported that nearly 70% of the output from Ministry of Ordnance Industry facilities and 80% of shipbuilding and repair activities were for nonmilitary use.

1999 Restructuring

With the approval of the State Council on 01 July 1999, the Chinese government split the top five Defense and Technology Corporations into ten new enterprises. These corporations are all large State Owned Enterprises (SOE's) under direct supervision of the State Council. These SOE's are the China National Nuclear Corporation (CNNC); the China Nuclear Engineering & Construction Group Corporation (CNEC); the China Aerospace Science and Technology Corporation (CASC); the China Aerospace Machinery and Electronics Corporation (CAMEC); the China Aviation Industry Corporation I (AVIC I); the China Aviation Industry Corporation II (AVIC II); the China State Shipbuilding Corporation (CSSC); the China Shipbuilding Industry Corporation (CSIC); the China North Industries Group Corporation (CNGC); and the China South Industries Group Corporation (CSG).

In each case, two new enterprises were formed from each of the five pre-existing corporations. In general, the pattern was to consolidate defense-oriented subsidiaries under one enterprise [which in some instances retained the old name], while splitting off a new enterprise that typically included a more commericial orientation that subsumed many non-core business lines that had accreted over time.

The military-industrial corporations being restructured into the new groups represent an important step in reforming management structures of the science and technology industry in national defense, improving competitiveness of related enterprises, and accelerating national defense modernization. The Commission of Science and Technology for National Defense Industry continues to play a role in supervising the industry and drawing up policies, laws, regulations, and standards governing the development of these groups.

According to Chinese Premier Zhu Rongji, the newly-established groups should make an effort in five areas: separating government from businesses; setting up a mechanism of fair competition; concentrating scientific research on ensuring production and development of weaponry and equipment; promoting better military-industrial layout and restructuring; and creating a good environment for enterprises to free themselves from difficulties and get reinvigorated. He said the groups should be shaped into economic entities that are solely responsible for their own profits and losses and urged that they act according to the rules of the market. He urged the industry to develop products and technology for both military and civilian purposes, adding that more advanced technology should be introduced to boost the industry.

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