NOT CLASSIFIED China Newsletter n.5– July 2021 Francesca Buratti – SACT China Subject Matter Expert

What is published in NATO SACT China Newsletters and Reports do not constitute the official position or policy of NATO or member governments. SACT publications on China seek to inform the community of interest and promote understanding of China's military and strategy. The views expressed by the author(s) are their own.

In this newsletter:

 Giving Precision Munitions ‘Eyes’ and a ‘Brain’: The State of PLA Research on Military Target Recognition, The Jamestown Foundation;  Becoming Strong: The New Chinese Foreign Policy, Foreign Affairs;  The U.S. Military Nuclear Nightmare: China Is Building 119 ICBM Silos (Or Not?), 1945 (Security Journal);  What China Wants from North Korea, The National Interest;  The China-Pakistan Partnership Continues to Deepen, The Diplomat;  What Xi Jinping’s Major Speech Means For Taiwan, Council on Foreign Relations;  Another strong year for China’s defence companies, Institute for Strategic Studies.

Giving Precision Munitions ‘Eyes’ and a ‘Brain’: The State of PLA Research on Military Target Recognition, The Jamestown Foundation, July 2

The People’s Republic of China (PRC) has identified artificial intelligence (AI) as an economic and security developmental priority. The State Council’s National AI Development Plan, released in July of 2017, calls AI “the new focus of world competition” and the 14th Five Year Plan, adopted in March 2021, promotes the “deep integration of internet, big data and artificial intelligence in industries”. Since the early 2000s, PLA doctrine has focused on enabling “informationized” warfare, a model of network-centric operations derived from the U.S. military. One of the most active fields of PLA AI research is applying machine learning to computer vision—teaching computers how to interpret the visual world. PLA officers and academic researchers alike are bullish on deep learning’s value for military applications. According to researchers at the PLA Army Academy of Armored Forces, deep learning offers advantages over traditional machine learning because it avoids the need for manual extraction of target features in the training dataset, an onerous chore when accurate programs demand tens of thousands of image sample. Image recognition for military applications requires a higher degree of accuracy for target detection than civilian applications of image processing, but early research is promising. While the deep learning tests described in the literature can correctly identify military equipment more than 85 percent of the time, PLA authors stress the need for further development to improve accuracy. PLA research on deep learning applications for image recognition broadly fall into two categories: object detection and classification. Object recognition algorithms can detect things that exist in an image but cannot properly classify them without the aid of another trained neural network. PLA researchers must design their own sets of training data to develop object classifiers and correctly categorize objects like tanks and fighter aircraft in both live video and still imagery. Finally, some PLA researchers are attempting to classify objects by “threat.” Another

NOT CLASSIFIED Page 1 of 9 issue is the PLA’s reliance on outside sources for image recognition algorithms. Moreover, the challenges reported in gathering sufficient samples for image classification underscore the need to consider how military systems imagery in the public domain will assist the PLA. While the PLA will undoubtedly train neural networks off its own classified imagery, commercial satellite and UAV imagery will likely assist this effort, no matter whether it is first acquired by the PRC’s military or private sector. Algorithms can become accurate by training off civilian imagery, then be turned over to the PLA for further development. The state of public access literature suggests that significant obstacles remain before the PLA will be capable of using AI as a guidance system for PGMs. But the direction of research is disturbing given that tests already indicate a high degree of accuracy, which is enough to aid imagery analysts and ensure continued PLA attempts at weaponization. In the near future, an emerging threat is the PLA’s potential to field “fire and forget” PGMs that can independently assess targets, especially if linked with the ability to loiter until targets become available. This type of stand-off munition would enhance the PLA’s already formidable combat capabilities in the Western Pacific.

