By John Pomfret
Washington Post Foreign Service
Thursday, July 23, 1998; Page A01

BEIJING, July 22—China's President Jiang Zemin ordered the People's Liberation Army to end its decades-old flirtation with capitalism and relinquish its massive network of commercial enterprises, which include everything from refrigerator manufacturing to golf courses and karaoke halls, the state-run press reported today.

Jiang's order came at a meeting of senior military leaders called as part of China's campaign to fight rampant smuggling, which is estimated to cost the government at least $12 billion a year. Last week, the Communist Party's People's Daily accused the army as well as the People's Armed Police, China's biggest uniformed internal security apparatus, of involvement in smuggling and warned them to end the illegal practices.

Jiang's move is part of a series of significant revisions designed to shake up the army and transform the way it operates. China's leadership has been trying since 1993, with limited success, to get the army out of the business of making money and back into the business of defending China.

While it is unclear whether this latest attempt will work, Jiang's order is the most serious effort so far to deal with a problem that is said to be a key impediment to the army's desire to become a regional and, ultimately, a global power. Western military officers have said for years that the army's moneymaking efforts have affected its ability to focus on its stated goal of professionalizing and improving the 2.3 million-strong military force.

"To focus efforts to fully build the military, the central authorities have decided that the army and armed police forces must earnestly carry out checks on all kinds of commercial companies set up by subsidiary units, and without exception from today must not engage in their operation," the official New China News Agency quoted Jiang as saying.

"The whole army must earnestly implement the anti-smuggling work and deployment . . . and strictly investigate problems with some units and people involved with the army and armed police," Jiang said.

It was the second time this week that government officials have taken a swipe at areas once perceived to be the military's turf. Earlier investigators broadened a probe into a securities firm with close links to the Guangzhou Military Region. J&A Securities was once one of the biggest underwriters of Chinese stocks in China. Earlier this month, however, investigators reportedly discovered $120 million missing from its books. J&A Securities is now reportedly being merged with another state-run securities firm, Guotai, according to Hong Kong press reports.

The army's involvement in business has been one of the more remarkable byproducts of China's two decades of economic reforms. Experts on China's military estimate that the army owns about 15,000 enterprises that generate perhaps $10 billion a year. Among the businesses are a tourist cruise line on the Yangtze River, three of China's professional basketball teams, an airline, textile and pharmaceutical manufacturers, discotheques, restaurants and hotels such as the luxurious Palace Hotel in central Beijing.

Some of the firms are owned by individual units; others belong to one of China's seven military districts, and still others are controlled directly by China's central military establishment -- such as the General Logistics Department or the army's General Political Department.

Some firms owned by the army have a toehold in the United States and other foreign countries. During the 1990s, army-owned firms sold millions of assault weapons to American gun collectors and thousands of pounds of whitefish to American fish-stick manufacturers. Companies controlled by the Chinese army own large chunks of property in Thailand and Hong Kong and, at one time, had property holdings around Atlanta and Dallas.

Jiang made his order during an anti-smuggling conference held on Monday and Tuesday at army headquarters in Beijing. Among the participants, the New China News Agency said, were all of the uniformed members of the Central Military Commission, China's most powerful military body, which Jiang chairs.

Army-run businesses of all descriptions can easily engage in smuggling because their trucks do not pay tolls or get stopped by police for inspection. Smuggling hurts China's economy, affecting, among other things, the price of oil -- which slipped about $35 a ton since January because of smuggling -- and of cars, Chinese press reports have said.

Jiang's order appeared to be aimed at military firms that produce things that have nothing to do with fighting wars. Weapons manufacturers belonging to the army reportedly are to be exempted from his ruling.

Indeed, Jiang's plan comes several months after China said it was launching sweeping reforms of the army's military-industrial complex. On April 5, central authorities announced the formation of a new wing of the army called the General Armaments Department, designed to be responsible for research and development as well as production of weaponry for the army.

According to Western sources, the new armaments department is expected to take responsibility for all of China's weapons manufacturers -- a job that in the past was done partly by an organization called the Commission of Science, Technology and Industry for National Defense and partly by army-owned firms. The army's procurement process was too complicated, Western officers have said, because the commission is directly responsible to the State Council, China's cabinet, and the army bows to the Central Military Commission. The State Council and the Central Military Commission often did not coordinate, resulting in delays of needed equipment, the sources said.

Under the new reforms, the Commission of Science, Technology and Industry for National Defense is expected to take responsibility for the remaining firms not involved in military production -- such as those that make refrigerators or other items that have nothing to do with war, the sources said.

David Shambaugh, director of the Sigur Center for Asian Studies at George Washington University, said the military's effort to reform its procurement process is not a guaranteed success.

"This is part of a long-term procedure to build a self-sufficient defense industrial complex," he said. "I am not optimistic about their capacity to produce world-class weapons and to maintain and absorb world-class weapons."