China: Commission of Science, Technology, and Industry for National Defense (COSTIND) and Defense Industries

China: Commission of Science, Technology, and Industry for National Defense (COSTIND) and Defense Industries

96-889 F
CRS Report for Congress
Received through the CRS Web
China: Commission of Science, Technology, and
Industry for National Defense (COSTIND)
and Defense Industries
Updated December 3, 1997
Shirley A. Kan
Analyst in Foreign Affairs
Foreign Affairs and National Defense Division
Congressional Research Service ˜ The Library of Congress

China: Commission of Science, Technology, and Industry for
National Defense (COSTIND) and Defense Industries
Summary
Congressional interest in the Chinese military, or People’s Liberation Army
(PLA), has increased as a result of the March 1996 tensions in the Taiwan Strait,
continuing allegations of Chinese proliferation of technology useful in weapons of
mass destruction, and reports that some Chinese defense-related corporations have
circumvented U.S. export controls to acquire dual-use technology. The Commission
of Science, Technology, and Industry for National Defense (COSTIND), an
important, high-level PLA organization, plays a role in China’s weapon programs,
sales of civilian goods, acquisition of military technology, and arms sales and export
controls. The purpose of this CRS Report is to examine the origins and command,
roles, and influence of COSTIND.
COSTIND was founded in July 1982 through the consolidation of multiple
organizations concerned with weapon programs. COSTIND answers to two superior
organizations: the State Council (the highest governmental organ) and the Central
Military Commission (CMC) of the Chinese Communist Party (the highest command
of the military). However, COSTIND belongs to the People’s Liberation Army
(PLA) organizational system commanded by the CMC. COSTIND’s new director
is Lieutenant General Cao Gangchuan, who has the bureaucratic rank of a minister.
Under COSTIND’s centralized coordination, China’s military facilities and
defense industries were to be made more efficient and effective. COSTIND is in
charge of military research and development, testing, and production in the military
and in the defense industries. China’s defense industries comprise six state-owned
sectors: electronics, nuclear, aviation, space/missiles, ordnance, and shipbuilding.
There are now large state-owned corporations in these defense-industrial sectors, and
they engage in both military and civilian business.
Over time, COSTIND has acquired further — perhaps, competing — roles as
China’s interests evolved. In addition to overseeing weapon development and
production, COSTIND has also facilitated civilian commercial deals, increased
weapon and technology acquisition from foreign countries, promoted foreign arms
sales, and taken on export control and nonproliferation roles.
COSTIND has exercised considerable influence. Such influence includes
political influence through personal access to top leaders, foreign policy influence
through some control over foreign arms sales, military influence over weapon
modernization, and economic influence through responsibility for the defense
industries, which are part of the debilitated state-owned sector. Recently, however,
there has been a debate about whether CONSTIND’s influence has weakened since
the 1980s. China’s economic reforms, leadership changes in COSTIND, and
continuing systemic problems in the defense sector may have eroded COSTIND’s
influence. The future of COSTIND will be tied to whether the current director can
resolve the problems in equipping the PLA with modern weapons and continuing to
restructure China’s immense defense-industrial complex.

NOTE
This CRS study was initiated at the request of the
Committee on National Security of the House of Representatives
and is reproduced for general congressional use
with permission of the Committee.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Origins and Command . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Defense-related Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Defense Policy Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Diversification of Defense Industries: Integrating Military and Civilian
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Technology Acquisition and Intelligence Collection . . . . . . . . . . . . . . . . . . 6
Arms Export and Export Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