Key Points: This article examines writings by PLA-affiliated authors and private sector researchers leveraging open-source research—much of which is developed in the U.S.—to improve China’s automatic military target recognition capabilities. Sources were drawn from the Chinese National Knowledge Infrastructure (CNKI). As such, it is a valuable resource for getting know how on China’s “whole of government” approach to Artificial Intelligence (AI), which has important ramifications for the People’s Liberation Army (PLA). It is in NATO’s interest to understand how China’s “military-civil fusion” strategy is intended to facilitate transfers of technology and expertise between the commercial and military sectors, including in the field of AI. Moreover, it is stressed that the AI’s use in the military is far different in China than in the United States. The PLA appears to adopt an approach of rapidly “failing forward” in attempts to exploit AI regardless of its maturity, in part motivated by a perception that the U.S. military still retains a large technological lead over it. Further, the conclusion of the analysis is particularly worth mentioning. According to the authors, the PLA sees significant military applications for AI and is actively developing “intelligentized” weapons designed to detect and attack U.S. aircraft, ships, and armored vehicles. It is especially interesting for NATO, to note that while the article focuses on the PLA’s development of computer vision, Chinese researchers are also employing deep learning in adjacent fields such as in-flight course correction for cruise missiles. Further, the PLA’s progress in adapting deep learning for image recognition is an example of the need for U.S. policymakers and developers alike to consider how open-source technology can be utilized by opponents. Quoting the expert: “reliance upon open architecture is a fundamental tenet of the American innovation ecosystem and should not be restricted to compete with the PRC. Rather, the defense community should see this as an advantage. Knowledge of which algorithms the PLA will rely upon allows the United States to determine possible weaknesses, exploit opportunities for data poisoning, and train against these algorithms in exercises.”

Becoming Strong: The New Chinese Foreign Policy, Foreign Affairs, July/August 2021

The article reviews the new Chinese foreign policy, whose main traits will likely emerge in the aftermath of the pandemic. The author points out a paradigm shift underway in Beijing: China believes that its rise to great-power status entitles it to a new role in world affairs—one that cannot be reconciled with unquestioned U.S. dominance. Biden’s attempts at isolating China diplomatically are seen a serious threat from President Xi who is working on multiple fronts to make the country less vulnerable to U.S. aggression and pressure. Beijing’s newfound confidence does not mean it will challenge Washington in every single domain. China rejects U.S. leadership on some issues, but as a developing country, it will limit competition to areas in which it feels it has an advantage, such as the fight against

NOT CLASSIFIED Page 2 of 9 COVID-19, poverty reduction, trade, international infrastructure and development, digital payment systems, and 5G technologies, among others. Beijing still hopes it can confine tensions with Washington to the economic realm and avoid an escalation to military clashes. Yet the risk of a conflict over Taiwan, especially, is growing. This is not to suggest that cooperation with Washington is out of the question. Beijing has expressed its willingness to play an active role in reforming global governance regimes, in aiding the global economy’s post-pandemic recovery, and in tackling transnational challenges in concert with Washington. Across the board, however, a post-pandemic China will make its voice heard with greater determination than before and will push back forcefully against any attempts to contain it. The article argues that the China-US competition will be played out on novel battlegrounds, chief among them cyberspace. As the digital sphere takes over more and more of people’s lives, cybersecurity will become more important than territorial security. Meanwhile, international cooperation will increasingly take the form of issue- specific coalitions instead of truly international (or even regional) institutions. China and the United States will build rival teams, with other countries deciding which to join on a case-by-case basis, depending on which arrangement best serves their national interests. Most governments will welcome this trend, having already adopted hedging strategies to avoid picking sides between the two powers. The limits of China’s global reach are also outlined. Despite being a major power, China also thinks of itself as a developing country. This dual identity will color all aspects of China’s post-pandemic foreign policy. As a developing country, China still lacks the resources required of a true world leader, with globe-spanning responsibilities, especially in the military realm. As a great power, however, it will not follow the United States’ lead, and on some issues, competition with Washington will be inevitable: on the one hand, China is anxious not to frame relations with the West as a new Cold War; on the other hand, China will try to shape an ideological environment favorable to its rise, pushing back against the notion that Western political values have universal appeal and validity. China’s economic policies are shifting, too, impelled both by the pandemic, which revealed the vulnerability of global supply chains, and by U.S. attempts at economic decoupling. In fact, the Chinese government believes that protectionism, a slowing world economy, and shrinking global markets will outlast the pandemic. Under a new “dual circulation” strategy, which was unveiled at a high-profile Chinese Communist Party meeting in May 2020, Beijing therefore aims to lessen its dependence on foreign markets. Science and technology will be at the center of this effort, laying the groundwork for future development. Beijing will also seek to reduce its exposure to U.S. financial sanctions, including by promoting the use of the renminbi in foreign trade and investment. China’s military strategy, by contrast, will remain largely unchanged in the post-pandemic world. Beijing seeks to turn the People’s Liberation Army into a world-class fighting force ready for war at any moment, emphasizing quality over quantity, cyber-capabilities over conventional prowess, and artificial-intelligence-based weapons systems over individual combat skills. Yet the PLA’s mission will remain one of deterrence, not expansion.

