By John Pomfret
Washington Post Foreign Service
Wednesday, August 19, 1998; Page A23

BEIJING—The People's Liberation Army, confronting allegations of corruption, a security dilemma on its southern border following India and Pakistan's nuclear tests, and a plan to slice 500,000 troops off its rolls, is limping toward the 21st century with its dreams of becoming a modern army facing important tests.

The headline in the People's Daily on Monday told a story of how the Chinese government would like it to be. "The military and the people share one heart," read a report on the work of hundreds of thousands of soldiers fighting floods in central and northeastern China. In reality, "a crisis of confidence" has penetrated the military's ranks, said one Western military expert, noting that the 2.5 million-strong Chinese army is feeling the bite of economic reforms in terms of laid-off officers and demobilized soldiers.

Recent Chinese weapons acquisitions from Russia, such as the Sunburn anti-ship missile system, could make U.S. forces think twice about clashing with China. Nonetheless, it seems that China's plan of creating an elite fighting force in Asia to "fight future local wars under high-tech, modern conditions" is under threat. Gen. Fu Quanyou, head of the army's General Staff Department, recently outlined that task as the army's main goal for the near future.

"One must not equate ambitions with capability and research with development," said David Shambaugh, an expert on the Chinese military at George Washington University, who has closely watched the army's attempts to modernize for more than 15 years. "In order to modernize, China's military is going to have to undergo an almost complete reconceptualization of its role."

China's army celebrated its 71st anniversary this month. Born amid the forbidding terrain of Thistle Mountain in southern China, it started as a ragtag guerrilla force. Success in battle against the Nationalist troops of Chiang Kai-shek and later Japanese invaders gave birth to a strategy of People's War, which envisaged arming a whole society against an aggressor. People's War was dumped in the 1980s when China realized it needed better troops, not more of them. But it still devotes a whopping 35 percent of its defense budget to personnel costs, one of the highest such figures in the world.

Taken independently, each of the problems the army is facing could be solved, military experts say. But one Chinese military analyst described them as "crabs in a barrel with interlocking claws."

"Grabbing one means that several more come with it," he said. "It is a difficult situation."

Perhaps most important among the army's issues is that China's ambitious program to reform its economy has begun to hurt the military. Almost every day the People's Liberation Army Daily runs stories about the difficulties confronted by demobilized soldiers and officers seeking jobs. The wives of officers are also a common topic, as they are getting laid off from their civilian jobs. This is significant because if a Chinese major makes about $125 a month, his wife's salary is critical to the family's survival.

On May 5, the paper reported, for example, that in the Nanjing military region, the firing of officers' wives was influencing the officers' ability to keep their minds on their jobs. "In order to prevent disturbances on the home front," the paper said, city authorities had agreed to place the women in new jobs or stop them from being fired.

At the 15th Congress of the Chinese Communist Party in September last year, China's President Jiang Zemin announced that 500,000 troops, including 50,000 officers, would be cut from the army's rolls. The reduction aims to cut the army's bloated troop strength to perhaps 1.8 million men by the end of the century, Shambaugh said, and is part of a program to forge a more professional force.

But the army faces two problems as it slashes its troop strength.

The first has been illustrated clearly in the floods that have ravaged central China over the last month. In the past, soldiers and civilians would battle the flood waters together. Today, civilians are not so easily mobilized because China's economic reforms have weakened the Communist Party's ability to organize people to work for nothing. So it has fallen on the army to stop the Yangtze River by itself. More cuts in troop strength will make its job even harder, army officers have complained, but those cuts are necessary to create a stronger army.

The second problem is that placing demobilized soldiers in jobs is getting more difficult as China's economy lags behind its breakneck pace of years past. China's economy grew at an annualized rate of 7 percent during the first half of this year, slower than last year, and Western economists expect it to further weaken in the second half. On June 2, the army's paper reported that five major meetings already had been held on the issue of employing demobilized soldiers.

The explosion of nuclear devices by India and Pakistan in May also has shaken up the army's general command, Western analysts said.

The army's plans to modernize its forces were based on the assumption that the international environment around China would be stable for 15 to 20 years, a theory first put forth by Deng Xiaoping, China's senior leader who died last year. So China's military planners have devoted the bulk of their expertise and development funds to planning for a conflict with Taiwan -- an island of 20 million people 100 miles off China's southern coast that China views as a renegade province. But with a brewing nuclear arms race on its southern flank, China could be pulled away from focusing on Taiwan and forced into confronting two potential conflicts at once.

One Pentagon official noted that military history has taught that armies -- such as German forces in the 1930s -- become powerhouses when they focus on one task, such as retaking the Alsace-Lorraine region of France, which Germany occupied and then lost in World War I. If China is forced to dilute its focus on Taiwan with preparations for problems between India and Pakistan, the army's modernization could be hurt, the official said.

"The strategists in the [army] are not very happy with this," the official said. "This throws a wrench in their plans."

In recent weeks, China's state-run media has criticized the army for its involvement in smuggling, which costs China an estimated $12 billion a year in revenue. To that end, on July 22, Jiang ordered the army to dismantle its huge empire of firms that operate a wide variety of businesses, from karaoke halls, to discotheques, to hotels, pharmaceutical companies, motorcycle makers and bowling alleys. This web of businesses is believed to generate $10 billion in revenue for the army each year, $3 billion of which is profit. In an editorial celebrating the army's 71st anniversary, the People's Liberation Army Daily told its troops to uphold Jiang's order.

"The army must hold high the banner of opposing money worship, hedonism and extreme individualism, and wage a resolute struggle against the negative phenomenon of corruption," the newspaper said in a front-page commentary.

Jiang's announcement, which Chinese leaders had been preparing for months, is part of another risky and important reform that, if it succeeds, will fundamentally change the way China's army procures weapons and finances itself.

More than 1,500 companies make up the army's commercial kingdom; at least three army-backed companies are listed on the Hong Kong Stock Exchange; and dozens of army companies have subsidiaries in the United States. The army entered into the business of making money in the 1980s as a way to supplement its shrinking share of the national budget.

But this strong focus on making money has hurt the army's ability to defend the nation, the Chinese military analyst said. As more and more military companies have focused on profit-making, the weapons-manufacturing wings of these firms have languished, he said. Military orders have gone unfilled as firms seek to crank out trucks instead of tanks, refrigerators instead of howitzers. Training also has fallen behind as regiments concentrate on profits not preparedness, he said.

In April, China announced that it was adding a fourth department to the army, the General Armaments Department, that would coordinate research and development and weapons acquisition. The government also announced that the Commission of Science and Technology for National Defense would be put under civilian leadership and concentrate on manufacturing. Western military experts are unclear whether the commission would be involved in weapons manufacturing and exactly how it would relate to the new armaments department.

What is clear is that these reforms are proceeding slowly.

In recent weeks, the General Armaments Department, which was supposed to be organized by early June, was unable to put together a team to visit the United States, "because no one had the authority to determine who could go," one Western diplomat said. The diplomat said the changes in the commission are even further behind schedule.

The diplomat noted that somehow money must be found in China's treasury to make up the losses incurred by moving the army out of business ventures. China's publicly acknowledged defense budget of $10.79 billion cannot possibly pay to house, feed and clothe 2.5 million men, much less for weapons development programs. While the real budget is much higher, the money made by the army "walking the capitalist road" is important.

"They have got to deal with the fundamental question of taking care of their soldiers," the diplomat said. "It is going to take innovative leadership to figure out an effective way to do that."