China: Commission of Science, Technology, and
Industry for National Defense (COSTIND)
and Defense Industries
Introduction
Congressional interest in the Chinese military, or People’s Liberation Army
(PLA), has increased as a result of the March 1996 tensions in the Taiwan Strait
1
,
continuing allegations of Chinese proliferation of technology useful in weapons of
mass destruction, and reports that some Chinese defense-related corporations have
circumvented U.S. export controls to acquire dual-use technology. The Commission
of Science, Technology, and Industry for National Defense (COSTIND), an
important, high-level PLA organization, plays a role in China’s weapon programs,
sales of civilian goods, acquisition of military technology, and arms sales and export
controls. This report describes the origins and command, roles, and influence of
COSTIND in the PLA and the defense industries. In addition, two subordinate
organizations of COSTIND will be discussed: the China Association for Peaceful
Use of Military Industrial Technology (CAPUMIT) and the China Defense Science
and Technology Information Center (CDSTIC).
Origins and Command
COSTIND was founded in July 1982 through the consolidation of multiple
organizations concerned with defense research and development, and production.
The National Defense Industry Office, the National Defense Science and Technology
Commission, and the Office of the Science, Technology, and Equipment Committee
of the Central Military Commission (CMC) were merged to form COSTIND.
2
COSTIND answers to two superior organizations: the State Council (the highest
government organ) and the CMC of the Chinese Communist Party (the highest
command of the military). However, COSTIND belongs to the PLA organizational
3
1 The People’s Liberation Army is a name which encompasses all of China’s military.
2 Lewis, John Wilson and Xue Litai. China’s Strategic Seapower. Stanford, Stanford
University Press, 1994. P. 87.
3 Blasko, Dennis J., Raymond F. Lawlor, John F. Corbett, Mark Stokes, and
Christopher Kapellas. China’s Defense-Industrial Trading Organizations: Reference Aid.
(continued...)

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system commanded by the CMC. COSTIND’s director has the rank of a minister.
4
Almost all high-level COSTIND officials have military rank. The current director
is Lieutenant General Cao Gangchuan, who was appointed in December 1996. Four
of the five deputy directors are Lieutenant Generals: Shen Rongjun, Xie Guang, Huai
Guomo, and Shen Chunnian.
Defense-related Roles
COSTIND plays important roles in China’s defense modernization. Those roles
involve: implementation of China’s defense policy concerning weapon research and
development, and production; diversification of defense industries to integrate
military and civilian production; technology acquisition and intelligence collection;
and arms export and export control.
Defense Policy Implementation
COSTIND has been called one of the “four large general headquarters” of the
PLA.5 COSTIND is an influential player in carrying out Chinese defense policy,
including weapon programs and resource allocations. This policy is said to be
formulated in piecemeal fashion by the PLA’s General Staff Department (for military
operations and plans), the National Defense University (for background and doctrinal
analysis), and COSTIND (for research and planning on weapons technology and
systems). In addition, COSTIND controls a vast amount of personnel, units, and
bases. For example, COSTIND Director, General Ding Henggao, wrote that t
6
o
further the implementation of the “863 Plan” (a high-technology research and
development plan), COSTIND, over ten years, organized 5,600 scientists and
technicians from nine departments in 16 provinces and cities to concentrate their
research in the aerospace and laser technology fields. Also, many local-level offices
7
concerned with defense industries throughout China are part of COSTIND’s system
or network.
One study of the defense complex finds that COSTIND controls a large budget
to fund defense research, development, and production. While there is a range of
different estimates, this study speculates that China’s defense-industrial complex may
3(...continued)
Washington, Defense Intelligence Agency, October 1995.
4 China Today: Defense Science and Technology. Beijing, National Defense Industry
Press, 1993. P. 121.
5 The first three are the General Staff Department, General Political Department, and
General Logistics Department.
6 Lewis, John W., Hua Di, and Xue Litai. Beijing’s Defense Establishment.
International Security, Spring 1991. P. 88-90.
7 Ding Henggao. Advancing Toward the World’s Advanced Ranks — Speech
Delivered at a Discussion Held by People’s Daily on March 28, 1996, to Review the “863
Plan” Over the Past Ten Years. People’s Daily, April 3, 1996. Translated in FBIS-CHI.

