For China's leaders, the economy is the most important factor determining future military power. This approach is not surprising from a country that is ruled by a communist party. In the Chinese Communist Party's publication, Qiu Shi, the director of the political department of the PLA's Guangzhou Military Region characterized the components of national power as a combination of economic strength and the "level of defense modernization" (guolang xiandaihua shuiping). [15] The emphasis on economic strength as a basis for future defense modernization accounts for the relative prioritization of military modernization as the last among the now-formulaic "four modemizations." [16] Chinese leaders believe that if resources are poured into military modernization at the expense of broader economic development, it will lead to stagnation and a form of economic growth that is not sustainable. The Chinese President, Communist Party Chairman, and Central Military Commission Chairman Jiang Zemin (in his address to the Communist Party's 15th Congress) also reflected this prioritization. Jiang made it clear that the focus will be on the "economic, scientific and technical" sphere rather than concentrating on strengthening China's military power. [17] This strategy was confirmed in the second defense white paper by China, China's National Defense, published on July 27, 1998, in Beijing. China's large population, its lack of arable land, its dwindling energy resources, and the burdens of supporting an aging population from state resources require greater attention to the problems of economic development over military strength and modernization. Beijing's strategy, therefore, is to buy time for increasing China's military potential, which is slowly improving its capacity to be a stronger military power. Economic Issues Chinese leaders face many serious problems if they are to maintain any economic growth. For instance, according to the Far Eastern Economic Review, the ratio of the elderly population dependent on working adults or the government to support them will rise from 11 percent in 1990 to 22 percent in 2025. [18] That increase places serious limits on how much money the PLA can count on for its modernization. The plight of the more than 300,000 state-owned enterprises (SOEs) also represents a serious financial burden on China's economy, one that will affect the military. These SOEs, of which about a third are industrial, employ (really they "under-employ") more than 100 million workers. [19] They are operating at a loss of about 1 percent of China's GDP each year (in 1996, 50 percent of the stateowned enterprises in China operated at a loss). Many industrial workers are being paid in kind and told to sell what they have produced on the open market; in other cases, workers are paid only part of what they are owed. Worse still, at some enterprises, the workers are simply told to go out and find another job, while they are allowed to keep their factory-owned houses. This represents a huge burden on the Chinese economy. The problem of underemployment and bankruptcy in state-owned enterprises is critical because it limits the amount of funds China is able to devote to military modernization. The potential for labor unrest is high, and may be one of the most volatile problems to confront the Chinese leadership and the PLA. [20] The one million-plus soldiers and officers in the reserve forces of China's military are primarily in state-owned enterprises of one form of another. For example, Beijing's Capital Iron and Steel Company (Shougang) and Shanghai's Baoshan Iron and Steel each incorporate a division-sized reserve unit. In northeast China, not far from the North Korean border, the rubber tire plant in Mudan iang, which has operated there since before World War II, contains its own reserve division. These are really light infantry divisions of 8,000-10,000 soldiers armed with small arms, machine guns, and artillery. Some reserve divisions also have tanks and armored personnel carriers. The specter of several such divisions turning against the government has to be a frightening one for China's central political leadership and is a strong incentive for sustaining the flow of funds into SOEs. [21] Another volatile problem facing the central government is China's "floating population" of under-employed or unemployed rural labor, numbering 100-120 million [22] people. Ian Johnson, writing in The Wall Street Journal, notes that a recent Chinese government survey indicates that 43 percent of China's population live in cities; whereas, only about 20 percent of the population were urban when serious economic reforms began about 20 years ago in 1978-9. [23] Most of these workers making up the floating population are male; many have some form of military training, either as militia or regular forces. The floating population migrates into cities and works on construction projects or as day laborers, performing jobs that the more well-to-do urban residents shun. The laborers return to the countryside from time to time or else send funds back to their families. The importance of keeping this group actively employed through continuous urban construction projects is as obvious to the central leadership as it is a burden on the economy. China also faces the potential for a financial crisis of serious magnitude. The centrally controlled banks of China and the government have been subsidizing state-owned enterprises with loans to prevent their collapse. Up to 90 percent of all loans granted to enterprises by state banks in 1996 went to SOEs, but these enterprises produce less than 40 percent of China's industrial output. By the end of 1996, according to the World Bank, the debt to the banks from these enterprises was about $120 billion, almost equal to China's foreign reserves. [24] The wage bill of state-owned industry is roughly equal to the amount of direct foreign investment that comes into China each year, and the debt of state-owned enterprises is roughly equal to China's foreign reserves. [25] Clearly, if China is to continue on its current path of economic integration, the central leadership must remain linked to the international economy. It also means that domestic stability must be ensured because no foreign country or banking house will invest in an unstable political environment. When Chinese military and civilian leaders say that their priority is economic growth and stability, they mean it; the primary mission of the PLA, and the People's Armed Police (PAP) that it largely controls, is internal security and stability. Still, the Chinese military is modernizing. Beijing is spending its money carefully on military items. China has purchased Su-27 fighter aircraft from Russia, Kilo-class submarines, destroyers, and, through intermediaries, two aircraft carriers, the Varyag and the Minsk, as models to reverse engineer. [26] To a large extent, however, the PLA is "distracted" from its mission of external defense and a serious military buildup by significant problems that eat up a lot of resources. The PIA can live with fewer resources because it saw what happened to the Soviet Union (total collapse), when Moscow tried to beat the West in an arms race. China's military leaders are very realistic, however. To compensate, they are working to develop the capacity to control sea lines of communication, project regional force, and deter the United States and other potential adversaries in creative ways without matching forces. [27] Back to Table of Contents China's Military Potential Back to SSI List of Issues Back to MagWeb Magazine List © Copyright 1998 by US Army War College. This article appears in MagWeb (Magazine Web) on the Internet World Wide Web. Other military history articles and gaming articles are available at http://www.magweb.com