Lost in Conversion

Dabbling in some theory, explaining China's defence industrial capabilities.

Guarding The Great Wall: Theorising China’s Defence Industrial Power

Anushka Saxena

In many domains, China has risen to the status of a near-peer competitor to the United States. Especially in the domain of military power, a variety of metrics, ranging from broad ones such as gross domestic product (GDP) and defence spending to specific ones such as the number of operational drones and naval tonnage, are used to assess China’s standing. However, such quantitative measures undermine the specific context in which Beijing converts its economic and industrial resources into military and defence power. At a theoretical level, I am particularly finding the framework explanations of David Baldwin, a senior American political scientist, and a career educator with stints at Columbia and Princeton – specifically his seminal work on the fungibility of power and economic statecraft – highly useful to explain the growth and ascent of China’s defence industrial power.

In a 1979 article for World Politics, Baldwin posed a crucial question to highlight just how problematic the definition and measurement of national power (or a lack thereof) is in international relations. He asked, despite the clear disparity in the power resources possessed by the two nations, how is it that Israel exercises massive influence over US foreign policy?

The rhetorical point he was making is that studying the power of nations as something possessed, and comparable to gross resources or capabilities, is insufficient. Here, of course, he echoes sentiments of another influential IR theoreticist, Robert Gilpin, who once stated that the array of definitions and measures of power should be an “embarrassment” to political scientists.

In Baldwin’s mind, such a study requires an assessment of power when exercised over a particular domain, within a particular scope, and through a particular means. Hence, he goes on, any statement about power that fails to specify scope (the issue-area in which A influences B) and domain (over whom A exercises influence) is, in Robert Dahl’s phrase that Baldwin endorses repeatedly, “verging on meaningless.”

Emerging from his musings is a most interesting concept to explain the exercise of power – the idea of fungibility. He defined in ‘79 the “fungibility” of power as the ease with which one power resource may be used in one issue area, as it may be in others. He explained it with a simple analogy to start the reader off – if one thinks of money as a resource, it is perhaps the most fungible because it can be readily converted into any other resource. Conventional resources of comprehensive national power – military, diplomatic, economic, and increasingly, technological – act a bit differently, of course. Here comes the value of the concepts of domain and scope of exercise, where the former refers to the entity(ies) over whom an actor exercises influence or power, and the latter refers to the aspect of another over which an actor exercises influence or power.

Here’s an instance combining fungibility with domain and scope, in China’s case. When Beijing deploys its manufacturing prowess as a power resource to convert capability to defence industrial power, it is essentially demonstrating the fungibility of that resource in one area built over decades – stemming from production structures, incentives, and process innovation – to assert power in another area (the defence industrial base and its implications). The exercise of the DIB as a power resource to influence outcomes vis-à-vis other actors, best manifests in the scope of allied military power projection, and the domain where it is most evident is with Pakistan, Serbia, Thailand or Algeria – China’s top arms importers.

The study of China’s defence industrial power through the lenses of “potential power” and the fungibility theory reveals fascinating results. Military-Civil Fusion (MCF), for example, represents a state-guided attempt to maximise the fungibility of China’s well-established industrial and commercial power into defence and military power, dissolving the barriers between the civilian economy and the DIB. By leveraging state capitalism to channel commercial success into military modernisation, Beijing attempts to achieve what Baldwin describes as the conversion of wealth into military influence and coercion capability.

The tradition of convertible power, of course, traces back also to Michael Foucault’s 1966 concept of the “conditions of possibility” for the conversion of power. It posits that power fungibility may often face critical “conversion costs.” In Beijing’s case, these manifest most prominently in the form of, say, systemic corruption, limits and curbs imposed by international backlash and export restrictions, dependencies on critical technological goods, and the inefficiencies inherent in state-controlled innovation. To this end, MCF both enhances convertible power and operationalises Baldwin’s “paradox of unrealised power,” in which vast inputs do not guarantee near-perfect efficacy of military outputs, primarily due to internal friction and external containment.

Applying the Framework to MCF

Historically, defence economics focused on “spin off” effects, in which military technologies – such as GPS, which was first used by the US during the Gulf War in 1991 – eventually benefit the civilian sector, as is evident in its use in mobile navigation. China’s MCF reverses this process, emphasising “spin on” effects that reflect in the rapid integration of civilian technological breakthroughs into the People’s Liberation Army (PLA).

