China is speeding up the transformation of the structures and mechanisms of the defense industry enterprises, and is in the initial stage of establishing a new system of defense-related science, technology and industry that features a small core, extensive cooperation and a large military potential reserve among civilians. Structural contradictions in defense-related science, technology and industry have been gradually and fundamentally solved through strategic restructuring and the streamlining of the main body of the defense industry. China is steadily promoting the transformation of defense industry enterprises into joint-stock enterprises, actively exploring approaches to diversifying the structure of property rights, giving priority on helping qualified competitive enterprises to be reorganized and listed on the stock market, and encouraging specialization-oriented restructuring and the integration of the efforts of enterprises, universities and research institutes. Relevant laws and regulations have been improved to standardize and supervise the process of reorganizing the defense industry enterprises and getting them listed on the stock market.

Improving the Weaponry and Equipment Research and Production System

Establishing a sound licensing system for weaponry and equipment research and production. In accordance with the Implementation Measures for Weaponry and Equipment Research and Production Licensing promulgated in May 2005, the defense-related science, technology and industry has adopted a licensing system for weaponry and equipment research and production featuring management of categorization. While maintaining state control over weaponry and equipment research and production, the document allows the non-public sector to enter this field and compete for research and production projects. In March 2008 the State Council and the CMC issued the Regulations on the Licensing Administration of Weaponry and Equipment Research and Production, further improving the system.

Enhancing the basic capabilities of weaponry and equipment research and production. Defense-related science, technology and industry are striving to enhance the informationization of weaponry and equipment design and development, and to render product design more digitalized, modularized, standardized and reliable. It has built digital simulation and hardware-in-the-loop (HIL) simulation facilities and a number of important advanced experimentation and demonstration facilities, which has resulted in a higher design capability and R&D success rate.

This sector has also increased final assembly and integration capabilities, and a number of key enterprises have realized systems integration of assembly, experimentation and testing. This has substantially raised core manufacturing capabilities by giving priority to resolving processing and technical issues in complex parts processing, precision manufacturing and special welding. In addition, a number of large-scale basic experimentation facilities serving the entire industry have been constructed, as well as specialized testing and experimentation centers for reliability testing and burn-in screening of components and parts, and improved measures, standards and other basic support conditions for defense industries have been put in place. With the improvement of basic capabilities, a leapfrogging development in the ability to provide weaponry and equipment has been achieved.

Building a dynamic innovation system for defense-related science, technology and industry. The government has taken the lead to create a favorable environment for innovation and guide innovation activities through policies and investments. With the research institutes and enterprises of the defense industry as the backbone and with institutes for basic research and institutions of higher learning as a vital new force, China is giving full play to the advantages of integrating enterprises, universities and research institutes, and making efforts to increase its capability for independent innovation in defense-related science, technology and industry. To consolidate the foundation of human resources for the innovative development of defense-related science, technology and industry, both the national major projects of science and technology and important projects for defense scientific research and weaponry and equipment R&D have been taken as platforms to identify, cultivate, employ and attract talented people.

Enhancing Cooperation With Other Countries

Following the principles of mutual benefit and common development, China is conducting cooperation with foreign countries in defense-related science, technology and industry. It emphasizes exchanges and cooperation with developed countries in defense industry technology to draw on their experience in technological development and management. It enhances mutually beneficial cooperation with developing countries, and engages in joint R&D and production in major cooperative projects, in accordance with the national conditions and specific requirements of the partners. On the export of military items, it adheres to the following principles: It should only serve the purpose of helping the recipient state enhance its capability for legitimate self-defense; it must not impair peace, security and stability of the relevant region or the world as a whole; and it must not be used to interfere in the recipient state's internal affairs.

China's defense-related science, technology and industry actively conduct cooperation with other countries in the field of hi-tech industries, combining military and civilian needs, and make great efforts to develop hi-tech civilian products with high added value. Major breakthroughs have been made in developing the international market for space products. China has exported its first satellite; and the earth resources satellite project with Brazil has played an important role in both countries' economic development. China has significantly enhanced its cooperation with other countries in aviation products and technologies, and made new headway in developing the international market for civil aircraft. China's shipbuilding industry has exported products for civil use in series and batches, further increasing its share in the international market for such products.

XII. Defense Expenditure

Guided by the principle that defense expenditure should grow in line with the demands of national defense and economic development, the Chinese government decides on the size of defense expenditure in an appropriate way, and takes a road of national defense and armed forces modernization featuring lower cost and higher efficiency.

In the past three decades of reform and opening up, China has insisted that defense development should be both subordinated to and in the service of the country's overall economic development, and that the former should be coordinated with the latter. As a result, defense expenditure has always been kept at a reasonable and appropriate level. From 1978 to 1987, as the nation shifted its focus to economic development, national defense received a low input and was in a state of bare sustenance. During this period the average annual increase of defense expenditure was 3.5 percent, while that of GDP was 14.1 percent and that of the state financial expenditure was 10.4 percent. The shares of China's annual defense expenditure in its GDP and in the state financial expenditure dropped respectively from 4.6 percent and 14.96 percent in 1978 to 1.74 percent and 9.27 percent in 1987. From 1988 to 1997, to make up for the inadequacy of defense development and maintain national security and unity, China gradually increased its defense expenditure on the basis of its sustained economic growth. During this period the average annual increase of defense expenditure was 14.5 percent while that of GDP was 20.7 percent and that of the state financial expenditure was 15.1 percent. The shares of China's annual defense expenditure in its GDP and in the state financial expenditure continued to drop. From 1998 to 2007, to maintain national security and development and meet the requirements of the RMA with Chinese characteristics, China continued to increase its defense expenditure steadily on the basis of its rapid economic growth. During this period, the average annual increase of defense expenditure was 15.9 percent, while that of GDP was 12.5 percent and that of the state financial expenditure was 18.4 percent. Although the share of China's defense expenditure in its GDP increased, that in the state financial expenditure continued to drop on the whole.