"The Multinational Monitor"        

JUNE 1997 · VOLUME 18 · NUMBER 6

T H E    M O N O P O L Y    M A K E R S

The Chinese Military-
Industrial Complex Goes Global

by David Welker

POLY TECHNOLOGIES unexpectedly garnered national media attention in the United States earlier this year, when it was disclosed that company chair Wang Jun had been a coffee confidante of President Clinton.

Its cousin corporations -- companies with names like China Xinxing Import and Export Corporation, China Carrie Enterprises (also known as China Kaili Corporation) and China Songhai Industries Corporation -- have managed to maintain relative anonymity, though they are major players in the growing trans-Pacific commercial trade.

The companies actively work to maintain their low profile -- lest it become widely known that the fast-growing commercial businesses are controlled by the Chinese military.

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. And the PLA Navy runs China Songhai.

These are not small operations. In 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.

The profits of all the PLA companies contribute, to varying degrees, to the budget of the Chinese military and facilitate the enactment of its military modernization strategy.

The U.S. government's policy of commercial engagement has completely glossed over this aspect of Chinese economic development, as these companies export millions of dollars of goods to the United States, open U.S. representative offices and, increasingly, partner with U.S. multinationals.

The emergence of the Chinese military's business empire is one of the most alarming aspects of China's hybrid authoritarian state capitalism -- and all indications are that the growth will continue.

ASTRIDE THE ECONOMY

Although Chinese armies have been involved in agricultural production throughout Chinese history, the scope of current PLA commercial activities in the overall economic modernization of China is unparalleled. The PLA runs farms, factories, mines, hotels, brothels, paging and telephone companies and airlines, as well as major trading companies.

It is nearly impossible to quantify the total extent of the PLA commercial empire. Western analysts estimate the number of PLA-operated companies at between 20,000 and 30,000. The exact figure of PLA earnings has never been disclosed by the Chinese government, nor has the amount of these earnings that is funnelled back into the national defense budget. Although there is an infant industry among Western military intelligence specialists toiling to nail down specifics on the PLA businesses, no one can say with any certainty how profitable the PLA commercial activities are. One thing is for certain, however: as trade with and investment in China grows, so grow the earnings of the PLA. The Chinese military commercial enterprises have not always been such a boon to the government. During Mao Zedong'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. Many individual plant managers were slow to adjust to this change, and in fact some still operate factories at a loss, but 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.

Initially, the trading companies scored their greatest success in the international arms trade. During the 1980s, Chinese military companies shipped arms to both Iran and Iraq during their conflict, and to Saudi Arabia and Pakistan, earning tremendous amounts of hard currency. The domestic commercial operations of the PLA were less profitable than this trade in weaponry.

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.

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. But the effort to rein in the PLA companies was soon short-circuited by Tiananmen Square, after which the PLA gained leverage in internal party struggles based on its brutal repression of the democracy movement.

In the early 1990s, 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.

THE PLA IN THE GLOBAL ECONOMY

Many of the PLA companies have become firmly enmeshed in the global economy. 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 favored 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 announced its plan to list soon 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.

For the most part, PLA companies are reluctant to list in the U.S. capital markets because of U.S. disclosure requirements.

The PLA firms do maintain representative offices in the United States, however. In 1987, weapons trader China Poly opened offices in Atlanta. China Jing An, a company run by the paramilitary People's Armed Police, set up shop in Smithfield, Michigan in 1989. Prior to President Clinton's executive order banning the import of arms and ammunition in 1994, China Poly, China Jing An and other Chinese military companies imported nearly $200 million worth of weapons and ammunition a year into the United States. Last year, federal prosecutors indicted Robert Ma, a registered agent for China Poly's Atlanta operations, in connection with an automatic weapons smuggling ring associated with Poly and Norinco, another Chinese military-related company. Ma fled the country before the arrests of the suspects were made. China Jing An still operates in Michigan and opened a new office in California in 1995, but is reportedly close to bankruptcy. China Xinxing maintains offices in New York and California, and operates a warehouse in suburban Los Angeles. 999 Enterprises maintains an office outside of San Francisco and has a sign promoting its products displayed prominently at Times Square.

The exact percentage of Chinese imports into the United States that are manufactured by the PLA or handled by their trading companies is impossible to determine with any precision. But the quantities traded and the dollar amounts involved are significant.