Under Chinese President Xi Jinping, MCF was elevated to the status of a national development strategy in 2015. And because the objective is to build a “world-class fighting force” by 2049, a holistic legal and national security apparatus adds an important angle of making political power fungible for military ends.

Under Xi, for example, institutionalisation is nudged along by the Central Commission for Military-Civil Fusion Development. The creation of the Commission in 2017 was a landmark decision, replacing the fragmented oversight of the past with a single high-level body designed to consolidate state resources and enable the development of a budding DIB. This body ensures that “new quality productive forces” – a term emphasising high-technology, digital innovation – are integrated into the PLA’s doctrine of “informatised” and “intelligentised” warfare doctrine. The Commission is chaired by Xi himself, and effectively oversees the synchronisation of economic and defence planning.

In terms of legislative and policy institutionalisation, the Five-Year Plans explicitly link industrial dominance in sectors such as robotics, aerospace, and new materials to military capability. Central laws, such as the National Intelligence Law of 2017, require private enterprises to participate in national intelligence work and to share dual-use technology upon request. The Overall National Security Concept makes national defence mobilisation a pillar of China’s holistic growth. Together, industrial and legislative power create internal fungibility of power over defence SOEs, citizens, private-sector firms, commercial innovators, universities, and more, thereby creating defence industrial power.

Convert To Dominate

Nowhere is the theory of fungibility more visibly vindicated than in China’s shipbuilding sector. Unlike the US, where defence shipbuilding is segregated into a few specialised yards, China utilises a dual-use shipyard model. China’s shipbuilding capacity, measured by the number of vessels, is estimated to be over 200 times that of the United States. The China State Shipbuilding Corporation (CSSC) produces commercial container ships alongside destroyers, frigates and aircraft carriers. This commercial dominance provides a massive “surge capacity.” In wartime, commercial yards can be rapidly pivoted to repair battle damage or produce simplified logistics hulls.

According to a 2025 Congressional Research Service (CRS) report, US-based analysts estimate that the PLA Navy (PLAN) battle force will grow to 435 ships by 2030, compared with 294 for the US Navy over the same period. Further, in July 2025, a reversal of the 1999 party-state decision to separate China’s two major shipbuilders – the China State Shipbuilding Corporation (CSSC) and the China Shipbuilding Industry Corporation (CSIC) – led to the creation of a massive dual-purpose shipyard. The contemporary CSSC’s asset scale exceeds US$56 billion, and the firm accounts for 21% of global shipbuilding capacity. This quantitative overmatch is a direct result of the high fungibility between China’s export-driven commercial shipbuilding (economic power) and its naval modernisation and expansion (military power).

Here, too, the ability to transfer workforce skills, raw materials, and dry-dock infrastructure between civilian and military projects creates an efficiency that the US, with its bifurcated industrial base, cannot match. Of course, the 1920 ‘Jones Act’ is blamed by some for “hollowing out” the US shipbuilding industry by imposing compliance costs that China beats. Beijing’s case, in that sense, validates the systems-engineering approach to national power, in which the consolidation of sectoral capabilities matters more than the sum of their parts.

In terms of domain and scope, China expands its naval power on both fronts through commercial port investments that possess latent military utility. Initially marketed as a logistics support hub, China’s naval base in Djibouti, for example, is now a fully fortified base capable of docking aircraft carriers. Similarly, its investments in Pakistan’s Gwadar Port, the Ream Naval Base in Cambodia and the Chinese radar deployments in Myanmar’s Great Coco Islands provide similar examples of China’s prowess in naval soft-basing.

By embedding military potential within commercial projects – such as the Belt and Road, or a port infrastructure project like Gwadar, or the Hambantota port in Sri Lanka – China reduces the diplomatic costs of expansion. A commercial port provokes less resistance than a naval base, yet, through interoperability and dual-use licensing with an amenable party, the former can quickly serve the latter. This is a sophisticated application of soft power and economic statecraft to achieve hard power goals.

