Move to Rein In China’s Army No Easy Business

A day after reports of a sweeping government order for China’s armed forces to withdraw from their myriad business ventures, a host of unanswered questions swirled here Thursday about how such an edict would be carried out, much less enforced, in the world’s most populous nation.

At the same time, strong indications emerged here that the directive, issued publicly by President Jiang Zemin earlier this week, had been in the works for months, as far back as last fall. Some of the People’s Liberation Army’s biggest companies have already begun quietly gearing up for a change in the way they operate, although precise plans have not been formulated or disclosed.

“This was just the official announcement,” one knowledgeable observer said of Jiang’s order, which caught many in the West--and in China itself--by surprise.

The order, an apparent attempt to return the PLA to its military roots and disentangle it from corruption and smuggling, immediately triggered a flood of questions: Would the armed forces, which own everything from high-tech firms to low-tech farms, shut their enterprises or merely divest from them? If the latter, who would take over? By what process? What kind of effect will the policy have on the burgeoning Chinese economy?

The Communist government, for now, is playing it close to the vest, setting no deadline and offering no specific guidelines, at least in public. But the answers, if and when they come, threaten to be as complicated as the PLA-run businesses, which vary so much in size, scope and influence that a uniform approach seems unfeasible.

“I’m highly skeptical that it can be done. Too many vested interests of too many important people would be infringed upon,” said June Teufel Dreyer, a China expert at the University of Miami.

“Heaven is high, and the emperor is far away,” she added, quoting a maxim about the chronic difficulty in China of getting the rank and file to put into effect directions from the top.

Tai Ming Cheung, a Hong Kong-based expert on PLA business dealings, said Jiang’s directive “is an extremely ambitious order. There’s a lot more to it than meets the eye. For example, its primary focus is on commercial activities, and less on industrial and agricultural activities. . . . It’s only focused on those areas that are considered to have the most detrimental impact on China’s professional fighting force.”

The PLA now has almost 3 million troops, the world’s largest military. In a remarkable transformation over the past decade, China’s armed forces have also become one of the country’s biggest moneymakers, splitting time between the business of national defense and the business of business.

A military that once prided itself on growing its own vegetables now serves up pricey delicacies in posh Chinese restaurants. Soldiers accustomed to living in bare-bones barracks run luxury hotels catering to foreigners. From pharmaceuticals to cellular phone networks to nightclubs, PLA tentacles extend into virtually every aspect of commerce, sometimes in ventures with American companies such as Citibank and Lucent Technologies. (The PLA affiliation is frequently, but not always, hidden on the Chinese side.)

All told, Cheung estimates, PLA-backed firms drum up as much as $10 billion a year.

Among the army’s 15,000 companies are conglomerates such as the Beijing-based Xinxing Group, which has more than 100 smaller enterprises and 180,000 employees. The company’s general manager is Sun Chengjun, a major general in the PLA. Its annual revenue is believed to exceed $1 billion, money drawn in from real estate holdings, hotels, steel mills, medicines, tourist services, import-export businesses and factories.

According to one employee, Xinxing’s top executives were meeting even before Jiang’s order to discuss the future ownership and operation of the company. A team from the PLA General Logistics Department, Xinxing’s parent agency, has already inspected each of the conglomerate’s subsidiaries to determine the type of work they do and how they are run.

Likewise, leaders of another large Chinese concern, the Yuanwang Group, which boasts a similar portfolio to Xinxing, have been working on a possible change in operational status ever since China’s 15th party congress last fall, said a management staff employee named Han.

“I’ve been looking at job ads,” Han said. “If the group still needs me, I certainly prefer to keep on working here. If not, I’ll face some new choices.”

In such large companies, which account for the great majority of the PLA business revenue, the army is likely to stay involved, not on the front lines of management but instead in the background, perhaps as majority stakeholders, said Cheung, the Hong Kong analyst.

Smaller and medium-sized firms, many of which barely meet their expenses, may be hardest hit, forced to survive on an equal footing with civilian competitors, without tax breaks or other perks so long afforded by their association with the PLA.

Civilian companies have often complained about preferential treatment given to PLA-backed concerns, whose executives sometimes are retired military personnel with special connections or the sons and daughters of high-ranking officials. (Lower executives and employees often have no PLA ties.)

At the Yanan Hotel in Shanghai, the general manager, a man named Feng, is a former soldier who left the military 10 years ago. Last year, the hotel earned a $1.2-million profit, nearly a third of which it turned over to the military, about the average level of tax the PLA collects from its businesses.

Feng said he has known about the mandated PLA withdrawal from commercial ventures since May. But underscoring the confusion surrounding the order, which supposedly covers PLA commercial companies at all levels, Feng asserted that his hotel would be exempt.

Indeed, it is inconceivable to many observers that the central government would shut down or pull the military out of prestigious businesses such as the five-star Palace Hotel in Beijing or the giant Poly Group, which deals in arms and defense production, among other things.

“The whole issue is not closing down these companies. It’s just making [the PLA] relationship different from what it has been, the degrees of separation between the military and its commercial activities,” said Cheung, who is writing a book on PLA business dealings. “While there are a couple degrees of separation between the military and its enterprises [now], it’s still clear there’s a direct relationship. What they’re trying to do is turn it into a more indirect, passive role.”

The military’s top officials have worried for years that the PLA’s moonlighting has detracted from their goal of modernizing China’s ill-trained, ill-equipped armed forces.

Notably, in front-page stories that local newspapers devoted to Jiang’s directive Thursday, the Chinese president stressed that “our armed forces are a people’s army under the absolute leadership of the [Communist] Party.”

Ironically, it was that same leadership that encouraged the PLA to branch out into business in the first place in the 1980s, when the military needed to find a way to make up for years of cuts in defense spending. Now, the government is forcing the PLA to give up its commercial endeavors, which may increase pressure on the government to jack up its defense spending anew.

“The army is just too deeply involved in commercial activities, and too dependent on commercial sources of revenue, to cease such activities,” said David Shambaugh, an expert on the Chinese military at George Washington University. “They certainly aren’t going to do so unless the state compensates the PLA with substantially increased allocations in the annual budget.”

Jiang’s order can also be seen as the latest of market-oriented reforms to reduce China’s behemoth public sector. Earlier, the Communist regime announced plans to phase out thousands of unprofitable state-owned enterprises, which have been propped up by the government for years, and to slash its own bloated bureaucracy by up to 4 million workers.

Officially, Wednesday’s public call to end PLA engagement in commerce came as part of a campaign against smuggling, which may cost China as much as $12 billion a year, the New China News Agency reported. In recent years, smuggling has become an escalating problem in which PLA troops and members of the People’s Armed Police have themselves been implicated through the businesses they run--businesses Jiang now wants to shut down.

Jiang won support Thursday from Gen. Fu Quanyou, the PLA chief of general staff, who ordered “every unit and every cadre” to implement the decree “without conditions.”

Wang Jilu and Bao Lei of The Times’ Beijing Bureau contributed to this report.