The commercialisation of PLA Inc, China's massive military-industrial complex, is not creating a threatening monster but instead is draining the economy and thwarting all attempts to turn around this state sector, according to the latest research by Western experts. 'Defence conversion has been a disaster. And it is getting worse,' said Dr John Frankenstein, an American academic and former fellow at the University of Hong Kong's School of Business who has just written a new study on China's defence industry for the European Commission. Recent books such as The Coming Conflict With China have warned that each year PLA Inc is garnering vast profits to fund the acquisition of new hi-tech weapons, which will enable China to disrupt the balance of power in Asia. However, Dr Frankenstein and others argue otherwise, pointing to the new and major reforms announced this year as evidence. In July, President Jiang Zemin ordered the People's Liberation Army to get out of business amid a massive bureaucratic shake-up of the defence sector. The 10,000 to 20,000 defence-related factories which employ over 16 million workers are for the first time to be run by a civilian body, the Commission on Science, Industry and Technology for National Defence or COSTIND. 'Nobody here even knows their address now,' confessed a spokesman at the Ministry of Defence confused by the state of the Beijing bureaucracy. Officials finally reached at COSTIND's new telephone number said they were still trying to work out what factories they control and were not ready to give interviews. COSTIND replaces a previous organisation of the same name which functioned under the Communist Party's Central Military Commission. Remaining defence technologies are to be concentrated under a new body, the General Armaments Department. From the late 1970s, paramount leader Deng Xiaoping had slashed military spending and ordered the defence sector to convert to civilian production although they continued to be responsible for producing arms if the military required. Although China claims about 80 per cent of military-industrial factories have jumped into the sea of commerce, very few are making profits. Two-thirds are thought to be losing money, accounting for half the loss-making state-owned enterprises (SOEs). What is more, their losses are growing rapidly as excess capacity has created cutthroat competition in many sectors. This year Beijing stepped in to introduce price floors for dozens of products and 1998 may see overall SOE losses up by 50 per cent. China's failure over the last 20 years to design and make a new generation of advanced weapons has forced it to spend US$1 billion (HK$7.7 billion) a year on buying Russian submarines, battleships, artillery and jet fighters. China's own military research institutes are being closed down and arms procurement orders have fallen steadily, leaving arms factories idle. The PLA has a vast stock of useless hardware made with 1950s technology, including perhaps one of the largest fleets in the world, an army equipped with some 10,000 tanks and a huge airforce with 5,000 aircraft. China built an aviation industry with an annual capacity to churn out 1,000 planes a year. Military aircraft production peaked in 1974 with 540 but output dropped to 200 in the 1980s and declined to just 80 a year by the mid-1990s. Not a single bomber has been made since 1990 and the PLA airforce has not even ordered new models such as the F-7 because they cost too much. Tank procurement plunged too. The Shanxi tank centre was intended to make 2,500 tanks a year, and it was just one of several tank factories built during the Mao Zedong era. Yet China's annual production of battle tanks is now thought to be less than 100 a year. Even in 1984 it was a mere 650, of which half were for export. Military shipyards have been equally bereft of orders and only six destroyers and 13 frigates have joined the Chinese fleet since 1990. Western defence experts estimate that two-thirds of defence industry capacity is now standing idle. Even those factories which do win orders lose money. PLA procurement prices are simply too low even to cover production costs. In a rare admission of the problem, the State Planning Commission described the situation in 1996 as 'grim'. This year the mainland is embarking on a fresh effort to transform the defence sector by trying to spin off as many of the loss-making defence factories as possible. 'Many converted enterprises - former defence plants that are attempting to produce for the civilian market - will be farmed out to other ministries, local authorities or left to fend for themselves in the market place,' Dr Frankenstein said in his report. The majority of those industries which cannot contribute to manufacturing modern weapons will be 'cast off to sink or swim in the sea of the market economy'. 'This is truly conversion by total immersion,' he said. Although China has often boasted about the success of its military conversion under Deng, especially in comparison with efforts in the former Soviet Union, it is now becoming clear just how intractable the problem is. Among the great disasters brought upon China were Mao's economic policies which for 20 years concentrated all resources into defence. Despite the impression that China was in chaos during the Cultural Revolution, it pushed a massive effort to prepare the regime to survive an all-out nuclear Armageddon. Even before Mao split with Moscow, he told India's prime minister Jawarlal Nehru that he was willing to lose millions to emerge victorious against the imperialist powers: 'The atom bomb is nothing to be afraid of. China has many people. They cannot be bombed out of existence. The deaths of 10 or 20 million is nothing to be afraid of,' he said. Soon after the Sino-Soviet split, Mao began preparing not only to resist the United States but also an invasion by his fellow communists. 