Similarly, DJI, the world’s largest consumer drone manufacturer, epitomises the blurred lines of MCF. DJI controls the global market for agricultural and hobbyist drones. In 2021, the US DoD (now Department of War or ‘DoW’) designated DJI a “Chinese Military Company” under Section 1260H, citing its role in enabling China’s defence industrial base – alongside 55 other Chinese SOEs, private sector firms, and industry groups. The court ruling upholding this designation pointed to DJI’s status as a National Enterprise Technology Center (NETC) and its receipt of investment from state-owned entities.

Of course, where the paradox of unrealised power and the hindrances to conversion capability emerge, for example, are in how centralisation required to drive MCF also creates the opacity that shelters corruption. Despite massive financial inputs and the prioritisation of MCF, the PLA Rocket Force, for example, suffered a catastrophic readiness failure. In 2023, Rocket Force Commander Li Yuchao and his deputy were removed. This was followed by the ouster of Central Military Commission Vice-Chairmen He Weidong and Zhang Youxia, most other CMC Members, Defence Ministers Li Shangfu and tens of other senior generals between 2023 and 2025.

This recent scandal highlights a critical flaw in the MCF model, wherein the system itself leads to inefficiency. In contrast to a market-economy model driven by price signals and competition-based efficiency, China deploys an involution-pricing-oriented, preference-based model to build a DIB within the state-directed MCF framework. As part of this ecosystem, vast sums of money are allocated to monopoly-holding SOEs (such as AVIC, CASIC, NORINCO, CASC, CETC, CSSC, and others) and their military and political patrons. This creates a rent-seeking environment where economic resources are siphoned off rather than converted into military capability.

Further, the Chinese procurement system has systemically relied on personal networks (guanxi) rather than merit, leading to the procurement of substandard equipment. The corruption of the 2023-2025 period was severe enough to reportedly alter US assessments of China’s willingness to go to war, suggesting that Xi may have been misled about his own military’s capabilities. This is the ultimate manifestation of Baldwin’s “paradox” – the possessor of the resources (such as China under Xi’s leadership) could not effectively wield them because of obstacles within the conversion mechanism, such as systemic glitches in the PLA’s procurement system.

Baldwin has noted that the failure to achieve goals is often attributed to a lack of will (resolve) or skill (competence). Studies such as RAND’s 2000 assessment on measuring post-industrial national power also lay emphasis on similar concepts, such as the significance of “ideational resources” in marrying national resources with national performance. While the CPC possesses immense political “will,” the PLA remains untested in actual combat, having not fought a war in over four decades. This creates uncertainty regarding the “skill” variable in China’s power conversion. The “peace disease” – a term used by Chinese military researchers and commentators to describe the lack of combat experience – essentially means that the PLA’s ability to operate systems in a high-intensity conflict remains theoretical.

Overall, the coexistence of MCF as a high-functioning fungibility engine and a corruption-sheltering opacity machine is not some resolvable contradiction. It is the kind of tension fungibility posits. The more important question Baldwin’s framework asks, is whether China’s conversion efficiency is improving, stalling, or deteriorating relative to a measurable baseline. The purges, for instance, are ambiguous on this point because they can be read either as evidence of deep-rooted rot that fooled even the commander-in-chief, or as evidence that Xi’s correction mechanism is functioning well. Which reading is correct matters enormously for any forecast of Chinese military effectiveness.

The external reliance on global markets for inputs also remains a critical vulnerability. Further, as the US and its allies adopt counter-strategies that effectively weaponise interdependence, the comfort of fungibility will likely decline. The future of the Sino-American rivalry could hence become a contest of conversion efficiency, essentially, and a policymaker willing to test theoretical applications of power, must ask: which system can more effectively translate its economic weight into power and influence without collapsing under the weight of its internal frictions?

Acknowledgements: I thank Pranay Kotasthane for introducing me to many theories of Power in IR. I thank Dr. Amrita Jash for her guidance in my studies on China’s DIB.

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Eye on China is a weekly newsletter curated by the Indo-Pacific Studies Programme at The Takshashila Institution, a public policy think-tank based out of Bengaluru, India.

Declaration on the use of AI/ML: Translation from Mandarin to English via the use of LLMs.