Key Points: This valuable analysis from Foreign Affairs, provides detailed insights of the new Chinese foreign policy, with a point of view aimed at assessing Beijing’s dual identity, as well as its competitive advantages and vulnerabilities when facing the rising competition with the United States. The main takeaways that might be of interest for NATO’s Allies and Partners are the assumptions that in the post-covid era China will limit competition to areas in which it feels it has an advantage. Further, as a post-pandemic China will make its voice heard with greater determination than before, NATO should be aware of the sentiments that will animate China’s post- pandemic diplomatic strategy: Beijing has always adjusted its policies to shifting domestic and foreign circumstances, and will continue to do so, in a way that achievements and failures will inform China’s path and choices. The backdrop to these adjustments, however, will be a radically altered global landscape, in which unilateral decisions by Washington and the various alliances and issue-specific coalitions it leads will no longer be as viable as they once were.

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The U.S. Military Nuclear Nightmare: China Is Building 119 ICBM Silos (Or Not?), 1945 (Security Journal), 14 July,

Late in June 2021, commercial satellite imagery revealed that China appears to be building a field of at least 119 underground silos for the launch of nuclear intercontinental ballistic missiles, or ICBMs, in its northwestern Gansu province. That is in addition to around 20-25 more silos already known to be under construction elsewhere. The 700 square mile ICBM field, located near Yumen City, also features multiple command bunkers with entrenched cables radiating out to ten ICBM silos each. And all of this is apparently after only five months of construction. The “shell game” is a strategy the Pentagon first conceived of in the 1970s to complicate the targeting of its MX missiles, and which China already considered adopting in the 1980s. However, the author stresses that China only has a small number of silo-based weapons capable of hitting targets across the United States: China is thought to have between 200 and 350 nuclear weapons, compared to 1,550 strategic nuclear weapons actively deployed by the United States and Russia. And the U.S. and Russia maintain hundreds more tactical nuclear weapons, and thousands more nuclear warheads in reserve. Overall, the analysis reports, Beijing fears that the U.S. might attempt a preemptive nuclear attack out of the belief that it can “soak up” any missiles leftover on Chinese submarines and surviving land-based launchers with its GMD missile defense system, which can potentially shoot down a few dozen incoming nuclear warheads. Nevertheless, a shell game strategy could mitigate fears of losing deterrence by making a counterforce strike more resource- intensive to execute. The article provides additional details of China’s nuclear forces. Beijing is qualitatively and quantitatively expanding other kinds of nuclear forces: It is reintroducing a nuclear role for its air force as it develops an H-20 stealth bomber; further, the PLA Navy will induct longer-range JL-3 nuclear missiles that will significantly improve the viability of its ballistic missile submarines. The analysis concludes by highlighting that, even if doubled in size and qualitatively improved, China’s arsenal will remain much smaller than that of the United States. Overall, Beijing fears that improvements to U.S. missile defense and prompt precision strike capability could cause China to lose nuclear deterrence, making it vulnerable to nuclear attack. Thus, it wants to hedge with bigger and better nuclear forces—and has not been open to arms control treaties that would constrain it to its present smaller one. That same insecurity motivates the Pentagon to point to improvements in China’s nuclear capability as to why it needs even better weapons, maintaining a feedback loop sustained by mutual fear and military-industrial interests.

