Non-Subscriber Extract
China focuses on reform of defence industry
16 July 2007
China is in the midst of a comprehensive effort to modernise its defence forces. This is an expensive business and, although estimates differ, one thing for certain is that defence spending has increased dramatically over the past 10 years and is certain to continue to increase in the near future.
The direction that this expenditure will take will be heavily influenced by the requirements of modernisation and is going to be focused increasingly on procurement of advanced, high-technology defence equipment; funding of increased professionalisation; and financing the consequent need for improved military training and benefits.
The spending increase is coming hand in hand with an unprecedented liberalisation of China's domestic defence industry. In the past five years China has introduced a number of reforms that are aimed at improving the quality and timeliness of indigenous defence equipment.
In a move that implicitly acknowledges the failure of the centralised, state-run defence industry model, the reforms are aimed at increasing competition between enterprises; outsourcing certain non-strategic defence-related activities to the private sector; increasing private ownership in state-run enterprises; opening up a proportion of the equipment budget to privately owned Chinese companies; and encouraging foreign investment in non-strategic defence industries.
The combination of increased defence spending and defence-sector liberalisation means China is on the cusp of opening up a potentially enormous new market for defence equipment and investment. However, as Alexander Neill, head of the Royal United Services Institute's Asia Security Programme, notes, one purpose of this may be to exert indirect pressure on the EU and US governments to lift the current arms embargo by offering such a highly lucrative carrot that industry cannot afford to miss out.
In March 2007 National People's Congress spokesman Jiang Enzhu announced that Chinese defence spending was to rise to CNY350.92 billion (USD44.06 billion) in 2007 - a 17.8 per cent increase in its official military budget over 2006 and a continuation of 14 years of double-digit defence spending.
China's official defence budget has more than doubled since 2001, going from USD17.4 billion that year to USD44.1 billion in 2007. Jane's forecasts that the trend will continue and by 2010 spending will have risen by 50 per cent again to reach USD59 billion - more than trebling in 10 years.
Although these numbers only reflect the official spending - unofficial spending is thought by many sources to be considerably higher, including areas such as strategic weapons, imported weapon systems (predominantly from Russia), pensions and state subsidies to the defence industry - they form a reasonable basis for estimating the potential size of the Chinese market. Based on China's National Defence 2004 White Paper, the procurement budget is around one third of overall spending, putting it at approximately USD15 billion in 2007.