Xi Looks to China’s Private Sector as He Pursues a Slimmer, Smarter PLA

February 23, 2018

Key Chinese advancements include: significant improvements in missile systems; 5th generation fighter aircraft capabilities; and increased size and capability of the Chinese navy […] I am also deeply concerned about China’s heavy investments into the next wave of military technologies, including hypersonic missiles, advanced space and cyber capabilities, and artificial intelligence — if the U.S. does not keep pace, USPACOM will struggle to compete with the People’s Liberation Army (PLA) on future battlefields. China’s ongoing military modernization is a core element of China’s stated strategy to supplant the U.S. as the security partner of choice for countries in the Indo-Pacific.”

-Admiral Harry Harris Jr., Commander, U.S. Pacific Command, Statement before the House Committee on Armed Services, Feb. 14, 2018.

As highlighted by Admiral Harris, China’s military-modernization drive continues to accelerate. Concern about the pace and intent of China’s defense modernization is indeed growing in the United States. The National Defense Strategy, issued in January, placed China front and center as one of Washington’s strategic competitors. China will, the document said, “continue to pursue a military modernization program that seeks Indo-Pacific regional hegemony in the near-term and displacement of the United States to achieve global pre-eminence in the future.” States in the Asia-Pacific are also concerned, among other things, by increased deployments within the region of modern military equipment and improvements to the military infrastructure of man-made islands China has expanded in the South China Sea.

But observers should not mistake China’s effort to build a leaner, stronger force as an unequivocal sign of progress. China is also engaging in an unprecedented effort to incorporate the private sector into its defense-industrial base, which is currently dominated by giant state-owned conglomerates. The focus on this “civilian-military integration” policy shows the Chinese leadership’s desire to remedy to the lack of innovation in the country’s defense industry, and determination to garner the private sector’s more agile and innovative defense manufacturing capacities. However, though this policy comes on the heels of previous efforts to support indigenous defense innovation and industry, progress is not guaranteed.

Over the past two decades, China has developed a leaner, stronger and more innovative armed forces, with the pace of change increasing.  The country’s streamlined military leadership is in charge of  this process, which aims to reach the 2035 goal of accomplishing military modernization and the 2050 goal of turning the PLA into a global top-tier fighting force capable of winning wars. Ultimate decision-making power is concentrated in the hands of Xi Jinping as Central Military Commission (CMC) chairman (who importantly is the president of China, secretary-general of the Chinese Communist Party and has been named “core leader,” an amassing of power not seen since Mao). At the 19th Party Congress last year, Xi continued to slim down and centralise the CMC, shrinking it to just seven total positions (chairman, two vice-chairmen and four members). The changes point to Xi’s priorities: Instead of appointing service positions as CMC members, Xi nominated those loyal to him with, in some instances, personal connections and particularly two with reported combat and blue-water naval experience (General Zhang Youxia, General Li Zuocheng and Admiral Miao Hua respectively). The new appointees are charged with improving interoperability across the People’s Liberation Army (PLA).

Since 2015, Xi has implemented a series of bold PLA reforms to make the service more agile and capable. China’s 2015 Defense White Paper announced that the strategic prioritisation would shift from the PLA’s traditional ground-force focus, abandoning “the traditional mentality that land outweighs sea. The Second Artillery Corps, responsible for nuclear and conventional ballistic missiles, was elevated to a full service and named the PLA Rocket Force, while Beijing also combined the PLA’s space-, electronic- and network-warfare forces in the PLA Strategic Support Force. The PLA Army was, meanwhile, downsized by 300,000 troops. The PLA was also reorganised from seven military regions into five theatre commands, in which centralized decision-making is meant to ensure greater interoperability between service branches. These changes seek to make the PLA a slimmer organisation, equipped with newer technology and capable of “fighting and winning wars.” That said, judgements of China’s military progress should also be informed by other areas, including doctrine, training, and tactics, where progress may be more measured. This was evidenced in a recent War on the Rocks piece by Dennis J. Blasko, who focused on recent training efforts by the PLA.

To parallel this modernization process, and in order to support it, China is also working to increase defense-industrial innovation and production. These moves are intended to strengthen Beijing’s capacity to produce its own weapons. Throughout the PLA’s history, China has been reliant on foreign arms purchases and technology transfers, including a fluctuating relationship with the former Soviet Union and then Russia as the main arms exporters to China. While this remains true for certain complex technologies such as aircraft engines, China has recently put a greater focus on self-sufficiency. Supporting defense innovation also serves to improve China’s arms-export prospects. For example, China has entered the market in heavy and armed UAVs, with Chinese exports headed to countries in the Middle East and Central Asia, to whom the west cannot or will not export. Indeed, Chinese arms imports now no longer outstrip its exports (Figure 1). China’s defense industry is innovating, and making a name for itself abroad.

Figure 1. China arms exports and imports, 1995–2016 (trend indicator values)

Source: Stockholm International Peace Research Institute, Arms Transfers Database, Importer/Exporter TIV tables

But the defense industry is being pressured to become more innovative in a context where spending is also expected to become more efficient. While China was the world’s second-largest defense budget ($150 billion) after the United States ($603 billion) and accounted for 39.5 percent of total Asian defense spending in 2017, its defense budget growth has slowed down in recent years. The 2017 budget grew by “only” 5.2 percent in real terms over 2016 — actually a slowdown when compared to the previous five-year period. Then, the official defense budget grew by over 7 percent per year in real-terms. However, this reflects mostly the alignment with slower economic growth, which has decelerated in recent years to 6–7 percent as China is transitioning from a manufacturing and export-based to a service and internal demand driven-economy. Indeed, military expenditure remain a priority for Chinese authorities, as reflected in the stable share of defense in central government spending since 2010 at around 35 percent (Figure 2).

