Despite an official push to convert defense factories to civilian products, China's cash-strapped military-industrial complex still finds that swords - not plowshares - are its biggest earners.
Last week, two major Chinese arms dealers with connections to senior leaders were implicated in a conspiracy to smuggle automatic weapons valued at $4 million into the United States.
One company, China Northern Industries Corp., or Norinco, is China's biggest producer of low-cost small arms and weapons. It has earned a reputation as a kind of K-Mart of weapons suppliers. The second company, Polytechnologies Ltd., a subsidiary of Poly Group Corp., is another large weapons seller and is run by He Ping, the son-in-law of paramount leader Deng Xiaoping.
During the last decade, China has tried to convert its bloated defense industries to make civilian goods such as space launchers and chemicals, barbells and negligees. By weaning military factories from state subsidies, the Communist leadership hoped to make them profitable, avoid worker layoffs and unrest, and raise badly needed funds for modernizing the military.
But less than half of the country's 50,000 defense-related companies have found profitable civilian products to produce and are viable, despite Chinese claims that more than three-quarters of the total output of these companies is now civilian products. More than ever, China's military industries are looking for lucrative arms sales to generate cash, Western analysts say.
International weapons deals are also instigated by corrupt military officers who channel the funds to overseas bank accounts. The earnings have been used to expand China's massive internal-security apparatus since the pro-democracy demonstrations in 1989.
Arms exports are Norinco's most lucrative source of income, averaging more than $1 billion in annual sales during the 1980s. "They're not only into weapons. They're into everything because everybody is diversifying like crazy," says John Frankenstein, an expert on China's defense industry at the University of Hong Kong.
"China has a huge military-industrial complex that is not getting any orders. All these companies are strapped. No one seems to be making much money," he says.
The US is a major market for Chinese small arms, reportedly importing hundreds of thousands of Chinese guns yearly. China's armed forces have set up a number of companies in the US to sell products and also, some analysts say, to acquire restricted technology.
At a time of deep strain between Washington and Beijing, last week's case is the most embarrassing in a recent series of disclosures involving illicit Chinese deals. The US has charged that a Chinese government company last year sold ring magnets used in nuclear-weapons production to Pakistan, but has accepted Beijing's denials and backed off from sanctions.
Children of senior Chinese leaders are also said to be involved in the illegal copyright piracy of American CDs. China and the US could be at the brink of a major transpacific trade war if an agreement isn't reached by mid-June.
Western analysts say the gun-running conspiracy could be an opportunistic deal by a few officials. But, like the copyright and nuclear-proliferation issues, it raises major questions about official accountability in China.
"This is another example of the kind of anything-goes mentality in China today," says Mr. Frankenstein. "This is at the heart of so much of the trade conflict the US has with China: Who is accountable?"
"The princelings [children of senior leaders] have a record of getting away with a lot because the government just looks the other way," adds a Western diplomat.
Both sides have tried to quiet the uproar and prevent the criminal case from becoming a diplomatic incident. The two companies tried to sidestep the charges, dismissing the case as "a pure fabrication or a misunderstanding."
On Tuesday, a Chinese Foreign Ministry spokesman denied that China was involved in gun-running but said the government would investigate. Those involved in exporting unapproved arms shipments will be punished, he said, although he declined to elaborate.
The State Department has downplayed the incident. Chinese trade officials announced Sunday that a new law was being drawn up to limit sales of sensitive items and tighten regulations to stop the dumping of China's products on overseas markets.
"The Chinese government has been cautious and responsible in trade of sensitive products," Liu Hu, an official in the Ministry of Foreign Trade and Economic Cooperation was quoted as saying. He insisted that China exports only a limited number of small arms each year.
Yet the high-placed connections of the leaders of the two companies belie the Chinese disavowals. Indeed, the involvement of relatives of Communist Party elders has intensified China's quest to blaze new trails in the international arms bazaar. Arms deals in China are handled through a labyrinthine sales establishment and children of party leaders and military chieftains often hold key positions in arms-trading companies.