Key Points: This analysis from “1945” a security online journal founded by accredited international experts, provides an interesting, sided view of the latest China’s development in the nuclear field. As explained, China has begun the construction of more than 100 new silos for intercontinental ballistic missiles in a desert near the city of Yumen, a building spree that could signal a major expansion of Beijing’s nuclear capabilities. While the acquisition of more than 100 new missile silos, if completed, would represent a historic shift for China, a country that possess a relatively modest stockpile of 250 to 350 nuclear weapons, overreact to this event would be inappropriate: U.S.’s massive advantages in strategic nuclear weaponry, including nearly a thousand submarine-launched nuclear missiles, virtually immune to preemptive attack, and the U.S.’s ability to deliver prompt precision attacks against enemy nuclear forces (i.e. counterforce strikes) cannot be excluded from an objective analysis of the new arms race. Nevertheless, China’s nuclear modernization program should be at the attention not only of the United States but of the whole Alliance. Ambassador Robert Wood, the U.S. envoy to the Conference on Disarmament in Geneva, said last week that China is “looking at” developing naval and aerial autonomous nuclear weapons systems. Wood said that while China has not yet developed or been able to weaponize the technology, the country, he suggested,

NOT CLASSIFIED Page 4 of 9 is interested in nuclear-powered underwater drones and nuclear-powered cruise missiles being developed by Russia. The U.S. does not have either type of system. “If they were to develop ... these kinds of weapons and aerial systems, this has the potential to change the strategic stability environment in a dynamic way,” he said. Wood also said that until China engages with the U.S. in bilateral arms control talks, “the risk of a devastating arms race will continue to increase—and that’s in the interest of no one.” (Associated Press - July 9, 2021) As Doc. Robert Henderson, expert at NATO SACT, has pointed out, this is a key point of reflection, as the US has let the INF treaty with Russia lapse and has called for China to join in negotiating a new "INF treaty" -- to which Beijing has refused.

What China Wants from North Korea, The National Interest, July 2

The articles reviews with accuracy the Chinese strategy towards North Korea, which is developed around three major goals. First, China needs a stable North Korea. It creates an important buffer zone next to China’s major urban and industrial centers. China does not want instability and chaos in a neighboring country – more so since this country has large stockpiles of weapons of mass destruction (WMD). Now, with the Sino-U.S. confrontation, the value of North Korea as a buffer zone has increased even further. Second, China needs a divided Korean Peninsula. China does not want to deal with an enlarged version of South Korea on its north-eastern border. Such a country will remain the US ally and might even station U.S. troops on its land. Third, China would prefer to see a non-nuclear Korea. Beijing does not welcome North Korea’s nuclear adventurism, not least because it creates a dangerous precedent. China understands: if the proliferation regime collapses, some East Asian countries might go nuclear, and their deterrence force will be directed against China. The analysis explains how, from the Chinese point of view, threats created by a stable and sovereign, but nuclear North Korea are real, but still less grave than threats likely to be created by either unstable North Korea or Korea being unified under Seoul’s stewardship. Consequently, this this leads the author to affirm that China has no reason to actively participate in a tough sanction regime, as that would not be functional to bring denuclearization: even if the economy fully collapses and another million North Korean farmers starve to death, Pyongyang will not change its course. China’s final aim in the region is to ensures stability, especially now when the strategic value of keeping North Korea afloat has increased due to the confrontation with the United States. The conclusion put in lights that Beijing is not stopping North Korea from working on the nukes and ICBMs but rather stopping it from being too noisy about its exploits. In the expert’s opinion the uncharacteristic quietness of the North Koreans who did not even greet a new U.S. administration with a nuclear test, might be a result of the Chinese pressure.

