(EST PUB DATE) CHINA: CAN LARGE ARMS SALES BE SUSTAINED?

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 01287103
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 24
• Document Creation Date: March 9, 2023
• Document Release Date: August 28, 2020
• Case Number: F-2020-00133
• Publication Date: June 1, 1987

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Directorate of
Intelligence
China: Can Large Arms Sales
Be Sustained?
An Intelligence Assessment
This paper was prepared by
Office of Global Issues. Comments
and queries are welcome and may be directed to
the Chief,
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Key Judgments
Information available
as V 31 March 1987
was used in this report.
China: Can Lar e Arms Sales
Be Sustained?
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China is unlikely to maintain its position as the world's sixth-largest arms
supplier if the Iran-Iraq war ends. Since embarking on a full-scale arms ex-
port campaign in the early 1980s, Beijing has averaged almost $1.5 billion
in arms sales each year, with Baghdad and Tehran accounting for 75
percent of sales. We believe this war-driven market is unlikely to last: both
countries are interested in reequipping their armed forces with better
Western or Soviet Bloc equipment. We also believe that China is unlikely
to find other customers in the short to medium term to make up for the ex-
pected postwar decline in sales to Iran and Iraq. Most large or relatively
professional Third World militaries will remain uninterested in Chinese
weapons, which are considered technologically inferior to Soviet or West-
ern equivalents.
Beijing almost certainly recognizes the transient nature of the Iran-Iraq
market and is trying to attract new customers to China's easily operated
and serviced weapons. China is offering economic incentives�such as
financing and coproduction�increasingly demanded by buyers, but it
generally has not been able to compete against wealthier suppliers.
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In view of the contraction in the global arms market in recent years
because of growing arms inventories, mounting LDC debt, and declining
oil revenues, we believe China's hard currency earnings from arms exports
will decline over the short term. This decline may constrain China's ability
to purchase US or Western arms or production technology and slow the
pace of the military modernization of Chinese forces along the Sino-Soviet
border. Short-term pressures on China might be reduced if nations
dependent on the USSR for arms turn to China for spare parts or
replacement weapons.
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June 1987
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Contents
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Page
Key Judgments
in
Introduction
1
1980s Arms Sales: A Booming Record
1
Limitations Through the Early.1990s 3
Limited Customer Base 4
Inferior Technology 4
Marketing Weaknesses 5
Prospects for the 1990s 7
Overcoming Technological Inferiority 7
Low-Cost, Easy-To-Use Weapons 10
12
Market Variables 14
Implications � 14
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China: Can Large Arms Sales
Be Sustained?
Introduction
Between 1980 and 1982, China emerged as the
world's sixth-largest arms supplier (after the USSR,
the United States, France, the United Kingdom, and
West Germany), largely on the strength of sales to
Iran and Iraq.
his paper analyzes the source of the strengths
and weaknesses in China's sales of arms to the Third
World and evaluates China's potential to compete in
the tight international arms market in the aftermath
of the Iran-Iraq war. It also assesses China's longer
term prospects as an arms exporter
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1980s Arms Sales: A Booming Record
(b)(1) China's emergence as a major arms seller in the 1980s
(b)(3) stems from a decision made in 1979 to enter the
international arms market to earn hard currency. This
decision�taken as a part of Deng Xiaoping's modern-
ization drive
signaled Beijing's move away from political factors as
the primary motive for Chinese arms exports. Until
then, China's arms sales and grant military aid had
(b)(1) focused on strengthening strategic neighbors like Pa-
(b)(3) kistan and North Korea.
arms sales would generate sufficient hard currency to
help modernize the armed forces with Western arms
and technology. Beijing sought to take advantage of
the increase in Middle Eastern arms purchases that
accompanied rising oil prices, but most of the oil-rich
countries initially rejected China's weapons in favor
of more sophisticated Western or Soviet arms.
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Figure i. More than 2,000 tanks have been sold to Iraq
China's opening into the lucrative Middle Eastern
market came in 1980, immediately following the
outbreak of the Iran-Iraq war, as a result of Soviet
refusal to sell major military equipment to Iraq.
Chinese equipment helped Iraq withstand repeated
Iranian ground offensives
Iraq received more than
70 percent of China's estimated worldwide arms
exports in 1981 and 1982
during this period Iraq contracted for more than
2,000 Chinese tanks, enough to replace most of its
losses (figure 2). Chinese deliveries of more than 1,000
armored personnel carriers (APCs) were sufficient to
replace an estimated two-thirds of Iraq's APC losses.
Baghdad also received large quantities of field artil-
lery, air defense artillery, and ammunition.
position as Baghdad's major arms source, and China
signed no large new deals with Iraq. Tehran, for its
part, purchased large quantities of Chinese ammuni-
tion and artillery through North Korean and other
intermediaries, replacing Iraq as China's largest cus-
tomer. We believe Tehran accepted Chinese offers
because Iran desperately needed consumables, such as
small arms and ammunition, to continue the war
During the 1983-85 period, Iran gradually replaced
Iraq as Beijing's primary customer. During that time,
the USSR and Eastern Europe resumed their prewar
Arms sales to countries other than Iran and Iraq fell
during this period and have continued to decline,
despite Beijing's attempts to attract new customers.
