Chinese Defence Market - Is It Really Worth It?

In early March the government of the People's Republic of China revealed its 2005 draft defence budget, the size and growth path of which, with gradually growing focus on the strategic military situation in Northern Asia, is of increasing interest to many more parties. This has become increasingly acute with the growing argument over the possible lifting of the European Union's (EU) arms embargo on China. Which brings us to the nub of the question: is the Chinese defence market really so worthwhile that the EU should risk incurring Washington's wrath?

TABLE ONE: Chinese Defence Budget Data

	Yen Billion	USD Billion
2000	121	14.61
2001	141	17
2002	166	20
2003	?	?
2004	200	24
2005	248	30

As with many financial figures, there is a dispute over whether the released data is the true data. Washington insists that the actual Chinese defence budget is substantially higher than the published one. Depending on which set of US data that one chooses, estimates put the real defence budget somewhere between 50 and 150 per cent higher than the published budget. Beijing, for sure, has been quick to point out that it spends far less than the USA and less than Japan, so there should be no concern.

Even if the overall figure were to be 50-100 per cent higher, then China would be spending between 75-100 per cent of the UK budget level – and this for armed forces measured in millions rather than hundreds of thousands!

But the absolute highest end estimates come from Washington DC where the State Department's World Military Expenditure report puts Chinese spending at some $88-billion in 1999 – and at least the report has the honesty to say that this is very much an estimate! But it is possible to look at the rate of change – up by 12.6 per cent from 2004 to 2005, and rises of over 15 per cent year-on-year in previous years – and see that there ought to be an immense market.

Red Market

But this still doesn't automatically add up to a serious market for European exporters – far from it. The reason is simple. Beijing has a good source for the overwhelming bulk of its defence equipment in the form of Russia and parts of the former Soviet Union. Just look at the major purchases that China has made over the past five-plus years. Su-27/30, Sovremennyy destroyers, Kilo SSKs, supersonic anti-ship missiles, powerful AAMs, advanced "Double Digit" SAMs. Now try to think of a significant non-Russian system.

Anything spring to mind at all? There is no evidence that China is looking to the EU for purchases of platforms or systems at all (see accompanying article). And there is equally little evidence that this will change over the next few years – even in the foreseeable future.

Lots To Lose - Part I

And while looking at what – or not – can be gained from the Chinese defence market, has anyone in Europe thought about the downside of lifting the embargo?

TABLE TWO: Arms Exports To Selected Asian Countries (USD billions)

China	1996	1500
	1997	490
	1998	600
	1999	675
	1994-96	2.4
	1998-99	1.8
Singapore	Average 1996-2001	0.75 - 1
	Deliveries 1996-99	3.3
	Deliveries 2000-03	6.9

Note: It shouldn't come as a surprise that even US figures from the same department, as with those for Chinese arms imports, do not tally!

The table shows that China has hardly been a massive importer of defence equipment – and it has to be assumed that most of what has been bought in is of Russian origin. Some may argue that this is partly due to the arms embargo: Beijing would wish to buy more from places such as the EU but has been unable to do so, or so the argument goes. But this is an amazing assumption. And it certainly presumes that Beijing would automatically look to Europe for any additional needs.

And the downside? Well, how would Singapore react to major sales of potentially sophisticated equipment to a longterm regional rival (think of island groups such as the Spratleys or Paracels)? The table makes clear that, despite having a defence budget about one tenth the size of China's, Singapore imports considerably more.

And even with a policy of producing more in Singapore, a major fall-off in Singaporean imports over the next decade or so would be foolish. Add in Taiwan, Indonesia and Japan, and a lifting of the EU arms embargo could dent or even ruin chances of market access for defence and aerospace products in those countries. By the way, for those who missed it, in March Japan formally announced that it had a firm position on Taiwan that is against military action hostile to that state. So "supporting" Beijing against Taiwan in military matters could well have a dangerously adverse impact on diplomatic and trade relations with Japan.