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include as many as 50,000 factories, research academies, and other facilities, with
possibly five million personnel. Whole towns, some secret, are part of this immense
complex.8 Another study found that COSTIND has its own authority to carry out
coordination among weapons-related organizations. It exercises both direct and
indirect influence. COSTIND controls satellite launch sites and all aspects of nuclear
weapons development. It also derives influence from allocating funds for weapons
procurement and development, and setting priorities.9 A Rand study concludes that
COSTIND is the PLA’s fourth most influential organizational player in devising and
supervising defense policy.10
According to a Chinese study on the defense industries published by a
COSTIND-affiliated press, COSTIND “is the leading body by which the CMC
conducts centralized control of the defense science and technology of the whole PLA.
It is also the leading organization under the State Council to conduct unified
management of defense science, technology, and industry. . .” Under the Stat
11
e
Council, China’s defense-industrial complex has consisted of six sectors: electronics,
nuclear, aviation, space/missiles, ordnance, and shipbuilding. Five of the six sectors
were restructured from ministries to state corporations: China National Nuclear
Corporation, Aviation Industries Corporation of China, China Aerospace
Corporation, China North Industries Group (NORINCO), and China State
Shipbuilding Corporation. Meanwhile, the Ministry of Electronics Industry is also
known as the China Electronics Industry Corporation.12
Thus, COSTIND sets policy and planning for weapons-related research and
development in military facilities as well as in defense-industrial facilities. For
example, after the Persian Gulf War, COSTIND Deputy Director Shen Rongjun
called for China’s weapon development programs to focus on high-technology,
especially electronics and military applications of satellites.13
The Chinese study on the defense industries also described the following tasks
assigned to COSTIND:
! study trends in development of weapon systems and equipment;
8 Cheung, Tai Ming. China’s Defense-Industrial Complex in the 1990s: The Long
March to Modernization and Commercialization. 1993.
9 Ostrov, Benjamin C. Conquering Resources: The Growth and Decline of the PLA’s
Science and Technology Commission for National Defense. New York, M.E. Sharpe, Inc.,
1991. P. 66-68.
10 The most important, in order, are the General Staff Department, PLA Navy, PLA Air
Force, and COSTIND. Swaine, Michael D. The Role of the Chinese Military in National
Security Policymaking. Santa Monica, Rand Corporation, 1996. P. 46.
11 China Today. P. 121-122.
12 Blasko, et al.
13 Wu Shuangjing and Wang Daitong. National Defense Science, Technology, and
Industry Commission Vice Chairman Shen Rongjun Says Use High Technology to Spur
Weapons Development. Science and Technology Daily, April 9, 1991. Translated in JPRS-
CST, October 21, 1991.

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! organize efforts to modify weapons and to conduct tactical and technical
evaluations, research, design, trial production, testing, certification, and serial
production of new types of weapon systems and equipment;
! direct the work of its subordinate test bases and directly affiliated colleges and
institutions;
! guide testing and construction at air force and naval bases;
! control the technical and professional work in science and technology of
various services and arms, the General Staff Department, the Second Artillery
Force, and the offices of defense science, technology, and industry in the
provinces, municipalities and autonomous regions.14
The Second Artillery is the PLA’s strategic missile force. COSTIND’s control
and coordination over the nuclear and space industries appear to give COSTIND a
close relationship with the Second Artillery. COSTIND and the CMC direct the
Chinese Academy of Engineering Physics, which runs China’s nuclear weapon
laboratories.
15 According to an expert on China’s defense industries, COSTIND runs
China’s space/missile program and operates front companies, such as the China
Satellite Launch Agents, Ltd.1 Another organization, China Satellite Launching and
6
Tracking Control, is also subordinate to COSTIND.17
In short, COSTIND carries out its part of defense policy by coordinating and
controlling research and development, production, and acquisition of advanced
technology and weapons by the many organizations involved. Organizations may be
military services or commands, bases, ministries, factories, research academies,
universities, or corporations. Centralized coordination is also needed because the
various organizations are in two hierarchical systems: the military and the state-
owned, defense industries.
Diversification of Defense Industries: Integrating Military and
Civilian Production
A study on the rise and fall of the National Defense Science and Technology
Commission (one of COSTIND’s predecessors) explained that the creation of
COSTIND was intended to eliminate the past conflicts between the military research
and development sector and the production sector by combining them in one
organization. COSTIND was initially formed to improve efficiency and effectiveness
of military research and development, and production efforts. COSTIND’s role,
14 China Today. P. 121-122.
15 Norris, Robert S., Andrew S. Burrows, and Richard W. Fieldhouse. Nuclear
Weapons Databook: British, French, and Chinese Nuclear Weapons. Boulder, Westview
Press, 1994. P. 342.
16 Cheung, Tai Ming. PLA, Inc. Far Eastern Economic Review, October, 14, 1993.
17 Chen, Kathy. Soldiers of Fortune: Chinese Army Fashions Major Role for Itself as
a Business Empire. Wall Street Journal, May 24, 1994, p. 1.