During the last two years, China was able to make
more sales to Iraq and Iran as Baghdad resumed
purchases of Chinese equipment and materiel, and
Tehran added to its purchases by buying major
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FiglIft 3. H
Iran in 1985
ace-to-air missile of the type sold to
Chinese equipment for the first time. We estimate
Iraq signed contracts worth more than $1 billion in
1986. China's large sales to Iran apparently resulted
from Beijing's decision to deal with Iran
directly. These orders from Iraq and Iran came as
new Chinese contracts with other customers dwindled
to almost insignificant levels.
Chinese weapons and ammunition helped Iran and
Iraq continue the war, and recent deliveries have
enhanced Iranian capabilities.
Since late 1985 we have confirmed at least $1 billion
in sales to Iran: a deal in 1985 for HQ-2
surface-to-air missiles, antiship missiles, field artil-
lery, and ammunition; and up to in sales
in 1986 for various weapons systems and ammunition
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(figure 3). The limited quantities of HQ-2s deliverea(1)(3)
to Iran will not seriously impede Iraqi air attacks on
vital oil terminals and refineries, in our judgment,
Limitations Through the Early 1990s
In the near term, China is likely to face serious
limitations in its effort to sell more arms in the Third
World. China's large sales volume so far in the 1980s
has resulted primarily from Iraq's, and more recently
Iran's, need for inexpensive, easy-to-use weapons.
Without large Iranian and Iraqi purchases, we believe
Chinese arms sales will be significantly reduced until
at least 1990 by a limited customer base, inferior
technology, and marketing weaknesses
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Limited Customer Base
- The lack of a reliable and extensive customer base will
make it difficult for China to maintain its current
level of sales. The number of nations buying arms
from China has declined over the last four years�
some customers in the early 1980s proved to be one-
time buyers, and several first-time customers in the
� last three years are unlikely to make additional
purchases.
In our view, Iraq is unlikely to continue buying such
large amounts of Chinese arms even if the war drags
on. We believe Baghdad only turned back to Beijing
in 1986, after three years of minimal purchases,
because reduced income from falling oil prices had
made the inexpensive Chinese weapons more attrac-
tive. The even larger purchases of weapons and
munitions from the USSR, however, indicate Bagh-
dad's continuing preference for Soviet equipment.
When the war ends, Iraq is likely to resume its late
1970s' effort to improve its armed forces with up-to-
date Western and Soviet Bloc equipment.
Iran is more likely to continue its large purchases
from China, and Beijing
is trying to arrange more sales�possibly including
tanks, fighter aircraft, and air-to-air missiles. We
believe Iran's purchases are not likely to equal the
scale of Iraq's past purchases, however, either during
or after the war:
f Tehran's war strategy is based on infantry-artillery
offensives that do not require large quantities of
equipment other than artillery, munitions, and small
arms.
� After the war, we believe that the Iranian military
will seek higher technology non-Communist equip-
ment and that a number of suppliers will be avail-
able.
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Inferior Technology
China's arms sales to large or relatively professional
Third World militaries will be limited by the wide-
spread and largely correct perception that Chinese
weapons are technologically less sophisticated than
Western and Soviet exports:
� Most Chinese weapons are based on Soviet designs
and technology of the 1950s.
One consequence of the dated technology in Chinese
weapons is the low demand for Chinese training and
maintenance support, which will further weaken Bei-
jing's market position. Other large suppliers use Third
World military training in the supplier country to
keep customers dependent on the supplier for spare
parts and follow-on support after an initial sale.
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China does not hesitate
to offer training on its more sophisticated systems,
however; more than 100 Iranians trained in China on
antiship missiles in 1985
Marketing Weaknesses
China's limited financial resources and emphasis on
earning hard currency through cash sales place it at a
significant disadvantage in an increasingly competi-
tive Third World arms market.
Beijing has been slow to adopt creative
financing practices, provides very little military aid,
and shows few signs of being abl
tively with other major suppliers.
Many Third World nations are seeking licensed pro-
duction agreements to reduce the foreign exchange
cost of arms purchases and to gradually decrease their
dependence on foreign weapons suppliers. Most major
suppliers,including the USSR, are responding to this
demand to garner sales and protect their markets; but
China is largely absent from the coproduction picture.
Even if China were to offer licensed
production to other customers, it would be refused, in
our view, because few countries can benefit from
purchases of dated Chinese production technology.
China's marketing efforts remain amateurish when
compared with those of more established suppliers,
which will hurt Beijing's sales in the highly competi-
tive marketplace
China is taking steps to attract new customers by
improving its marketing, but it is still not ready for
the showy marketing arena of the large Western
suppliers:
� Beijing hosted its first international arms exhibition
in November 1986, which featured China's newest
equipment along with personnel to discuss the capa-
bilities of the equipment and sales.
