PLA expands its business empire for additional revenue

LONDON: Renewed criticism by the U.S. Congress of China's domestic and foreign policies overshadowed the successful summit on Oct. 29, 1997 between Chinese President Jiang Zemin and U.S. President Bill Clinton.

During Congressional hearings in early November, a topic that featured prominently, alongside human-rights abuses, was the commercial activities of the People's Liberation Army (PLA), especially their dealings in the U.S.

The House of Representatives passed a bill on Nov. 7, 1997 -- that Clinton will almost certainly reject -- banning PLA companies from operating in the U.S. These concerns are based on allegations that PLA-owned firms are employing prison labor and are using their earnings to fund China's military-development program.

However, these suspicions are based more on political rhetoric than hard facts. One conclusion from the hearings was that little was known for certain about the Chinese military-business complex (CMBC)'s operations. U.S. government officials stated that the names and activities of PLA companies changed so often that it was impossible to impose effective sanctions against them.

While the CMBC may be opaque, the Chinese media regularly reports on its activities. Officially, there are around 10,000 military-owned factories, trading companies, farms and other commercial entities operating throughout the Chinese economy. The vast majority of these firms are small and barely profitable, but as much as three-quarters of the CMBC's total output and profit is generated by 500-1,000 large enterprises. This level of production is believed to be equivalent to that of a small province, such as Hainan or Qinghai.

Many of these large enterprises are being merged into conglomerates that will drive the CMBC's growth into the next decade. Around 30 of these bodies have been formed, each comprising between 40 and over 100 subsidiaries. The most profitable is the China Poly Group (CPG), the PLA's primary weapons-trading firm which sells arms to countries such as Myanmar and Pakistan.

CPG -- which is run by He Ping, a son-in-law of the late Chinese leader Deng Xiaoping -- is also involved in property development, telecommunications and financial services, and aims to become one of China's corporate powerhouses. Each of the PLA's 14 top central and regional military commands has two or more of these enterprises.

The formation of these conglomerates is part of a broader effort by the military high command to centralize control of the disparate network of businesses and to clean up their malpractices. When the authorities agreed in the mid-1980s that military units could engage in commercial activities, little effort was made to supervise their operations. This laissez-faire approach quickly led to a sharp rise in corruption, smuggling, profiteering and other abuses. Military readiness and cohesion also suffered as soldiers neglected their duties in order to make money.

These problems became so acute that the military leadership launched a two-year rectification campaign at the end of 1993 and closed down 40 percent of the PLA's commercial entities. Combat units were also banned from running businesses, but they were allowed to participate in agricultural and other subsistence activities.

Control over many of the enterprises was transferred to military authorities at the regional and central levels. This allowed the General Logistics Department (GLD), in charge of managing the PLA's business operations, to collect a greater share of the profits and taxes that lower-level units had previously kept for themselves. Despite this reorganization, however, corruption and other forms of misconduct remain a major problem for the authorities.

A key reason for allowing the PLA to engage in business activities was to improve the living standards of troops and to provide employment for their families. Reductions in defense spending during the 1980s led to serious funding shortfalls for lower-level units. Consequently, they were allowed to retain most of the business profits for their own use. Much of this money was spent on improving accommodation, supplementing wages and, in many instances, buying luxury cars for senior officers.

Before the 1993 rectification campaign, the GLD received only a small share of business earnings -- probably no more than 25 percent. However, this has increased substantially since the GLD assumed direct control of a large number of enterprises. With declared PLA business profits in 1996 of approximately Yuan 4-6 billion (US$480-$780 million) from a total turnover of more than 50 billion Yuan, between half and two-thirds of this sum may have gone into central reserves. But most of this money is likely to have been given back to lower-level units to cover lost earnings.

Only a small proportion of the PLA's commercial revenue is believed to finance the procurement of new weapons. It is more likely that these funds come primarily from CPG's profits. A sizable amount of money retained by military units is also spent on improving training.