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however, has been broadened to closely integrate the civilian and military sectors of
research and development, and production.18
Deng Xiaoping, the architect of China’s reforms, laid down the overall policy
under which COSTIND carries out its mission of developing defense and civilian
production. In January 1982, Deng articulated a 16-character policy: “combine
military with civilian, peace with wartime, military take priority, nurture military
with civilian.” This policy is referred to as the “Military-Civilian Combination
Policy.”19
In practice, although Deng intended military modernization to continue to be
treated with priority, a decline in military procurement and budgets and a drive
toward commercialization in China have made civilian profit-making a competing
goal. PLA and defense-industrial enterprises have been exhorted to diversify
production to include profitable civilian or dual-use (civilian or military) goods. An
20
official estimate says that civilian products now account for roughly 80% of the total
output value in the defense industries. Most likely, much of this commercial value
21
has been added by the few successful defense-related industries: electronics,
aerospace (including satellite launches for Chinese organizations and foreign
businesses), aviation, and shipbuilding.
Even with the policy of combining military and civilian production, many of
China’s defense industries are in financial trouble. According to an OECD study,
only about 40% of defense-industrial enterprises earn regular profits. Another 40%
make occasional profits, but are not necessarily profitable. The remaining 20% have
not developed civilian operations and are a drain on government revenues.22
Nonetheless, the diversification drive toward civilian production is intended to
serve the defense industries as well as the national economy. At a national
conference on defense science, technology, and industry into the 21st century,
attendees agreed on three recommendations: (1) concentrate on the development of
high- and new-technology industries; (2) develop technologies that serve both
military and civilian objectives; and (3) actively apply civilian technology (especially
electronic, information, and manufacturing technology) to military research and
production.23
18 Ostrov. P. 66.
19 China Today. P. 159.
2 0 China’s defense-industrial restructuring is sometimes referred to as “defense
conversion,” although the production lines for military products may not be converted.
21 Yin Tan. China Quickens Pace of Defense Production Conversion into Civilian
Production. Wen Wei Po (a Chinese-controlled newspaper in Hong Kong), April 16, 1996.
Translated in FBIS-TAC.
2 2 Berthelemy, Jean-Claude and Saadet Deger. Conversion of Military Industries in
China. Paris, Development Center of the Organization for Economic Cooperation and
Development (OECD), 1995. P. 53.
23 Liu Cheng and Wang Yufang. Drawing a Blueprint for Development in Defense
(continued...)