Key Points: This article describes in clear and analytic details, China’s strategy towards North Korea. From the Chinese point of view, threats created by a stable and sovereign, but nuclear North Korea are real, but still less grave than threats likely to be created by either unstable North Korea or Korea being unified under Seoul’s stewardship. This assumption opens future food for thoughts for NATO’s Allies and Partners, when assessing to what extent the People’s Republic of China (PRC) has influence over North Korea. Certainly, Pyongyang’s continued dependence on Beijing for food and energy supplies guarantees that the PRC’s status as a crucial patron will continue. However, as reported by the National Interest in another analysis, it is a mistake to assume that the PRC can simply issue orders to Kim regarding Pyongyang’s nuclear weapons program or any other issue: “even if Xi Jinping’s government would like North Korea to curtail its provocative nuclear ambitions, the continuing toxic (non) relationship between Pyongyang and Washington gives Kim ample reasons to expand his embryonic nuclear deterrent, not abandon it” ( The National Interest, China Might Help Contain North Korea’s Nukes—For a Price – July 3, 2021). In sum, the current situation shows that North Korea’s determination to preserve the country’s independence by means of nuclear deterrence will not be exchanged with any Partnerships or formal Alliance with

NOT CLASSIFIED Page 5 of 9 third countries. This is a geopolitical and strategic factor that cannot be excluded from future NATO’s assessment of East and South Asia.

The China-Pakistan Partnership Continues to Deepen, The Diplomat, July 9

The China-Pakistan military and strategic relationship continues to deepen. Recently, the Pakistan Army inducted its first batch of Chinese-made VT-4 battle tanks. The VT-4 tanks, built by the Chinese state-owned defense manufacturer, Norinco, were supplied to Pakistan starting in April 2020. Similarly, Pakistan’s use of Chinese-made combat drones or unmanned combat aerial vehicles (UCAVs) against India cannot be ignored. The China-Pakistan defense trade is not new, but the latest arms deliveries are a sign of a mutual desire to deepen their strategic engagement. Toward this end, the Chinese defense minister, General Wei Fengshe, visited Islamabad in late November 2020 and the two countries signed a Memorandum of Understanding (MoU) aimed at enhancing defense cooperation between the Chinese People’s Liberation Army (PLA) and the Pakistan Army. The Chinese Defense Ministry quoted Wei calling for a closer engagement, with a desire to “push the mil-to-mil relationship to a higher level, so as to jointly cope with various risks and challenges, firmly safeguard the sovereignty and security interests of the two countries and safeguard the regional peace and stability.” The growing number of China-Pakistan military exercises are a further sign of the deepening partnership between the two militaries. In one of the more recent engagements, in May, the two militaries conducted a joint exercise close to the Line of Actual Control (LAC) in Tibet. In December, the Chinese PLA Air Force and the Pakistani Air Force participated in a joint exercise, Shaheen (Eagle) IX, in Sindh. These exercises were meant to “promote the development of China-Pakistan mil-to-mil relationships, deepen practical cooperation between the two air forces, and improve the actual-combat training level of the two sides.” Pakistan has been an important partner to China for decades. Its importance may have increased further for a number of reasons. One, China has antagonized a large number of countries with its wolf warrior diplomacy, from its neighborhood in the Indo-Pacific to Europe. This raises the importance of the few real partners it has, like Pakistan. Also, increasingly worsening relations with India have resulted in New Delhi becoming closer to Washington and its allies, including Canberra and Tokyo. All of these new partnerships are clearly designed to counter China, even if India is reluctant to say that plainly. But all of these also make China depend more on Pakistan to counter India. Another reason for the growing Chinese dependence on Pakistan has to do with the evolving situation in Afghanistan. With the U.S. exiting the theater, China might want to have greater access to Central Asia through Afghanistan. All of this will be possible only through the good offices of Islamabad and the links that the Pakistani establishment has with the Taliban. And finally, China might also want to demonstrate its loyalty to close friends such as Pakistan and its capacity to maintain good relations with other countries at a time when its relations with many countries in the region are in trouble.

