Client Advisory

China’s Growing Civilian Defense Industry: Compliance Risks for Investors

Stroz Friedberg is a specialized risk management firm built to help clients solve the complex challenges prevalent in today’s digital, connected, and regulated business world

by Richard Ip
June 2017

In 2017, the Chinese government has accelerated the integration of its military and civilian sectors, which included expanding the latter’s participation in the defense industry. In January, the Central Commission for Integrated Military and Civilian Development was created to steer the program, with President Xi Jinping as chairman. In March, President Xi particularly stressed the importance of the integration program during a meeting of the National People’s Congress, the country’s legislative body.

  • This top-level support underlines China’s growing desire to build a US-style defense industry with close cooperation between private companies and the state.  In particular, China seeks to expand the private sector’s role in developing and manufacturing military equipment. The stated goal is to make China’s defense industry more efficient and cost-effective.
  • Increased private sector involvement in China’s defense sector will raise corruption concerns. Corrupt practices seem ubiquitous in business dealings between the Chinese military and the private sector. For example, since the nation-wide anti-graft campaign began in 2012, the Chinese government has prosecuted numerous senior military leaders for corruption, including accusations of bribery in military procurement. To avoid being swept up in real or perceived misdeeds, foreign companies should be aware of US restrictions on exports with both commercial and military applications (dual-use items) to China, along with similar regulations imposed by the EU and other authorities.
  • Foreign investors should also consider whether their industries are of interest to China’s military and screen for business relations with the military when performing due diligence on local counterparties. Sectors in China most exposed to military industries include: telecommunications, navigation and radar, information systems, electronics, internet security, aviation and ship-building. Some companies also employ senior management leaders with military backgrounds. A notable example is Huawei, the Chinese telecommunications giant, whose founder is a former military engineer; US Congress has investigated the company for alleged links to China’s security apparatus.

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