CRS-6
General Chi Haotian, a vice chairman of the CMC and China’s Minister of
Defense, wrote in April 1996 that “the military enterprises transferred to the
production of goods for civilian use must pay attention to retaining the capabilities
of producing military supplies.” General Chi also urged increased application of
military technology to civilian use as well as application of civilian technology to
military fields and the development of dual-use technology.24
Through the China Association for Peaceful Use of Military Industrial
Technology, or CAPUMIT, COSTIND promotes domestically and internationally its
public relations concerning civilian production. CAPUMIT also facilitates business
deals for China’s defense-related factories, research institutes, and other enterprises,
especially with foreign companies. In July 1993, CAPUMIT (together with a United
Nations organization) held a large exhibition in Hong Kong called the “1993 Hong
Kong Conference and Exhibition on International Cooperation To Promote
Conversion From Military to Civilian Industry.” Many Chinese defense enterprises
— including those in the ordnance, aerospace, electronics, shipbuilding, weapons,
and nuclear industries, as well as PLA corporations such as China Xinxing Group
(under the General Logistics Department) — promoted projects seeking foreign
investments.25
CAPUMIT’s publicity materials tout it as a civilian organization founded in
1986 to promote the peaceful use of military industrial technology. It operates under
the guidance of COSTIND, the State Planning Commission, and the State Science
and Technology Commission. Its members include enterprises and institutes in
China’s defense industry. Lieutenant General Huai Guomo, one of COSTIND’s
deputy directors, is an honorary chairman of CAPUMIT. The organization of
CAPUMIT, according to the materials, consists of a General Assembly at the top,
with a Council subordinate to the Assembly. Subordinate to the Council are four
organizations: General Office, Development and Exchange Department, Science and
Technology Development Department, and International Liaison Department.
Technology Acquisition and Intelligence Collection
Since the early 1980s, acquisition of advanced foreign technology to apply to
weapons production appears to have been an increasingly important objective of
COSTIND in carrying out defense policy. To further technology acquisition,
23(...continued)
Science and Technology — Sidelights on a National Conference for Directors of Offices for
Defense Science, Technology, and Industry. Liberation Army Daily, January 15, 1996.
Translated in FBIS-CHI.
24 Chi Haotian. Taking the Road of National Defense Modernization Which Conforms
to China’s National Conditions and Reflects the Characteristics of the Times — My
Understanding Acquired from the Study of Comrade Jiang Zemin’s Expositions on the
Relationship Between the Building of National Defense and Economic Development.
Seeking Truth, April 16, 1996. Translated in FBIS-CHI.
25 CAPUMIT. Projects for International Joint Ventures and Cooperation. 1993 Hong
Kong International Exhibition on Peaceful Use of Military Industrial Technology, July 5-11,
1993.

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beginning in 1980, the State Council and the CMC set up state corporations under
various defense-related offices, commissions, and ministries. COSTIND’s New Era
Corporation, for example, was established at this time. The corporations were
allowed to conduct import and export of civilian and military goods. The
compendium on China’s defense industries states that “on the basis of adhering to
self reliance, the defense industrial departments actively carried out international
technical exchanges and cooperation to import some advanced technology from a few
countries to provide better platforms for launching independent designs and upgrade
the modernization of military equipment.”26
The U.S. Defense Intelligence Agency (DIA) apprises that China’s defense
industrial organizations are “key to supporting the uniformed services and China’s
industrial base and to acquiring military and dual-use technology.” In addition to
New Era (Xinshidai) Corporation, other important defense trading corporations
directly under COSTIND’s control are Yuanwang (Group) Corporation and Galaxy
New Technology Corporation. Besides these corporations, two key supporting
organizations are CAPUMIT (already discussed) and CDSTIC. Yuanwan
27
g
Corporation reportedly created a company in California, called Technology Selection
Inc., to transfer U.S. technology to China.
28 Galaxy New Technology Corporation
set up a Sino-U.S. joint venture called Hua Mei Telecommunications to acquire
advanced telecommunications technology useful for China’s military.29
As part of its function in acquiring advanced technology with military
applications, COSTIND collects intelligence, both overtly and covertly. According
to a study of Chinese intelligence operations, COSTIND is one of China’s secondary
intelligence organizations; members of COSTIND have attempted to steal foreign,
especially American, technology for military applications. COSTIND technical
experts, principally posing as businesspeople working for the New Era Corporation,
travel overseas to collect information and identify what technology or weapons
systems are needed. They have reportedly tried to clandestinely acquire U.S.
technology which has not been approved for export. Another cover for COSTIND
personnel has been the Poly Technologies Corporation (also known as Baoli), which
is a corporation under the General Staff Department’s Equipment and Technology
Department.30
In addition, within COSTIND is an Intelligence Research Institute, established
on March 14, 1959 — before COSTIND’s genesis. The Intelligence Research
Institute sends its personnel to foreign countries as students or visiting fellows and
encourages them to participate in professional associations and academic activities.
26 China Today. P. 158.
27 Blasko, et al.
2 8 Greenberger, Robert S. Let’s Make a Deal: Chinese Find Bargains in Defense
Equipment as Firms Unload Assets. Wall Street Journal, October 21, 1996. P. 1.
29 Gilley, Bruce. Peace Dividend. Far Eastern Economic Review, January 11, 1996.
P. 14-16.
30 Eftimiades, Nicholas. Chinese Intelligence Operations. Annapolis, Naval Institute
Press, 1994. P. 104-107.

