China has mobilised at least $55.6bn to fund private sector companies that develop technology with potential military applications, according to Financial Times calculations based on public documents and state media announcements.  “Civil Military Fusion”, or the use of private companies to help develop China’s defence sector, was a key theme at last week’s Zhuhai Air Show, where exhibitors were keen to stress how their products fitted into the national strategy.  As part of this effort, state defence companies and provincial governments have pooled money into what are in effect state-backed venture capital funds, designed to guide the private sector into helping to modernise the People’s Liberation Army.

Since 2016, local governments and state-owned companies have pooled capital to create at least 14 such funds to finance private companies whose technology can have defence applications, according to state media announcements. One of the largest, the Rmb200bn ($28.75bn) Foshan Civil-Military Innovative Industries Fund, was launched in September 2017 with capital from China Energy Engineering Group, an energy conglomerate, and the municipal government for Foshan municipality in southern Guangdong province. In recent years, officials have broken state monopolies over critical sectors by allowing private companies to participate in designing, manufacturing, and operating everything from telecoms to rockets.

While traditional state-owned players such as the weaponry group Norinco and aerospace company AVIC still head China’s largest defence projects, the regulatory relaxation has spurred private entrepreneurs to related sectors such as secure communications, light arms and unmanned vehicles.

The private sector has helped state companies outsource the development of key projects, often with an eye on selling to other countries.  For example, Guangdong Hongda, once a metals and mining company, sprouted a subsidiary in 2011that produces short-range missiles and other explosives that can be mounted under drones and manned aircraft.

In 2015, Maipu was acquired by China Electronics Corporation, a major state-owned telecoms hardware provider. Phytium, a wholly owned CEC semiconductor manufacturing subsidiary, supplies Maipu with all of its computer chips so it no longer needs to rely on foreign chips. That has enabled Maipu to meet growing demand as Chinese defence clients increasingly demand domestic components for security reasons.

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