April 23 (Bloomberg) -- China plans to fold developers of military hardware into listed state-owned companies, people familiar with the matter said, giving them access to capital markets as the country prioritizes high-technology defense capability.
The plan would allow military research institutes to be incorporated into state-owned enterprises, said the two people, who asked not to be identified because they weren’t authorized to discuss the plans publicly. The policies, being drafted by the Ministry of Finance and other agencies, could be released as soon as next month, they said.
The changes fit with the Communist Party’s pledge to give markets a bigger role in the allocation of resources. By weaning the weapons developers off state funding, China may also be able to cultivate more innovative defense companies that can fill the military’s technology gaps, said Jon Grevatt, Asia Pacific Defence Industry analyst at IHS Jane’s in Bangkok.
“China has recognized that that protection of the state has led to a state where innovation has not always been encouraged,” Grevatt said by phone. “That encouragement of accountability will prompt innovation and capability development.”
President Xi Jinping has made a modern, combat-ready military a priority. After the government announced a 12.2 percent rise in defense spending for this year, Premier Li Keqiang said last month that China will boost research on the development of new and high technology weapons. The Ministry of Industry and Information Technology said in December that China will promote the two-way transfer of military and civil technologies and overhaul the shareholding system of military enterprises.
The Ministry of Finance didn’t immediately respond to faxed questions seeking comment on the policy proposals. The People’s Liberation Army Daily newspaper said today the Central Military Commission has called for greater secrecy to help realize the party’s goal of a strong military.
The institutes, which develop products including electronics, aircraft, ships and weapons for military use, would be transformed into companies before being put under the umbrella of listed enterprises, the people said. Currently, the institutes are fully funded by the government and don’t seek to make profits.
Still, military institutes working on highly sensitive technologies are unlikely to see their assets injected into listed state-owned companies, Grevatt said.
China is prohibited from importing military technology from the European Union or the U.S. due to arms embargoes imposed after the 1989 crackdown on protesters in Tiananmen Square.
Aviation Industry Corp of China, which makes fighter jets for the military, has units listed on the country’s stock exchanges. One such unit, AVIC Aero-Engine Controls Co., said in March it plans to raise as much as 3.2 billion yuan ($513 million) from a private placement of as many as 275 million shares, to finance expanded production.
In September, China Shipbuilding Industry Co. said it planned to raise funds through a private share placement to buy assets from affiliates for designing and building battleships and submarines.
The policy may also promote the formation of higher-quality defense companies that can compete internationally in markets such as Sri Lanka and Bangladesh as they increasingly require more high-tech equipment, according to James Hardy, Asia Pacific editor of IHS Jane’s Defence Weekly.
“There has been a trend to streamline originally fully-state owned enterprises and make them a lot more competitive internationally,” Hardy said. “Generally these research institutes are where a lot of the high end, high-tech stuff like missiles tend to get designed and road-tested.”
China will stop short of allowing defense hardware providers to function as “truly marketized firms,” said Richard Bitzinger, a senior fellow at the S. Rajaratnam School of International Studies who analyzes Chinese military modernization.
“Foreign companies will be restricted from investing, many parts of these companies’ production, especially the military side, will continue to be restricted and controlled,” he said. “About the only thing that might change is that they could raise overall new funds from stock sales.”
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