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This Intelligence Research Institute is also known in open and international fora as
the China Defense Science and Technology Information Center, or CDSTIC.
31
CDSTIC conducts defense-related research, and domestic and foreign
exchanges. For example, on October 26, 1995, CDSTIC held a seminar in China on
“military technical revolution” with participants from the Academy of Military
Sciences, National Defense University, armed services, and defense industries.32
CDSTIC also houses a Department of Arms Control and Disarmament Studies whose
experts are allowed to travel abroad, hold discussions with foreigners about arms
control and military issues, and publish articles.33 CDSTIC publishes a journal in
Hong Kong, called “Conmilit,” or “Contemporary Military Affairs” in Chinese.
Its promotional information says that CDSTIC was founded on March 14, 1959
and is an institute directly subordinate to COSTIND. CDSTIC specializes in research
on defense science and technology, and is staffed by hundreds of researchers and
technical experts covering a wide range of specialties. CDSTIC takes pride in having
China’s most advanced information processing facilities, including a computer
system backed by comprehensive databases. CDSTIC also houses a library with two
million technical papers and scientific journals.34
Arms Export and Export Control
Through supervision of its subordinate corporations and coordination of other
defense-related corporations, COSTIND plays a role in China’s foreign arms sales
and export control. For example, it was COSTIND which, on December 5, 1984,
approved the aerospace ministry’s plan to develop, produce, and export M-9 short-
range ballistic missiles. In theory, arms sales may be coordinated by COSTIND
35
,
the PLA’s General Staff Department, the Ministry of Foreign Affairs, and other
departments. In reality, the General Staff Department and COSTIND are believed
to have the final authority. Corporations might consult with the Foreign Ministry
over sensitive sales.36
COSTIND also participates in a formal structure for export controls, as China
has become sensitive to foreign concerns over proliferation of weapons of mass
31 Yuan Yaojun. Review and Prospects of the National Science and Technology
Intelligence Enterprise. (In Chinese) Forty Years of Defense Technology and Industry of
New China. Beijing, National Defense Industry Press, 1989. P. 514-516.
3 2 Cited in: Gill, Bates. China and the Revolution in Military Affairs: Assessing
Economic and Socio-Cultural Factors. U.S. Army War College, May 20, 1996.
3 3 For example: Liu Huaqiu. Evaluation and Analysis of China’s Nuclear Arms
Control Policy. Conmilit, November 11, 1995. Translated in FBIS-TAC, January 26, 1996.
34 China Defense: Research and Development. Beijing and Hong Kong, China Defense
Science and Technology Information Center and China Promotion Ltd., 1988.
35 Lewis, John Wilson and Hua Di. China’s Ballistic Missile Programs. International
Security, Fall 1992. P. 34-35.
36 Lewis, et al. Beijing’s Defense Establishment. P. 89, 95.