Lots To Lose - Part II

There are two EU member states standing to lose much from a growing row with the USA over the China arms embargo issue – the UK and Italy. It is these two players who have fought strongly over technology transfer issues for defence in general and projects such as the Joint Strike Fighter in particular. The UK has tried to show that it can be in both camps, as partly shown by a government answer to a parliamentary question about lifting the embargo.

"The Government have [sic] discussed with the United States Administration the background to the EU's deliberations on the embargo on arms exports to China. We have emphasised that any decision to lift the embargo would be made only in the context of a continuing commitment by member states strictly to control the export of defencerelated items to China. This is consistent with the view of the European Council meeting in December 2004 that the result of any decision to lift the embargo should not be an increase in arms exports to China in either quantitative or qualitative terms."

This reads like an attempt to say that even if the embargo is lifted then nothing will change, and that the USA has nothing to fear. BAES has stated strongly that it has no intention of selling to China, is even hostile to the move, and is keen to do practically anything to maintain its position in the US market. But whether legislators will notice the nuances here is open to doubt. From the overwhelming nature of votes in Congress so far, it seems that US legislators have made up their minds that they view this issue as one of "Europe versus the USA" – so no nuance here.

Whether Italy has seen the same signs and will try to backtrack from a common EU position is yet to be seen. Defence Analysis believes that there is little vision in Rome with regard to this problem. And perhaps in the aftermath of the killing of an Italian secret service agent involved in a hostage rescue, few Italians are minded to be conciliatory to the USA.

It's Not Defence, Stupid!

There is an area that few have considered with regard to the embargo. As far as the keenest exponent of the lifting – France – is concerned, it has nothing to do with the selling defence systems to Beijing. Instead, removal of the embargo is actually more symbolic of a willingness to show respect for China, and that there is a great volonte to do more trade with it in the broadest sense. It is not a question of selling Rafales, submarines or Leclerc MBTs to China from the Parisian viewpoint.

Rather, it is a wish to be a serious player and selling in the world's fastest growing economy, one that stands a good chance in the next decade or so of being the biggest. Think trains, telephones, power stations or bridges rather than defence equipment. The closest that this vision would come to thinking about defence would be with regard to Airbus sales and satellites – and this latter area is one that seems to scare Washington, especially with regard to secure communications and surveillance.

Now, one might take this a stage further and decide that Paris has thought that the chances of major French-backed defence deals in the Asian area now look so slim, that it might as well give up and so will not suffer economically in the end. But to return to the main point. If France can get an inside line in all trade with China, who really cares about the odd billion or so euro defence deal elsewhere?

The Worst Argument

A line that emerges from a myriad of EU sources when the arms embargo lifting is discussed draws an immediate comparison. Israel seems permitted by Washington to sell to Beijing, so why can't the EU? Further, on occasions when this matter is raised the line that comes back from Washington is that at least Washington knows what Tel Aviv has sold to China and so can keep track of what impact this has on Chinese military capabilities.

However, this "explanation" is remarkably close to comments by French Defence Minister, Michele Alliot-Marie, when she said that as Beijing will get most of the military capabilities it desires over the next five or so years, then the EU may as well be in a position to sell them anyway, while retaining that particular knowledge. However, regardless of the rights or wrongs of whether Israel has had a more-or-less free hand in selling to China, anyone who doubts how agitated the USA is over this issue should get disabused ASAP. The USA has serious security concerns, not just in the long term, and is less than happy with the idea of someone else making these worse.

• UK Defence Budget
• Future Lynx Announcement
• UK Helicopter Procurement Option
• Franco-Italian FREMM Frigate Programme
• Italian Defence Budget
• Gulf Defence Market
• UK Watchkeeper Programme
• BAES Buy-Out Of UDI
• Chinese Defence Procurement Options
• Defence Industry News
• Defence Diversity

REF XQQDA XQQPC XQQAR XQQLD XQQSA XQQTY