This April, the tireless human rights activist Harry Wu disclosed at Kmart's annual meeting that Kmart had purchased more than 73 tons of men's rainwear from China Tiancheng Corporation, a company run by the PLA General Political Department. When Kmart faced similar revelations in 1994 by the AFL-CIO, an official of Kmart stated in a letter to the AFL-CIO that "We have never had any dealings with the People's Liberation Army nor do we intend to ever have dealings with them." Kmart Chair Floyd Hall had no immediate reaction to either the new information or the past pronouncements by Kmart. A Kmart spokesperson later said that the company would investigate the matter.

Inside China, the PLA has extensive dealings with U.S. companies interested in penetrating the Chinese market. The November-December 1995 China Business Review, the publication of the U.S.-China Business Council, the U.S. corporate lobby for unfettered trade with China, reported that PLA enterprises were involved in more than 200 joint ventures with foreign partners in 1994. China Xinxing alone has more than 50 foreign joint-venture projects, according to the report, as well as licensing agreements with companies like Bennetton Shoes and Remington Shavers. The PLA is also the preferred partner for real estate development deals inside China, with published reports linking the PLA with investors from Singapore, Malaysia, Hong Kong, Japan and the United States.

Western companies have recently entered into a series of partnerships with the PLA in the telecommunications sector. Only three companies are allowed to operate long-distance and cellular phone systems in China; the PLA owns and operates the newest entrant to the industry, China Great Wall Mobile Telecom. Motorola recently won the contract to supply the ground stations to Great Wall Mobile Telecom in the Beijing market, and San Diego-based Qualcomm, a wireless telecommunications manufacturer, won the contract to supply $350 million worth of handsets to Great Wall Mobile Telecom. These deals are especially worrisome because they may help the PLA establish a modern internal command and control system.

Both Motorola and Qualcomm deny their contracts with Great Wall will strengthen the PLA. Although the "PLA is a part owner of Great Wall," says James Lee of Qualcomm, "the army is not an active partner. The whole deal was done with a civilian entity." There is simply no way to avoid dealing with the PLA and still operate in China, at least for those in the telecommunications field, he says. "Virtually every enterprise in China is government controlled," Lee says. "The PLA holds the rights to the airwaves," so Qualcomm had no choice but to deal with it. And, he insists, "All of the phones and all of the service [provided by Qualcomm] are civilian."

Motorola echoes these comments. The system Motorola will help construct "will not be used for military purposes," says Tim Kellogg, a spokesperson for Motorola. "It is a straight commercial system, with the same sort of uses for cellular as elsewhere in the world." Asked whether he was concerned about how the PLA might use the telecommunication system, even if it is constructed as a commercial system, Kellogg says, "We are concerned about the use of our products anywhere. Our first concern is to meet U.S. export requirements. We are very diligent to meet those requirements." He adds, "Some larger issues are being debated in public ... But [Great Wall] is a commercial customer, and we think it is appropriate to do business with them."

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.

DOLLARS TO DICTATORS

The U.S. Defense Intelligence Agency (DIA) monitors the commercial activities of the PLA and has published organizational charts of these companies in 1990 and 1995. The charts and accompanying reports show a web of overlapping control of the companies by the various departments of the PLA, the Commission of Science, Technology and Industry for National Defense (COSTIND), the "key organization" responsible for "coordinating and over-seeing defense related development, production, technology transfer and marketing," and the Chinese military-industrial complex.

"These profit-oriented organizations provide foreign exchange earnings to the defense-industrial complex," says the 1995 DIA report. "They are also the primary conduits for new and advanced technologies acquired to improve weapons and civil products." This and other warnings fall on deaf ears at Motorola, Qualcomm and other members of the U.S.-China Business Council. The drive for profitability and stability in their Chinese investments appears to have blinded the corporations to the long-term repercussions of their partnerships with the Chinese military. In strengthening the military-industrial complex, these corporations are strengthening the Chinese government's ability to repress its people's freedom. They are also creating conditions that imperil the long-term stability they so value -- as the threat of an increasingly assertive Chinese military endangers regional geopolitical stability, and the prolonged, brutal suppression of the Chinese people's human and political rights builds up domestic anger and resentment.

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