Publication: China Brief Volume: 1 Issue: 4

by William R. Hawkins

China is making a concerted effort to establish itself as a Pacific naval and maritime power. In February 1992, the National People’s Congress passed a law unilaterally claiming sovereignty over not only Taiwan, but the Spratlys, Paracels and Diaoyutai/Senkaku islands as well. It has subsequently built military structures on several isles in the Spratlys and Paracels.

The law declared that the Chinese military had the right to patrol these waters and “to adopt all necessary measures to prevent and stop the harmful passage of vessels through its territorial waters.” The April 2001 downing of a U.S. Navy EP-3 surveillance plane in international airspace, but over China’s exclusive economic zone (EEZ), was in accordance with Beijing’s expanded claims to sovereign authority in the South China Sea.


Does Beijing have the industrial wherewithal to send to sea forces strong enough to maintain its claims should other states in the region contest them? At the moment, no. But it does have enormous potential to create a shipbuilding capability that could pose such a threat to the Asian balance of power.

China is today the world’s third-largest shipbuilder in terms of gross tonnage, surpassed only by Japan and South Korea. The high volume of these three Asian countries comes from commercial, not naval (military), construction. Commercial shipbuilding has always been considered a strategic industry. Adam Smith wrote of the role of merchant shipping in The Wealth of Nations, “the defense of Great Britain depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.”

Beijing has followed Smith’s advice by expanding its shipbuilding as its foreign trade has expanded. China is the world’s tenth-largest trading nation, accounting for 4 percent of world trade, and, according to World Bank estimates, could become the second-largest by 2020. The Chinese-flag merchant fleet numbers more than 1,500 ships, over 700 of which have a displacement over 10,000 deadweight (dwt) tons.

In comparison, U.S. flagged merchant ships over 10,000 dwt number less than 470, with one-third of these owned by the U.S. government. Less than 3 percent of American trade is carried in U.S.-flag ships, and American ships represent less than 1 percent of world commercial tonnage (down from 9 percent twenty years ago). These low shipping figures persist despite the fact that U.S. imports account for 18.5 percent of total world imports and U.S. exports make up 12.4 percent of the global total. Washington has not followed a policy to leverage its position as the world’s largest trading nation into leadership in maritime commerce or industry.

More than 600 Chinese-flag merchant ships, aggregating over 20 million dwt and carrying 30 percent of China’s trade, are operated by a single entity: the China Ocean Shipping Company. COSCO, a state-owned conglomerate with close ties to Beijing’s military, routinely supplies shipping support to Chinese military and naval exercises, and is Beijing’s principle carrier for foreign arms shipments.

Though the gap in naval and commercial ship designs has widened since Adam Smith’s days, the commercial shipyard facilities and their associated professional and production workers still provide a nation with the mobilization capacity to build warships whenever state authorities give the order.

A study of the Chinese shipbuilding industry by the European Commission (EC) found that Beijing has managed to expand its share of world shipbuilding to 7 percent. This is still behind the goal Beijing set to reach a 10-percent market share. According to the EC, “there has been significant capacity expansion in recent years both through the construction of new facilities and the upgrading of existing shipyards.” Beijing uses subsidies to offset costs the EC estimates as higher than in Korea or Japan due to lagging technology. “These difficulties have not stopped the expansion process,” the EC says, noting that China is constructing one of the world’s largest shipyards at Waigaoqiao.

This Chinese expansion makes little sense from a purely economic perspective, given that there is already a worldwide overcapacity in the industry. The Organization for Economic Cooperation and Development estimates that shipbuilding overcapacity may increase to around 40 percent by the year 2005. However, if Beijing continues to follow a mercantilist policy of using its expanded trade to support its commercial shipping at the expense of rivals, combined with subsidies and lower labor costs, it may be able to force other countries to be the ones that “adjust” (downsize) their shipbuilding industries. This would be especially true if major rivals depend on “market” forces rather than strategic planning to guide their actions.

According to a report from the United Nation’s Economic and Social Commission of the Asia and Pacific Region, container ship traffic in the region will double over the coming decade. The report indicates that Shanghai will replace Singapore to become the second busiest port after Hong Kong. Correspondingly, the number of containerships also will rise. It is estimated that 1,342 new containerships will be put into operation in the region by 2011. At the same time, a total of 427 new port berths will be constructed, of which 164 (39 percent) are to be built in China. Beijing will thus have the leverage to sustain and expand its shipbuilding capacity.


China’s shipbuilding industry, however, still has obstacles to overcome before it can take full advantage of the opportunities offered. Beijing’s goal of sourcing 80 percent of ship components from Chinese industry by 2000 was not met. The actual use of Chinese-made equipment is very limited due to its poor quality. This is most vexing in the area of propulsion systems.

China has also been importing advanced production methods and capital equipment, including complete production lines. Using foreign sourced computer-aided design and computer-aided manufacturing (CAD/CAM) hardware and software, Chinese naval architects are becoming more proficient in designing ship hulls, compartment layouts and propeller-rudder combinations that improve speed, efficiency and structural integrity.

Inefficiency is another pressing problem. Many of China’s 800 shipyards are underutilized. A typical Chinese yard employs 9,000-12,000 workers, but these workers are not always kept busy. Poor management, corruption, lack of technical knowledge, political mandates to use particular suppliers, and slow delivery times have hurt productivity. In recent years, Beijing has been trying to reform the industry’s structure by merging yards and making changes in the China State Shipbuilding Corporation (CSSC). The CSSC was created in 1982 to combine the shipyards run separately by the 6th Machinery Ministry and the Ministry of Communications. The change in nomenclature from ministry to corporation did not, however, stimulate an entrepreneurial spirit among managers.

