Insight: China builds its own military-industrial complex

By David Lague and Charlie Zhu

HONG KONG (Reuters) - When China turned to Russia for supplies of advanced weapons through the 1990s, it kick-started Beijing's military build-up with an immediate boost in firepower.

It also demonstrated the failure of its domestic defense sector which was still turning out obsolete 1950s vintage equipment for the People's Liberation Army from a sprawling network of state-owned arms makers.

Now, after more than two decades of soaring military spending, this once backward industry has been transformed -- China is creating its own military-industrial complex, with the private sector taking a leading role.

With Tiananmen-era bans on Western military sales to China still in place, an innovative and efficient domestic arms industry is crucial for Beijing as it assembles a modern military force capable of enforcing claims over Taiwan and disputed maritime territories.

China has locked horns recently with its Southeast Asian neighbors over conflicting claims to strings of islets in the South China Sea. Tensions have also flared with Japan over uninhabited islands in the East China Sea, even as the United States executes a strategic military pivot towards the Pacific.

Well funded defense groups have rapidly absorbed the technology and expertise needed to build complex weapons, freeing China from its former heavy reliance on Russian and other foreign equipment, Chinese and Western experts say.

"A country's defense sector should reflect the strength of the country's economy," says Wu Da, a portfolio manager at Beijing-based Changsheng Fund Management Co Ltd which invests in listed Chinese defense stocks.

But, he adds, the sector is so shrouded in secrecy it's been hard to assess how viable it is.