'Should the Russians launch a nuclear attack and destroy every Chinese city, there would still be over a 100 million Chinese to carry on,' Mao said. So, starting in the early 1960s, about half of China's capital investment went into building what was called a Third Front. The first line meant the defences along the coast facing Taiwanese and American forces, the second line referred to industrial plants and camps in Manchuria facing the Soviet Union. To ensure the party and military machine could survive an invasion, Mao ordered the relocation of factories, technicians and workers into the interior, especially the mountainous provinces of Sichuan and Guizhou - the third line, or front. 'The intention was one strategic relocation but in fact it was a huge expense; estimates are that over 50 per cent of Chinese national investment went to the front,' Dr Frankenstein and fellow academic Bates Gill wrote in an earlier paper. 'But the need for roads, rail lines, tunnels, absorbed 80 per cent of the available funds.' The Third Front was an undertaking of immensity and megalomania with few parallels in history. Some 29,000 factories were built or moved from coastal areas at a cost of some 200 billion yuan (about HK$186 billion today). These enterprises comprised 75 per cent of the nuclear industry, 60 per cent of the domestic electronics industry and half the armaments and aerospace industries. In Guizhou province alone, defence factories employed 700,000 workers, some labouring in munitions factories which were built inside the hollowed-out limestone Karst mountains. The war preparations included putting the urban population to work, building gigantic underground nuclear shelters to protect the party elite. In Beijing tourist guides still take visitors to a counter in a textile shop where a trap door opens to a subterranean world. Down a long escalator, visitors find a dank network of tunnels with shops, restaurants, cinemas and underground hostels with 40,000 beds. Wuhan has the largest covering 57,000 square metres, Shenyang's underground city extends over 45,000 square metres, and they also exist in Guangzhou, Chengdu, Tianjin and other cities. Outside Beijing, a mountainside was excavated to enable planes to shelter and take off unseen by any enemy. Hundreds of tanks were also hidden in caves found down narrow valleys in the Western hills. Even after Mao died, the building of such colossal projects, which numbered nearly 2,000 in all, continued well into the 1980s. Each province also had to build its own 'small third front' to ensure local forces could feed, clothe and arm themselves in case of an invasion. Since the early 1980s, about 800 of these plants have been re-relocated back to the coast or to various industrial zones. Of the rest, up to 90 per cent are thought to be so bankrupt they cannot pay workers and pensioners. Last year tens of thousands of unpaid workers went on the rampage in Third Front cities like Nanchong and Mianyang in Sichuan province. Yet the state has continued pouring extra funds into conversion, earmarking 20 billion yuan in 1980 and 50 billion yuan in 1995. At first the burden of defence conversion was eased by exports to the Middle East but, after the Iran-Iraq war ended, Chinese arms exports dropped to just US$600 million in 1995 from the 1988 peak of US$3 billion. In the 1990s, China's unreliable and low technology weapons were outclassed by the bargains which Russia made available. China boasts about the success of its conversion, with 80 per cent of its military-industrial complex making civilian products, leading the CIA to report that PLA Inc's annual profits reached US$5 billion by the end of 1993. The reverse is true. Most factories have sunk deeper and deeper in debt and even Chinese state banks are refusing to provide fresh loans. 'The few successes are vastly outnumbered by the problems and the potential bankruptcies,' said another study published in China Quarterly, an academic journal. 'Firms make what seems to be selling, without any real attempt to understand market forces.' The successful conversions came early on. Changhong Machinery plant in the Sichuan mountains used to make radar equipment before Japan's National Corporation helped it make television sets in the early 1980s, turning it into China's biggest consumer electronics firm. Potential European and American investors, especially cars and vehicle-part manufacturers, are now being asked to invest in other debt-laden factories stuck at the end of remote valleys. Generally, US companies have entered last but Asimco, Delphi Automotive Systems, Caterpillar, Borg-Warner and many others are now in China. Some hope former defence factories can be picked up for a song and turned around to make low-price parts, either for the growing domestic market or exports. Under the new reforms Beijing is divesting itself of responsibility for the loss-making SOEs. Local leaders may now be forced to privatise them, just as the PLA's inventory of redundant tanks and planes must sooner or later become scrap. Mao's military empire, built to fight a war which never happened, is about to dissolve.