Key Points: This article from the Diplomat is a valuable source for understanding the China-Pakistan relationship. Evidence from the analysis show that the already deep Sino-Pakistan military and strategic relationship will continue to deepen. It is of particularly interest for NATO to keep monitoring the evolution of their cooperation in the field of military and technology, as well as in the Afghan region. Recently, a spokesperson for China’s Ministry of National Defense, said that the two countries are “all-weather strategic cooperative partners” whose “bilateral relations can only get better in the future.” He went on to add that “the military ties between China and Pakistan serve as an important pillar for the two countries’ bilateral relationship. Moreover, it is worth mentioning that since the beginning of 2020, the two militaries have maintained close high-level strategic

NOT CLASSIFIED Page 6 of 9 communication and carried out pragmatic cooperation in related fields, testifying their brotherhood and friendship enabling them to go through thick and thin together.

What Xi Jinping’s Major Speech Means For Taiwan, Council on Foreign Relations, July 6

On July 1, in a major speech celebrating the centennial of the Chinese Communist Party (CCP), Xi Jinping asserted the CCP had “transformed the future of the Chinese people and nation,” liberating the Chinese people, lifting the nation out of poverty, and ending a period of “darkness.” Xi argued that thanks to the CCP’s leadership, “China’s national rejuvenation has become a historical inevitability.” China would no longer “accept sanctimonious preaching from those who feel they have the right to lecture us.” He warned that any foreign force that dared “bully, oppress, or subjugate” China “will find themselves on a collision course with a great wall of steel forged by over 1.4 billion Chinese people.” Xi’s language reflects China’s growing confidence and ambitions, but the speech did not reveal a fundamental shift in Beijing’s approach to Taiwan. First and most significant, Xi affirmed that China’s policy remains one of pursuing “peaceful national reunification;” he did not openly abandon this approach and shift emphasis to employing nonpeaceful means. In a major statement China issued on New Year’s Day 1979, it pivoted from seeking “liberation” to “peaceful unification,” and Xi gave no indication that China is revisiting that stance. In other words, although China has largely alienated the Taiwanese people because of its increasing military, political, and economic coercion of the island, and repression of Hong Kong, Beijing still believes that the possibility of achieving “unification” without resorting to military force remains. Had Xi not uttered the phrase “peaceful national reunification,” it would have raised concerns about a shift in Beijing’s Taiwan policy, as happened when the government’s annual work report neglected to use the phrase last year. Second, Xi did not put a timeline on completing this “historic mission.” In 2013 and 2019, Xi asserted that the Taiwan issue cannot be passed down from generation to generation, imbuing the question of resolving cross-Strait differences with urgency and implying that he would demand to begin political negotiations with Taipei on his watch. In this new speech, however, he did not repeat this language, leaving the question of timing open-ended. Indeed, Xi put more emphasis on opposing Taiwan independence than on pressing “unification.” Third, Xi continued to link the Taiwan question with China’s “national rejuvenation.” Shortly after he was elevated to leader of the CCP, Xi introduced the “Chinese Dream,” which is defined as “the rejuvenation of the Chinese nation.” Achieving the “Chinese Dream” is usually pegged to the “Two Centenaries”: becoming a “moderately well- off society” by the one hundredth anniversary of the CCP and completing “national rejuvenation” by the one hundredth anniversary of the People’s Republic of China, which will occur in 2049. In this new speech, Xi claimed victory in achieving this first centenary goal. Now, the focus will likely turn to accomplishing the second centenary goal of “national rejuvenation” by 2049. Fourth, although Xi mentioned “One Country, Two Systems” in the context of Hong Kong and Macao, in this speech he did not mention this model when discussing Taiwan. Granted, in 2019, he promoted “One Country, Two Systems” as China’s offer for Taiwan, so it is unlikely that omitting it from this speech represents an abandonment of this approach. This model, however, remains deeply unpopular in Taiwan. Finally, although Xi called on “compatriots on both sides of the Taiwan Strait” to “come together and move forward in unison,” he did not emphasize building cross-Strait ties. Key Points: This analysis from the Council on Foreign Relations, argues that Xi Jinping's speech marking the one hundredth anniversary of the Chinese Communist Party, demonstrates how China is unlikely to drastically change its approach to Taiwan anytime soon. According to what reported above, Xi’s major speech revealed, in fact, broad continuity with China’s longstanding cross-Strait policy. The expert explains that President Xi did not abandon in his speech, the “peaceful reunification”

