Despite reforms making little apparent progress, the Chinese defence industry appears to be booming. Production and sales are up—by 19 per cent and 14 per cent, respectively, in 2001 (the last year for which we have reliable data)—and China’s military-industrial complex technically broke even in 2002 after eight straight years of losses. The missile and shipbuilding sectors have been particularly profitable in recent years (‘Chinese defence industry: Chinese puzzle’, Jane’s Defence Weekly, 21 January 2004; Medeiros et al. 2005:8).

It is also increasingly evident that the Chinese have in recent years greatly added to their military capabilities in terms of power projection, stand-off precision strike and improved command, control, communications, computing, intelligence, surveillance and reconnaissance (C4ISR). China’s defence industry has begun manufacturing and delivering to the PLA several new types of advanced weapons systems, including the fourth-generation J-10 fighter, an upgraded version of its JH-7 fighter-bomber, the HQ-9 long-range surface-to-air missile (akin to the US Patriot air-defence missile), the improved Song-class diesel–electric submarine and the Type-052C destroyer (which incorporates low-observable features and an Aegis-type phased-array air defence radar into its design). Moreover, the quality and capabilities of some Chinese weaponry have also apparently improved. Recent versions of the Song-class submarine, for example, are outfitted with a skewed propeller for improved quieting and are capable of carrying an encapsulated anti-ship cruise missile that can be launched underwater.

The shipbuilding industry has made particular progress in modernising its design and manufacturing capabilities and in spinning-on commercial shipbuilding technologies to its naval construction side. Chinese shipbuilding is competitive domestically and globally (at least, at the low end of the technology scale), and it also appears to be profitable—so much so that it is the only sector in the defence industry that is actually adding productive capacity (that is, new shipyards and more workers). This in turn has permitted a significant expansion in naval-ship construction since the turn of the century, and, since 2000, China has begun construction of at least six new destroyers, seven frigates and eight diesel-powered submarines—more than double the rate of naval-ship construction during the 1990s.

Nevertheless, most progress in expanding armaments production, quantitatively and qualitatively, seems to have come about despite defence industry reforms—or at least the more recent attempts at reform—rather than because of them. Many of the so-called successes in generating new-generation weapon systems actually have their genesis in design and development decisions made years, even decades, ago—that is, long before the reforms of the late 1990s were inaugurated. These weapons programs were already in the pipeline and on schedule to enter production in the late 1990s and the first decade of the twenty-first century, and while the most recent reform efforts could have helped to accelerate or expand production of these weapons systems, they certainly did not play any key role in their initiation. For example, the success of the Chinese shipbuilding industry appears to be the result mostly of decisions made back in the early 1980s to commercialise the shipbuilding sector, to open up the industry to foreign technology inputs and to compete on the global market.

In addition, it is perhaps premature to make overly optimistic and sweeping statements about recent progress in modernising the Chinese defence-industrial base. In particular, the continuing lack of transparency on the part of the Chinese forces Western analysts to rely too much on scanty, often anecdotal, evidence and inference. Some new weapons systems and platforms could appear to be more modern and more capable, but in the absence of sufficient and reliable information (which is perhaps collectable only by covert means), one can only speculate about any true increase in the capabilities and quality of weapons systems presently coming off Chinese assembly lines. We also continue to lack detailed and consistent economic data regarding the Chinese defence industry (such as sales, profits, capacity utilisation, productivity, and so on) when it comes to assessing the success of defence-sector market reforms.

Moreover, rising defence spending also likely has had as much to do with the recent expansion in Chinese arms production as any reform efforts. Chinese military expenditure has nearly quadrupled in real terms since the mid 1990s. China’s official 2007 defence budget was CNY350 billion (US$45 billion)—an increase of nearly 18 per cent from the previous year and thus continuing a trend of double-digit real increases in Chinese military spending extending back more than a decade. PLA annual spending on equipment increased from US$3.1 billion in 1997 to an estimated US$12.3 billion in 2006—a fourfold increase in real spending; at this rate, the 2007 equipment budget would total about US$15 billion (not including likely extra-budgetary funding for foreign arms purchases, which was running at about US$1.5–2 billion a year). It could be argued, therefore, that simply throwing more money at the problem has had the most impact on the local defence industry—that is, in increasing procurement spending and therefore production, and by providing more funding for R&D.

It also is important to note that the sharpest edges of the pointy end of the PLA spear are still mostly foreign—and particularly Russian—sourced, such as the Su-27 and Su-30 fighters, the Sovremennyy-class destroyers and S-300 surface-to-air missiles. They are, with few exceptions (such as tactical ballistic missiles or nuclear submarines), still the most critical force multipliers when it comes to calculating Chinese military power.

Overall, it appears that Beijing’s formal strategy regarding its defence sector still relies on minor structural tinkering, a healthy increase in defence spending and a continuing reliance on ‘pockets of excellence’. While past reform efforts have resulted in some technological and structural improvements in weapons R&D and manufacturing, China’s military-industrial complex remains in many respects an inefficient and less-than-optimal production model. This will continue to exert a drag on the Chinese military modernisation process and make it harder for the PLA to close technology and capability gaps with its rivals.

It is important to note, however, the long-term potential of China’s general industrial transformation. The growing scope for non-state economic activities in China extends to militarily relevant high-technology industries, and there are numerous indications that the private sector is eager to avail itself of the opportunity to develop and produce arms for the PLA and for export. There is some recognition of this potential on the part of Chinese authorities, who are permitting non-state enterprises to enter the defence market. In 2006, for example, it was announced that the State was prepared to subsidise private-sector arms production (Vogel 2006:18). It remains to be seen how this trend will develop or what impact it will have, but if China is able to effectively harness the potential inherent in its dynamic industrialised economy, this could help to offset the limitations of the state defence-industrial sector outlined above.