People's Army sets up shop to pay its way: From face creams to civil nuclear technology, China's military has embraced business in a big way, writes Teresa Poole from Hong Kong

HE HAD beautiful skin, a fine advertisement for the small jars of Chinese face cream ('guaranteed to make anyone more lovely') that he was selling from a table by the main street of Zhaoqing, a town in China's Guangdong province. But his full People's Liberation Army (PLA) uniform seemed rather incongruous.

Face cream is not the most obvious sort of commercial venture for the army, but it is a good indication that there is not much these days that the PLA is not involved in. Everything from sewing machines, cameras and hair tonic to civil nuclear technology, medical equipment and satellite-launching is on offer from the military. And those sewing machine sales are helping to pay for an ambitious army modernisation programme.

According to David Shambaugh, of London's School of Oriental and African Studies: 'The military has been told, like every other institution in China, to pay its own way and they have made good use of their comparative advantages.'

For instance, China North Industries (Norinco), the huge state arms company, produces two-thirds of the country's motorcycles and is the main manufacturer of heavy-duty trucks.

The shift by the PLA from military to civilian production began in 1979 when Deng Xiaoping's economic reforms and open-door policy took hold, accompanied by huge cuts in military spending. Between 1979 and 1989, defence spending fell by about a quarter in real terms and armaments factories were told to adopt a policy of 'walking on two legs', converting some production to civilian items in order to cushion the sharp drop in military orders and to save jobs. Military industries were urged to 'look for rice to be put in the pot' - to search out business opportunites.

The impact on the PLA's factories has been huge. In 1979 only about 10 per cent of their output was civilian goods, the rest being armaments. Nowadays the civilian proportion is claimed to be 66 per cent, with a target of 80 per cent by the end of the decade. Between 1991 and 1995 the state has earmarked 6bn yuan (pounds 728m) for converting more military enterprises to civilian production.

All this has a direct impact on the true level of defence expenditure in China. In the three years since the June 1989 Tiananmen Square shootings defence cuts have been reversed and there has been an annual real increase of up to 15 per cent. But China still boasts that, in comparison with the United States and the former Soviet Union, its defence budget is only 2 per cent of GNP, about 37 billion yuan in 1992.

'But you have to add to that the proceeds from the civilian goods-producing defence industries, which is all off-budget revenue, plus the arms exports. The total military operating budget is thus considerably greater,' said Mr Shambaugh. Analysts estimate the real budget may be up to two and a half times the announced figure.

The military is forever being exhorted to expand these 'off-budget' activities. Last week, for instance, the State Commission of Science, Technology and Industry for National Defence held a ceremony in Peking to honour the country's 10 best military entrepreneurs.

Managers of PLA factories were told to 'liberate their minds' to produce civilian products for exports and to promote technology transfer through joint ventures with foreign companies.

These formerly closely guarded and secretive units, including the nuclear industry, are now calling out for foreign investment. Collaboration between the PLA and foreign companies has so far concentrated on the least sensitive areas, such as tourism and consumer goods. One Hong Kong Chinese businessman who is involved in a joint-venture hotel project with the PLA said: 'They are the best partners. Think about it. In every city centre you have the hospitals and the city halls that cannot be moved. But the military headquarters can be relocated, freeing up prime central sites perfect for hotels.' The PLA also has the clout to ensure the speedy provision of services, such as telecommunications and electricity.

There is little the PLA is not interested in. Last weekend an army joint venture with a Belgium group to make jewellery was announced in Peking. Business ventures take place at all levels. China Xinxing Corp, one of the biggest PLA exporters of military supplies, now has 17 joint ventures, from steel to property. It also has a joint venture with a Japanese company which last year sold 200,000 bottles of Lily Hair Tonic, developed by the Chinese Academy of Military Sciences.

At a local level, PLA commanders have been told to make use of the new economic freedoms and are looking for any way of making money - like selling face cream.

Parts of the military-industrial complex remain a severe drain on central funds, however. In the west and south-west of China are the expensive white elephants of Mao Tse-tung's 'Third Front', a mammoth project in the Sixties to build huge numbers of army industrial plants in remote, inland, mountainous areas in case of military attack. Far from the booming cities, fitted with antiquated equipment and without good transport links, thousands of these factories represent the worst of China's loss-making state enterprises.

One-third of the military factories still make losses. Peking does not want to close those that could be converted back to military use in times of war; conversion of plants is very expensive, and even afterwards many enterprises have been unable to sell what they have produced.

Last week, Zou Jiahua, a vice-premier, told military plants to help promote the country's economic development. Other countries in the region, alarmed by China's recent claims to the Spratly and Senkaku islands, take a more wary view of any boost to China's military budget. They are increasingly concerned at China's shift towards a more aggressive defence posture. And selling hair tonic is all part of the modernisation of the PLA into a leaner, better-equipped army that could threaten China's neighbours.

(Photograph omitted)