China's direct sales pitches to governments are also
flawed
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Prospects for the 1990s
We believe China recognizes the need to develop a
market for its weapons beyond Iran and Iraq, and the
steps it is taking now to attract new customers may
enable it to maintain a moderate level of sales in the
1990s. China, for example, is developing new equip-
ment�much of it specifically designed to meet cus-
tomer requirements�and is seeking to incorporate
Western technology into its weapons. China enjoys
several comparative advantages that may further
bolster arms sales in the 1990s, if the technology lag
can be bridged. The key to China's future success, in
our judgment, is its ability to market its improved
products in an increasingly competitive marketplace.
If China is unsuccessful in its attempts to produce and
sell major weapons based on Western technology, the
prospects for increased arms sales are not as optimis-
tic.
Overcoming Technological Inferiority
China is seeking several ways to overcome the most
important drawback to increasing arms sales�the
technological inferiority of its weapons. We believe
Beijing is producing NATO-standard weapons and
ammunition and is reconfiguring current weapons to
meet customer requests.
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Low-Cost, Easy-To-Use Weapons
China probably will continue to maintain a moderate
level of arms sales based on its traditional strengths.
Relatively unsophisticated, small military forces in
the Third World find Chinese weapons attractive
because of their simplicity and low price. As with
Soviet, weapons, training is not complicated, and
personnel with limited basic or technical education
can learn to operate Chinese weapons easily and
quickly.
We believe China's potential market will continue to
include all LDCs that have purchased weapons from
the USSR or its allies. Most of China's weapons and
ammunition types are identical to, or derived from,
Soviet models, and most of its sales have been made to
LDCs that have
purchased Soviet weapons
many Third World countries still want
to diversify their source of arms. Some nations may
purchase arms from Beijing to make Moscow more
forthcoming with equipment or financing. In cases
where Moscow and a client government have a falling
out, Beijing may have opportunities for more signifi-
cant sales.
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Beijing has also made a place for itself by providing
spare parts and technical assistance for Soviet equip-
ment. China produces parts for its own inventory of
weapons based on Soviet designs and can provide
parts for a wide variety of older Soviet equipmentl--1
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Market Variables
If China is to maintain or expand its current sales
volume, it must overcome several factors that will
constrain the arms sales of all suppliers to the Third
World over the long term. All of these factors, taken
together, have already led to a contraction in the
Third World arms market of at least 20 percent since
1982, and a repetition of the boom years for the
international arms trade in the late 1970s and early
1980s it unlikely:
� Many Third World nations purchased their first
major weapons systems�jet combat aircraft, war-
ships, and armored vehicles�in the last decade, and
dther, larger LDC militaries completed major ex-
pansions and modernizations of their inventories at
the same time. We judge that many LDCs will
make no major weapons purchases until at least the
early�1990s, when another more modest moderniza-
� tion cycle will begin to replace arms purchased in
the 1970s.
� Falling oil prices since 1982 have also reduced sales
� to the Middle East as well as to other oil-producing
states. Only a significant rise in oil prices would
rekindle strong demand in the I 990s. �
� Falling commodity prices in general have reduced
export earnings for many nonoil producing, less
developed countries, thereby reducing their ability
to buy arms.
� Rising LDC foreign debt burdens, in part a result of
falling commodity prices and previously ambitious
import schemes, have forced sharp cutbacks in LDC
imports of many goods, including arms. Many
LDCs are likely to face debt-imposed import limita-
tions well into the 1990s.
� Many Third World nations are slowly developing
indigenous defense industries. This trend is likely to
continue as LDCs try to reduce their dependence on
foreign arms suppliers and the foreign exchange cost
of importing arms. Indigenous Third World produc-
tion wiff reduce the export market and provide more
competition for China in its areas of strength�
inexpensive, relatively unsophisticated weapons and
ammunition.
� The equipment China is developing today for export
will face stiff competition from other Third World
suppliers. Brazil produces the highly successful
Tucano trainer aircraft, armored vehicles, and a
wide range of other equipment that competes direct-
ly with Chinese armament. Other emerging suppli-
ers, such as Singapore and South Africa, will also be
anxious to make sales.
We believe China's effort to develop both higher
quality and more widely demanded weapons while
maintaining low prices gives it a better-than-even
chance of selling at least $1 billion of arms annually
irt the 1990s. Beijing's potential ability to supply
inexpensive weapons with few political strings at-
tached will give it an advantage over large arms
suppliers marketing costly high-technology items. In
addition, Beijing's ability to produce large quantities
of arms quickly will give China an edge over smaller
nations that can only produce in small quantities.
Only China's inability to or lack of interest in offering
attractive financing or licensed production packages
will remain serious constraints to its 1990s' market
position.
Implications
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