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destruction and has increased participation in arms control and nonproliferation
efforts. In November 1995, the State Council issued the first Chinese defense white
paper, which shed some light on China’s enigmatic export controls. In the section
on exercising “strict control” over military weapons and technology transfers, the
white paper stated that the State Council and the CMC set up the State
Administrative Committee on Military Products Trade (SACMPT) to exercise
“centralized control” over military exports. The primary members of this committee
are representatives of the Ministry of Foreign Affairs, General Staff Department,
COSTIND, the Ministry of Foreign Trade and Economic Cooperation, and other
departments.37
In September 1997, China issued new regulations to control nuclear exports (in
part to ameliorate U.S. concerns in considering the implementation of the 1985 U.S.-
China agreement on nuclear cooperation). The China Atomic Energy Agency
(CAEA) ,
38 COSTIND, and the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) are primarily responsible for implementation of the regulations.
COSTIND’s important role in strategic arms control policy partly derives from
its supervision of the Chinese Academy of Engineering Physics (which runs China’s
nuclear weapons laboratories) and the China National Nuclear Corporation (which
39
produces, stores, and controls all fissile materials).40
Influence
As can seen in the previous discussion, COSTIND has exercised considerable
influence. COSTIND has derived political influence from its director who is a high-
level military officer. Through the previous director, General Ding Henggao,
COSTIND also enjoyed access to the top leaders through his family connections.
Ding, director from 1985 to 1996, is the son-in-law of the late Marshal Nie
Rongzhen, who was an important leader of China’s defense industrial efforts. Ding’s
wife, Nie Li, was a Lieutenant General and a vice chairman of the Science and
Technology Committee of COSTIND until her retirement in 1994. Such nepotism
at COSTIND exemplified a widespread effort, beginning in the 1980s, by children
of top leaders (also referred to as “princelings”) to acquire lucrative and high-level
3 7 Information Office of the State Council of the People’s Republic of China. China:
Arms Control and Disarmament. November 1995.
3 8 CAEA is a part of the China National Nuclear Corporation (CNNC), which
represents China's nuclear industry. Jiang Xinxiong is the president of CNNC and the head
of CAEA.
3 9 CAEP (and its subordinate institutes), the Institute of Applied Physics and
Computational Mathematics, and the High Power Laser Laboratory in China are included
in the "Entity List" used by the Bureau of Export Administration of the U.S. Department of
Commerce. Entities on the list are foreign end users involved in weapon proliferation
activities, and exports to them require a license from the Bureau of Export Administration.
4 0 Frieman, Wendy. Chinese Arms Control Organizations: A Basic Primer.
Washington, SAIC Corporation, February 27, 1995. P. 7-8.

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positions. Ding’s connections provided COSTIND access to top leaders and
important political influence. In addition, the commission has economic influence
through its responsibility for the financial health of the immense defense-industrial
complex and role in facilitating civilian business. COSTIND has played in role in
defense policy as a ministry-level organization overseeing weapon modernization
programs and foreign technology acquisition. It even has some influence in China’s
foreign policy through its authority over arms sales and its increasing role in export
control.
However, there has been a recent debate about whether COSTIND’s influence,
while still considerable, is in decline. There are several factors that point to a
decrease in COSTIND’s authority since the early 1980s.
First, as part of the overall trends of commercialization and decentralization in
China, COSTIND’s control over the defense industries has weakened. DIA notes
that “a few of the larger defense production facilities and complexes have formed
their own corporations in recent years and apparently are seeking to operate
somewhat independently of national-level organizations.”41
Moreover, some analysts believe that the state corporations retain their profits
from civilian sales and are not required to submit such revenues to COSTIND. It is
uncertain what share of profits from military sales are returned to COSTIND for
defense research and development, and production. In any case, Chinese foreign
arms sales have dropped since the 1980s. It can also be assumed that enterprises tend
to under-report revenues to retain more of the profits and that different deals have
different profit-sharing arrangements. According to one study, the PLA is allowed
to keep part of the profits from arms sales, while COSTIND and the General Staff
Department are supposed to direct how those funds will be spent. The Ministry of
Finance is also supposed to receive part of the revenue to add to China’s foreign
exchange reserves. Then there are, of course, individual “sales commissions” for
China’s movers and shakers. In short, increasingly profitable and independen
42
t
defense-industrial corporations have recently relied less on COSTIND’s allocations.
Economic reforms have also initiated responsibility or contract systems in
China. COSTIND’s logistics system has likewise implemented a contract system in
research and development projects. The contract system aims to ensure that
timeliness and quality goals are met, while competition reduces the costs.
43
A
contract system has likely reduced COSTIND’s control over weapon programs.
Second, economic reforms and a drop in military procurement have resulted in
a decline in defense-industrial output as a share of the total industrial output of
China. One report estimates that state-owned enterprises now account for perhaps
41 Blasko, et al.
42 Lewis, et al. Beijing Defense Establishment. P. 103.
43 Fan Juwei and Su Kuoshan. Commission of Science, Technology, and Industry for
National Defense Provides Effective Support for Scientific Research in National Defense.
Liberation Army Daily, May 22, 1996. Translated in FBIS-CHI.