Figure 2. China real-terms defense budget, and share of defense budget in central government spending, 2010–2017.

Sources: Military Balance Plus; China Statistical Yearbook; International Monetary Fund World Economic Outlook Database

The massive defense spending growth in previous years has allowed the Chinese government to develop and strengthen its defense technological and industrial base. However, in these times of slower spending, the government is now looking to follow a more efficient and innovative defense-industrial policy — trying to get more “bang for their buck.” One of the routes pursued to achieve greater efficiency is civil–military integration (軍民融合). Indeed, during the 19th Party Congress, Xi vowed to sharpen the focus on civil-military integration, saying: “We will … deepen reform of defense-related science, technology, and industry, achieve greater military-civilian integration, and build integrated national strategies and strategic capabilities”’

China’s civil-military integration policy does not necessarily derive from a belief that the private sector is inherently more efficient than the state-owned enterprises, but rather that increasing the participation of private companies in the defense enterprise will foster competition and innovation, and reduce duplication of effort. Additionally, and importantly, in the context of lower defense-spending growth, the participation of private firms is expected to reduce costs by providing equipment to the PLA (generally equipment that would not be described as a “big-ticket” procurement) at a lower price tag than the major state-owned defense conglomerates.

Several measures were taken last year with regard to civil-military integration policy. A Commission for integrated military and civilian development, headed by Xi, was created early in 2017. Another initiative was the funding of 2,000 defense-R&D projects developed by the private sector, for a total investment of RMB6bn (US$883 million). In line with the objective of the political leadership, some state-owned enterprises have also announced the inclusion of private firms in their supply chains. The government also created the Military Science Research Steering Committee (事科学研究指), modelled after the United States’ Defense Advanced Research Projects Agency, a dedicated military-research agency. Like its American counterpart, the steering committee seeks to engage with the private sector to build on innovations occurring outside the traditional defense-industry manufacturers.

In March 2017, a further important step was taken towards the goal of engaging China’s civil–commercial sector: the release of over 3,000 patents, relating mainly to Chinese air, space, and missile technologies registered between the late 1980s and 2016. The patent release marked an unprecedented effort by the government to engage with the civilian sector on defense. China’s previous efforts to promote civil-military integration were more concerned with political discourse rather than actually breaking the monopoly held by state-owned enterprises in the defense-technology sector. Now, the PLA has declassified national defense patents for the first time since the military patent system was set up in 1985, making patents easily accessible to private Chinese firms.

Still, the effectiveness of this particular release is questionable. There is a lack of clarity around specific procedures, such as how to apply for patents, the processing times of those applications, and the legal validity of defense patents. Furthermore, despite a focus on air, space, and missile technologies, the government chose to declassify mostly older defense patents. The decision-making process regarding which technologies to publicize remains unknown, though the selection is unlikely to have been random. Moreover, although releasing patents and improving civilian-sector access to China’s defense industry could spur innovation, simply pursuing spin-on policies, whereby civilian technologies are transferred to the military sector, is not a guarantee of success.

China’s progress shouldn’t be underestimated. The PLA is reformed, modernizing, and increasingly using domestically engineered and manufactured equipment. China now relies on arms imports for only the most advanced technologies and is increasingly becoming a competitive arms exporter. But that’s not to say challenges do not remain. While the reforms launched in the past several years support a continued path towards a leaner and stronger PLA, another pillar of the country’s military power, its defense industry, is still under construction, even if it has come a long way since the 1980s. The success of the Chinese government’s civilian-military integration reform remains to be seen, and depends in particular on whether the Chinese defense industry takes advantage of innovation in the private sector for dual-use technologies — a now collaborative practice held by many Western defense sectors. The Chinese government under Xi’s leadership is taking steps toward this. Should they succeed, one measure of the success of China’s civil-military integration policies would be if private defense companies emerge with the capability to produce major platforms; others would include a faster pace of Chinese innovation and a China that has caught up with (or overtaken) technologically advanced countries such as Russia and the US in key areas of defense technology.

Reform, modernization, and superiority have become the buzzwords around the PLA. As Harris warned in his House testimony, “China’s historically unprecedented economic development has enabled an impressive military build-up that could soon challenge the U.S. across almost all domains.” As Xi pushes forward reforms and cements his status as China’s most powerful leader in decades, it remains to be seen whether further progress towards civil-military integration and building a robust defense technological and industrial base will make this century the one in which China replaces the United States as the dominant military power.


Meia Nouwens is Research Fellow for Chinese Defence Policy and Military Modernisation at the International Institute for Strategic Studies. Prior to commencing at IISS, she worked for the European External Action Service’s representation in Taipei, Taiwan as a political officer covering cross-Strait political relations, regional security developments and national defense. Meia holds a BA Honours in International Relations and Political Science from Macquarie University, a Masters of International Relations and Diplomacy from Leiden University in conjunction with the Clingendael Institute, and an MPhil in Modern Chinese Studies from the University of Oxford and Peking University.

Lucie Béraud-Sudreau is Research Fellow for Defence Economics and Procurement at the International Institute for Strategic Studies. She was recently awarded the Bastien Irondelle Ph.D. Prize from the French Association for War and Strategic Studies, for her thesis on French and Swedish arms export policies. Her recent publications include ‘Arming China: Major Powers’ Arms Transfers to the People’s Republic of China, Journal of Strategic Studies, 2017, p.1–37 (with Hugo Meijer, Paul Holtom & Matthew Uttley).

Image: Xinhua