China’s defence conglomerates: temporary troubles?

IISS | Lucie Béraud-Sudreau, Meia Nouwens

China’s defence state-owned enterprises NORINCO, CASC, CASIC, and CSGC experienced significant real-term revenue declines between 2019 and 2025 despite Beijing increasing overall defence spending by 32% to USD273 billion in 2026. This unexpected financial contraction threatens to temporarily disrupt arms procurement pipelines for the People’s Liberation Army across critical Indo-Pacific operational sectors.

Structural pricing reforms introduced by the Central Military Commission in 2019 forced state-owned conglomerates into competitive tendering and price inquiries, sharply reducing unit profit margins previously guaranteed under cost-plus contracting models. High-level anti-corruption purges further disrupted contracting. Senior executives across multiple aerospace and electronic warfare firms were purged. Nevertheless, military revenues are projected to recover under the upcoming 15th Five-Year Plan covering 2026–30. Expanding defense export access across Asia provides an additional financial buffer as Aviation Industry Corporation of China secures high-profile J-10CE fighter deliveries to Uzbekistan, Bangladesh, and Indonesia.

Comment

The shift from cost-plus accounting to competitive tendering under the Central Military Commission's 2019 pricing regulations exposes structural vulnerabilities within Beijing’s state-capitalist defense industrial framework. By squeezing profit margins across tier-one contractors like NORINCO and CASC, Central Military Commission auditors effectively forced state-owned conglomerates to absorb efficiency losses that were previously subsidized by state budget allocations. This regulatory enforcement prioritises fiscal discipline and procurement oversight over the guaranteed cash flows historically enjoyed by PLA suppliers.

This margin compression operates directly through multi-tier subcontracting chains, where sub-tier component suppliers like Hengyu Xintong Aviation Equipment absorb proportional price cuts from prime integrators such as AVIC. When combined with anti-corruption investigations by the Central Commission for Discipline Inspection targeting SASTIND, procurement officers routinely stall contract approvals to avoid audit scrutiny, creating prolonged production delays across major aerospace assembly lines.

Strategic Question for Discussion

If the Central Military Commission's pricing regulations continue to depress profit margins across sub-tier suppliers like Hengyu Xintong Aviation Equipment, will Chinese defence conglomerates maintain technological innovation through internal efficiency gains, or will risk-averse managers delay platform modernization to avoid financial exposure?

The pattern of state-owned enterprise restructuring suggests that squeezed margins will initially slow sub-tier innovation as component vendors prioritize fiscal compliance over risky research and development. However, Beijing's continued expansion of defense spending under the 15th Five-Year Plan will likely offset these domestic margin pressures once procurement streams stabilize after anti-corruption audits conclude. In the interim, prime contractors will increasingly rely on foreign export sales, such as AVIC's J-10CE deliveries, to subsidize their domestic operational margins.

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