Breaking ranks in PLA Inc
Army chiefs can no longer continue the march into capitalist adventures. Mark O'Neill reports on how military-owned firms must surrender their economic power
THE WAITERS AT Flamingo, a nightclub in northeast Beijing, used to dress in People's Liberation Army (PLA) uniforms and hang rifles on the wall - but now they wear boy-scout outfits as they serve beer, snacks and light meals.
'We used to wear military uniforms but it frightened customers away,' said one waiter. 'So we dress like boy scouts instead. But we are all former soldiers. The investment for the club came from two retired soldiers.'
The Flamingo is a small piece of the giant jigsaw of the PLA's business empire which is now being broken up.
In July 1998, President Jiang Zemin ordered the PLA to divest itself of its business interests, a decision both economic and political. It was economic because military companies were abusing their privileges to compete unfairly with other firms and were heavily involved in smuggling. It was political because Mr Jiang saw the power of the military growing too large, especially that of Liu Huaqing, formerly vice-chairman of the Communist Party's Central Military Commission and one of the seven members of the standing committee of the politburo that rules China.
Many people believe Mr Liu helped protect Lai Changxing, the Xiamen smuggling king who is now in a Vancouver detention centre, fighting extradition to China where he faces the death sentence.
For Mr Jiang, the growth of the PLA's empire was a major breeding ground for corruption, since the military operated virtually outside the law. Its planes and boats arrived at military piers and airports laden with Lexuses and Mercedes-Benz cars, Honda motorcycles and crates of Marlboro and 555 cigarettes. No police officer nor customs official had the right to inspect them.
One result of Mr Jiang's decision was a dramatic fall in smuggling because of reduced army protection. Earlier this month, the customs department announced revenues for last year of 224.2 billion yuan, (about HK$212 billion) an increase of 41 per cent over 1999, with the arrest of 2,257 smugglers.
The process of dismantling the military's business empire began on December 15, 1998. In the first stage, which lasted two years, the PLA disposed of 6,000 companies with assets of about 200 billion yuan. Ownership of the large firms was transferred to the State Economic and Trade Commission (SETC), which set up a 'National Transfer Office' headed by Sheng Huaren, the SETC chairman and one of the most trusted advisers of Premier Zhu Rongji.
The smaller firms were handed over to the local governments in their areas. Of the 6,000 companies, only 900 remain as independent firms. The rest have been closed or merged with other companies.
But many companies remain under the PLA and a second stage, to dispose of them, has just begun. It is due to be completed by June this year. In this stage, the PLA is to hand over assets including more than 50 garment, shoe and leather goods factories, a listed foundry, 588 collective farms with 260,000 hectares of land, clinics and hospitals.
Also part of the PLA are China United Airlines and Great Wall Telecommunications Company. Disposing of them is proving difficult. China United, under the air force, flies the planes that carry national leaders as well as operating a limited number of commercial passenger and cargo flights within China. It has been argued that, because of its special role, it should remain under the PLA and has won a reprieve until at least next year.
'There are issues of what is to become of the workforce,' said an airline official. 'But do not ask me any more questions. This is the military.'
Great Wall, a joint venture between the PLA, China Telecom and other investors, won the right to operate CDMA phone operations on a trial basis in six cities and had 500,000 customers by last year.
Last June, after protracted negotiations with the military, the Government announced that it would hand over Great Wall to China Unicom, the country's second-largest telecommunications carrier.
But this is easier said than done. The army wants to retain its own internal telecommunications network and, for its part, Unicom said last month that the transfer would take six to 12 months because Great Wall had a high level of debt, along with private and foreign shareholders who are restricted in ownership of domestic telecom services.
The transfer of the assets in the first stage seems to have gone more smoothly, probably because of the slogan 'transfer first, solve the problems second', leaving the new owners to tackle issues like debts, surplus workers and pollution.
In 1999, the SETC took over the nine major PLA conglomerates, including the Poly Group and Xin Xing (New Prosperity) which was set up in 1989. Under the PLA it had assets of 15 billion yuan and annual income of over one billion yuan, with more than 100,000 employees in 58 clothing and shoe factories, 14 trading companies, pharmaceutical firms, coal mines and the army's biggest foundry.
'We formally left the PLA in March 1999 and now belong to the SETC,' said a member of the general manager's office of Xin Xing. 'We took the construction, medical and trade firms and left the clothing plants with the military. Our group now contains 14 companies with 108 subsidiaries, 30,000 people and assets of seven billion. Since the divorce, we have not enjoyed any of the privileges of the army.'
The nine big conglomerates accounted for 75 per cent of the output of the business empire and the rest were small and medium-size firms, many of them in the red. Many were closed down after losing their military status, under which they paid 9.9 per cent income tax, against 33 per cent for normal firms.
It is hard to reconstruct the military involvement in business because its operations are shrouded in secrecy. Corporate names have been used to disguise their real ownership. From what little is known, the PLA started to go into business in the mid-1980s because it had excess manpower, land and resources.
The PLA enjoys enormous privileges - a nationwide network of transport, cheap labour, its own supply of land and food, its own telecommunications system and, most important, its position at the peak of the communist system of power and privilege, giving it virtual immunity from the law.
The daily symbol of this in Beijing is vehicles with military plates - a red Chinese character to the left of the numbers - that can use bus-only lanes, pass red lights and disregard the traffic police.
The PLA has enormous patronage to dispense, enabling it to offer positions and promotions as part of the bidding process. The military's privilege was greatly enhanced by its role in putting down the student-led protests in 1989 when it saved the positions - and possibly the lives - of those who now rule China.
In return, the rulers gave it free rein and its empire expanded rapidly. Foreign estimates say the empire had 15,000 companies at its peak, with annual sales of 150 billion yuan or two per cent of China's Gross Domestic Product. It was said to include 70 automobile plants, nearly 400 pharmaceutical factories, 1,500 hotels, four of China's 10 biggest bedding companies as well as firms in finance, paging and telecom.
There were three main factors in Mr Jiang's decision to call a halt. One was rising anger against the PLA from ordinary companies who complained they could not compete against firms that enjoyed lower levels of tax, immunity from inspection and free access to men, money and materials which should have been reserved for military use.
There was also resentment from the public who saw the military abuse its privileges, from army trucks disobeying traffic rules to sons and daughters of officers making millions from their connections.
A second factor was the military's involvement in smuggling, which by 1998 had reached such a level that it damaged the national economy. The third reason was that Mr Jiang saw this empire as out of his control and a potential threat to his power. That is why he ordered the arrest of Ji Shengde, then chief of the PLA's military intelligence and also son of Ji Pengfei, one of most senior diplomats of the communist period.
Mr Jiang is also said to have ordered the arrest of the daughter and daughter-in-law of Liu Huaqing for their involvement with Lai.
The PLA seems to have got the raw end of the deal. It did not receive compensation from the Government for the assets it gave the SETC. But it did receive a substantial rise in its budget, from 93.47 billion yuan in 1998 to 107.67 billion in 1999 and 121.29 billion last year.
Mark O'Neill is a member of the Post's Beijing bureau