In 1999, CSSC was split into two organizations: one to control operations in the south, the other in the north. The southern entity retains the name China State Shipbuilding Corporation and administers the yards in Guangdong, Jiangxi, Anhui and Shanghai. It controls some thirty industrial enterprises. About half of all Chinese ship construction takes place in the Shanghai area, with Dalian and Guangdong the next two most important centers. The China Shipbuilding Industry Corporation will control the northern yards in Yunnan, Dalian, Hubei, Tianjin, Shanxi and Liaoning. CSIC will control some forty-eight industrial enterprises. Both corporations also oversee numerous science, design and research units. There are some smaller shipyards still run by the Ministry of Communications, by the provincial governments of Jiangsu and Pujian and even by a few local private firms.


As Chinese builders have become more competitive in world markets, particularly in dry cargo and crude oil tankers, Japanese and Korean shipbuilders are taking steps to protect their corporate profits, if not their homeland’s industrial position. Japan’s Kawasaki Heavy Industries formed a joint venture with COSCO to create the Nantong Ocean Ship Engineering Company (NOSEC), the core enterprise of the newly founded COSCO Shipyard Group. This group has already built the largest ship repair facility in China, and has announced its intentions to become “the No.1 ship repair yard group in the world.”

In 1997, Korea’s Samsung Heavy Industries opened its Ningbo Factory in the Quingshi Industrial Zone of Xiaogang, China. Ningbo Factory manufactures and exports hull blocks of ships, steel structures and outfittings to Korean and Japanese shipyards.

Joint ventures between the developing Chinese shipbuilding industry and established Japanese and Korean yards will inevitably serve to transfer technology, engineering skills and production know-how to Beijing. Hundreds of Chinese engineers are being trained by their Japanese and Korean partners. Such transfers are a prerequisite for doing business with any state-owned enterprise in China. Both Japan and South Korean shipbuilders were able to make dramatic improvements in productivity, running as high as 15 percent a year, in their earlier periods of development. With a strong commitment to the industry from Beijing and the inflow of foreign knowledge, it can be expected that Chinese shipyards will also make great strides over the next five to ten years.

The ability to produce commercial hulls on a competitive basis does not translate directly into building first-class warships that can compete in the far more rigorous arena of combat. Weapons systems, sensors, communications, propulsion and navigation gear are far more complex in men-of-war, and their integration forms the real heart of a warship. China is far behind Japan and the United States in the development of these systems. Even Australia, South Korea and India have put more sophisticated warships to sea. Rather, China’s shipbuilding capacity is merely a building block towards a more robust naval capability in the future.

The People’s Liberation Army Navy has been primarily equipped by warships from the Soviet Union/Russia, and still looks to Moscow to provide its most capable new units such as Sovremennyy-class guided-missile destroyers and Kilo-class diesel attack submarines.


China has built some light combatants. The Hutang Shanghai shipyard built four frigates in 1958-59, and an additional four were produced by various yards in 1967-69. During the same period the Jiangnan and Wuhan shipyards in Shanghai started building submarines based on the Soviet Romeo-class. Jiangnan also produced a number of guided missile frigates of the Jianghu-class from 1975 onwards and Luhu-class guided missile destroyers starting in 1994. Jianghu and Jiangwei class frigates were also built at Hudong shipyard in Shanghai and Huangpu shipyard in Guangzhou. Series production of the small destroyers of the Luda-class were spread among shipyards in Dalian, Guangzhou and Shanghai centers.

Even more than with its commercial ships, Chinese warships depend on imported components for their more advanced capabilities. For example, the two Luhu destroyers relied on gas turbine engines from the U.S. with subsequent units using Ukrainian engines; fire control, surface-to-air missiles and radars are from France; and an antisubmarine suite from Italy (license-built in China). Many hailed the 1998 launch of the first Luhai guided missile destroyer as a major step forward for Chinese shipbuilding. At 6,600 tons, the Luhai was half again the displacement of the Luhu and nearly double that of the Luda. But only one more of this class has been built since.

China’s success with nuclear-powered submarine design has been marginal, and only one of the five Han-class (Type 91) nuclear-powered attack submarines is thought to be fully operational. The new Type 93 nuclear attack sub design is reported to be struggling. The first Chinese Song-class diesel attack submarine, launched in May 1994 did not become operational until 1998 and is said to be a less than satisfactory design, though another has been built and more are planned. The indigenous Ming-class (Type 35, based on the Russian Romeo) program, underway since the early 1970s, produced its twentieth hull late in 2000.

There have been rumors of a license agreement to build Russian Kilo-class submarines in China, but negotiations have been under way for the purchase of a late-version Project 636 Kilo to be assembled in Russia (not China) from surplus components. The first two Chinese Kilos, delivered in 1995-96, are to be refitted at Russia’s Bol’shoy Kamen yard on the Primoriy Peninsula, not in a Chinese yard.

Beijing is decades away from sending to sea naval forces that can support its claims in the South China Sea (or beyond) if challenged by the United States or a more active Japan. However, the resources China is devoting to improving its shipbuilding industry indicates that Beijing finds its current inferior position intolerable and intends to change the balance of power in the region when it develops the means to do so.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council Education Foundation, Washington, DC.