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half of China’s total industrial output. Among them, the defense-industrial sector
now accounts for about 12% of the gross output of all state-owned enterprises.44
Third, leadership changes have also affected COSTIND’s influence. Nie
Rongzhen died, and Nie Li has retired. General Ding Henggao was replaced in
December 1996 by Lieutenant General Cao Gangchuan. Ding’s retirement removed
a long-time power-holder whose patrons were leaders of the revolutionary generation.
COSTIND, however, may find a powerful patron in General Chi Haotian, who is
considered to have an important relationship to COSTIND. In October 1995
45
,
China’s president and CMC chairman, Jiang Zemin, promoted Chi (along with Zhang
Wannian) to CMC vice chairman in preparation for the retirements of the more
senior vice chairmen, Generals Liu Huaqing and Zhang Zhen.
Lieutenant General Cao's appointment surprised those who expected the
promotion of a deputy director from within COSTIND. Instead, the top leaders
transferred Cao from his position in the General Staff Department as a Deputy Chief
of General Staff of the PLA. Cao's reassignment likely reflects the top leadership's
new priority on meeting the PLA's requirements for modern equipment, especially
from Russian, Israeli, and other foreign sources. Cao can be expected to advocate the
immediate needs of the PLA for modern weapons, perhaps over the needs of the
defense industries to continue research and development of indigenous designs.
Another indicator of Cao's priorities and China's turn to greater use of foreign
military technology is the decision, announced in July 1997, to open the defense
industries to foreign investors. COSTIND and the Equipment Department of the
PLA's General Staff Department made the decision, reported the China Daily.
COSTIND, the Equipment Department, and the Ministry of Electronics Industry plan
to hold in 1998 the first China International Defense Electronics Exhibition to attract
U.S. and other foreign defense manufacturers to market in China.
Last but not least, COSTIND’s prestige may have declined over the last decade
as China’s defense industries continue to suffer systemic problems despite the
creation of COSTIND. Acquisitions of foreign weapon systems, such as the Russian
Su-27 fighter, indicate that indigenous defense programs are not satisfying the PLA's
immediate needs. According to experts, Chinese military research and development,
production, and deployment still suffer a lack of central oversight and
“interconnectedness.” The defense industries are still fragmented and said to be
“almost feudal.”46
Conclusion
44 Berthelemy and Deger. P. 44.
4 5 Swaine, Michael D. The Military and Political Succession in China. Rand
Corporation, 1992. P. 71-72.
4 6 Bitzinger, Richard A. and Bates Gill. Gearing Up for High-Tech Warfare?
Washington, Center for Strategic and Budgetary Assessments, February 1996.

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Deng Xiaoping and other Chinese leaders formed COSTIND in 1982 with
ambitious aims. Under COSTIND’s centralized coordination, China’s defense
industries were to be made more efficient and effective. Over time, however,
COSTIND has taken on additional — sometimes, competing — roles as China’s
interests evolved. In addition to overseeing weapon development and production,
COSTIND has also facilitated civilian commercial deals, increased weapon and
technology acquisition from foreign countries, promoted foreign arms sales, and
taken on export control and nonproliferation roles. Due to the status and connections
of its leaders, vast resources, and the importance of its roles, COSTIND has exercised
considerable influence. At the same time, China’s economic reforms, changes in the
leadership, and continuing systemic problems in the defense sector may have
weakened COSTIND’s influence. The future of COSTIND will be tied to whether
the current director can resolve the problems in equipping the PLA with modern
weapons and continuing to restructure China’s immense defense-industrial complex.
This restructuring will also affect the fate of China’s entire, debilitated state-owned
sector.