America both helps and hinders China’s military industrial complex

JIANGHANG AIRCRAFT EQUIPMENT has struggled to woo investors with the fuel systems and removable gas tanks it builds for Chinese warplanes. The company, controlled by Aviation Industry Corporation of China (AVIC), the country’s largest aerospace and defense conglomerate, had seen its share price drop 50% since its initial public offering in Shanghai last year. But in the first three months of the year, demand for its goods skyrocketed. On May 28, Jianghang said the net profit for the period nearly doubled year over year. Trading in its shares then had to be halted after their price rose 10%, the maximum swing allowed in a day.

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Jianghang is just one of dozens of booming military-related businesses. Most are unlisted and disclose little financial information. The public navy shipbuilders have flotillas of publicly traded subsidiaries. AVIC, the main group behind the Chinese fighter aircraft program with more than one billion yuan ($ 157 billion) in total assets, has 24 publicly traded divisions. To get a feel for the industry, analysts track dozens of small military stocks. Citic Securities, an investment bank, covers 58. Everbright, a public brokerage, follows 115.

The total arms sales of the four largest Chinese companies that manufacture them, including AVIC is most important – have been stable at just over $ 50 billion since at least 2015, according to the Stockholm International Peace Research Institute (SIPRI), a think tank, even as those of its foreign competitors have grown. But if the divisions listed are any guide, things can get better for the industry.

Combined operating income of companies tracked by Everbright rose 11% last year to 475 billion yuan. Citic estimates that the net profits of the industry’s listed quota increased by around 50% in 2020. While the Chinese economy was booming in the first quarter, especially in relation to the severe Covid-19 shutdowns of the last year, only agribusiness and non-ferrous metal miners grew faster year-over-year income growth than China’s military-industrial complex.

The main reason for this arms manufacturing windfall is China’s increasingly cold relationship with America. A note to investors from Huaxi Securities, a brokerage company, was embellished with an image of two fists, draped in opposing US and Chinese flags, flying toward each other. US attempts to “lock China out of technological progress,” Huaxi analysts say, are spurring new growth. Citic speaks of “a period of volatility that has not been seen for 100 years” and predicts “a rare period of rapid development” in China’s military-industrial enterprise as a result. SIPRI noted in December that Chinese arms groups were benefiting from a program to modernize its armed forces.

The domestic market is becoming more and more important for Chinese arms companies. According to SIPRI, China’s arms exports fell by 8% between 2016 and 2020. At the same time, those of America, France and Germany increased. Chinese drones may be cheaper than Western drones, but they are also considered to be less efficient.

Fusion firepower

In an effort to change this state of affairs and strengthen domestic arms manufacturers in the process, Chinese officials speak of “military-civilian fusion.” This long-standing project aims to introduce advanced civilian technologies such as artificial intelligence and semiconductors into military supply chains, in line with the Communist Party’s slogan that “civilians and troops are members of the same. housework”. Protests of the idea include Hikvision, a state-owned surveillance kit maker, which reported net profit of 2.2 billion yuan in the first quarter, up 45% from the previous year.

So it’s ironic that the same Sino-U.S. Tensions that spur Chinese arms manufacturers end up undermining this strategy. The idea of ​​a civil-military merger frightened Donald Trump’s administration and prompted it to ban U.S. companies from supplying companies like Huawei, a telecommunications equipment giant seen as close to the military popular liberation (APL). The result has been disastrous for Huawei. Its revenues fell for the second consecutive quarter earlier this year. He struggles to get hold of chips and more and more Western countries are avoiding his 5g mobile networks.

The blacklisting of the United States may also deprive some adjacent Chinese defense companies of a source of capital. Foreign ownership of military-related stocks was considered low. It may soon be nonexistent. Since January, US investors have been banned from holding shares in state-owned China Spacesat Fortune 500 companies that help run the country’s space program. That same month, Fidelity Investments, an American asset manager, confirmed to its clients that it would sell certain securities following the sanctions.

Mr Trump’s successor, Joe Biden, shows little intention to ease restrictions. On June 3, he tightened up some of them on companies linked to watch and advocacy groups. A recent article from the Center for a New American Security, a think tank, noted that China’s continued obsession with military-civilian fusion reflects concerns that reforms to achieve it “have not progressed quickly enough. “. US military strategists would love China’s efforts to speed things up to have the opposite effect.

Editor’s Note (June 3, 2021): This article has been updated since publication.

This article appeared in the Business section of the print edition under the headline “The Best Designed Battle Plans”

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About Joaquin Robertson

Joaquin Robertson

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