PLA enterprises can be found throughout the Chinese economy, although they are most heavily concentrated in the industrial and service sectors. The PLA's 4,000 factories and mines contribute about half of the CMBC's annual turnover, while military-owned trading companies, hotels, finance firms and other entities in the tertiary sector generate around 40 percent of output. The remaining 10 percent of revenue is produced by the military's 600 farms.

PLA-owned firms have carved out lucrative niches in some of the fastest growing parts of the economy, including: * Transportation

An extensive military-dedicated transportation system -- airports, naval bases and railways -- has been converted to commercial use. The Air Force has its own airline and uses military transport jets to serve less-popular domestic routes; the Navy has several inland and ocean-bound shipping companies. * Vehicle production

Seventy army-run factories produce around 20 percent of China's passenger cars and trucks. But because of poor efficiency and a lack of orders, most operate at less than half capacity. The most successful of these firms, Liaoning Songliao Vehicle Corporation, belonging to Shenyang Military Region, was listed on the Shanghai stock market in 1995. * Pharmaceuticals

The PLA has nearly 400 pharmaceutical factories producing around 10 percent of the country's annual output of medical goods, particularly traditional Chinese remedies. The 999 Enterprise Group in Shenzhen -- owned by the GLD -- is China's largest pharmaceutical company. * Hotels

There are more than 1,500 PLA-owned hotels in China. These range from converted army guest-houses to five-star luxury accommodation. * Real-estate development

Military companies are heavily involved in China's booming property sector. They are building high-rise office and commercial complexes as well as affluent residential homes in major cities. CPG, for instance, is one of the most active property-development companies, with a real-estate portfolio ranging from the Shanghai stock exchange's new building to luxury villas in Beijing. * Garment production

Four of China's 10 largest clothing enterprises are PLA-owned. They originally produced military uniforms, but now manufacture anything from running shoes to designer-label outfits. * Mining

Military units run almost 150 major mines, producing coal and ferrous metals. Annual coal production is around 40 million tons, most of which is sold on the open market. The paramilitary People's Armed Police - which has close ties with the PLA - is one of China's leading gold producers. * Telecommunications

The PLA has a major commercial presence in the rapidly growing mobile telecommunications market, largely because it controls crucial radio frequencies. Military construction units have also laid most of China's fiber-optic communication lines. * Foreign trade

Military conglomerates have begun to expand their operations into overseas markets because of rising domestic competition. Hong Kong is a favored destination, and a small but growing number of prominent PLA-owned subsidiaries have been listed on the local stock market to finance their corporate expansion. Many PLA firms have also established 'shell' companies in offshore tax havens -- such as the British Virgin Islands -- to deposit money siphoned off from their profits.

Other growing markets for PLA companies include the U.S. -- a top destination for military exports of consumer goods, such as food products, toys and garments -- and the former Soviet Union. Overall, military firms are estimated to earn as much as US$1 billion annually from foreign trade, excluding arms sales. In 1996, CPG achieved total exports and imports of $440 million, a figure which probably included weapon transactions.

When the PLA started setting up its business ventures, it was a temporary expedient to make up for inadequate defense budgets. After nearly 15 years of spectacular growth, however, the CMBC is likely to be a permanent and powerful presence in the Chinese economy.

Despite the additional business revenue, PLA chiefs are demanding increased government funding because of the financial benefits the state derives from economic reforms. The country has more than $130 billion in foreign-exchange reserves. Senior military officers argue that they need more money to replace depreciating weapon systems and to establish a military capability commensurate with China's emerging regional-power status.

Many of the thousands of small PLA enterprises are unlikely to survive in the short to medium term, especially since the Communist Party of China (CPC) endorsed a massive state privatization program at its 15th Congress in September 1997.

Nevertheless, a small core of giant military conglomerates is taking shape. The military's relationship with these corporations will be as passive owners or majority shareholders rather than as active managers. These enterprise groups are likely to become a major corporate force over the next few years, providing a long- term source of revenue for the PLA leadership.