NOT CLASSIFIED Page 7 of 9 as China’s goal. He also did not move the goalposts by introducing a timeline on “unification,” demanding that political talks begin in the near future, or redefining “One Country, Two Systems.” A valuable takeaway for NATO, coming from these reflections, might be to bear in mind that rash policies based on the assumption that Xi will invade Taiwan in one, two, or even six years, should be avoided. In other words, the United States should continue to shift its military assets to the Indo-Pacific, focus on preparing for a Taiwan conflict, and increase coordination with Japan. However, this should be done in a focused, urgently deterrence way, not driven by panicking sentiments.

Another strong year for China’s defence companies, Institute for Strategic Studies, July 13

Amid considerable global turmoil in 2020, the relatively strong performance of the Chinese economy and continued commitment to defence budget growth contributed to the robust performance of Chinese defence state-owned enterprises (SOEs). While all Chinese firms in the Defense News Top 100 global defence companies list for the 2019 financial year ranked in the top 24, all seven SOEs ranked in the top 20 for 2020, suggesting a generally positive performance despite the impact of COVID-19 on China’s economy in early 2020. The combined defence revenues of the Chinese SOEs in the Top 100 came to an estimated US$96 billion in 2020, growing by 7.3% compared to 2019. In this year’s list, Aviation Industry Corporation of China (AVIC) and China North Industries Group Corporation Limited (Norinco) held on to their number six and number eight positions in the global Top 100 ranking for a second year in a row. Both companies continue to enjoy strong demand from the People’s Liberation Army, as well as ongoing procurement in aircraft and land systems. The real shift in rankings was seen in armoured vehicles and light weapons manufacturer, South China Industries Group Corporation (CSGC), which saw a 20.5% increase in revenue between the 2019 to 2020 financial years. he company’s successful 2020 financial performance is thus likely the result of a highly diversified portfolio, China’s post-COVID economic recovery and demand for the company’s civilian products. This year’s list also includes the revenue for China State Shipbuilding Corporation Limited (CSSC), which formed after a ‘re-merger’ of China’s two largest shipbuilding SOEs in late 2019. this year’s financial filings – the first since the re-merger – indicated a 27.5% increase in revenue over the previous year’s estimate. CSSC’s leadership has stated that it intends to focus on innovation in strategic, cutting-edge and disruptive technologies, by strengthening the group’s basic- and key- technology research.

Key Points: This article from the International Institute for Strategic Studies (IISS) marks the publication of the Defense News Top 100 ranking of global defence companies. It is a fully detailed and brilliant analysis of how Chinese companies measure up against their global competitors. The main outcome of the analysis is that China’s drive to enhance its domestic defence industry is borne out by the strong performances of its state-owned enterprises over the past year. The experts provide evidence that for the second year in a row, none of China’s seven SOEs reached the top five of Defense News’ index. However, the general uplift of all Chinese companies into the top 20 (up from the top 24) reflects a defence industry that remains globally competitive, as well as China’s successful isolation of its defence- industrial base from the economic impacts of the COVID-19 pandemic. Moreover, it could be of NATO’s interest to note that multiple Chinese SOEs have already entered into strategic cooperative agreements over the course of 2021; in particular, CSSC and China Aerospace Science and Technology Corporation are aimed at enhancing efficiency and competitiveness, as proof that China is investing heavily in the sector. The conclusion of the report is also crucial for evaluating at best the real impact of the China civil-fusion program. Nevertheless, the goals of the China’s 14th Five-Year Plan, included a requirement for national defence entities to expand collaboration efforts – both among themselves and with the commercial sector – to bolster domestic

NOT CLASSIFIED Page 8 of 9 defence-industrial capabilities and innovation. In the five years ahead, the Atlantic Alliance should expect that Chinese companies will continue to pursue reforms towards ‘independent innovation’, to commercialize more major platforms and to support the PLA’s modernization goals to 2035.

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