In early 2021, Matthew P. Funaiole, a researcher focused on Chinese security policy, noticed something strange while sifting through satellite imagery of Jiangnan, China’s largest shipyard located on the Yangtze River near Shanghai. Docked next to Chinese warships were multiple container ships owned by the Taiwanese shipping giant, Evergreen. 

The People’s Liberation Army Navy (PLAN) represents Taiwan’s foremost military threat. In the event of an invasion, China’s naval fleets would play a crucial role transporting tanks, jets, troops and other supplies across the 90-mile Taiwan Strait. Most PLAN ships are constructed by the China State Shipbuilding Corporation¹This is a preview of the CSSC corporate ownership page from WireScreen, the data division of The Wire. It’s a subscription only service but this single page is unlocked for magazine subscribers. (CSSC), the state-owned behemoth that also owns Jiangnan shipyard. So Funaiole wondered: why were Taiwanese vessels in a P.R.C. shipyard next to warships that might one day attack Taiwan? 

Evergreen, it turned out, rates among CSSC’s top foreign clients. Since 2018, the company has ordered at least 44 vessels from CSSC, according to a study conducted by the Center for Strategic and International Studies (CSIS) in Washington, with much of that commercial revenue — newbuilds range from $28 million to $51 million per ship — likely subsidizing CSSC’s military shipbuilding. 

“There’s no clear document that says, ‘Twenty percent of all revenue from commercial sales will go directly into the navy,’” says Funaiole, who is the director of the iDeas Lab and a senior fellow at CSIS. “But it should definitely raise eyebrows.” 

Especially because it’s not just Evergreen. After its merger in 2019 with China Shipbuilding Industry Corporation (CSIC), CSSC became the largest shipbuilder in the world by tonnage, with $112 billion in assets and more than 300,000 employees. Firms from Japan, France, Switzerland, the U.S. and elsewhere have also purchased container ships, oil tankers, trawlers, ferries and more from CSSC and its hundred-plus subsidiaries, according to CSIS. One subsidiary, for instance, is currently completing an 85,000-ton vessel for Carnival Cruise Line, the Florida-based cruise giant. Foremost Group, the shipping conglomerate owned by the father of Elaine Chao, Donald Trump’s Secretary of Transportation, has purchased ships from CSSC for 30 years, from 1988 to 2018, according to a spokeswoman.

CSSC, like many of China’s state-owned conglomerates, does not conceal its military ties or its sense of a nationalist mission. The company has said it is motivated by its “dream of serving the country” and calls itself the “main force” behind China’s naval modernization. But with tensions rising between Beijing and Washington and an increasingly assertive Chinese military, Funaiole’s findings raise larger questions about the wisdom of foreign companies doing business with Chinese firms operating in defense industries. Why help fund the military capabilities of a potential adversary? 

The U.S. and other governments haven’t taken China seriously as a naval threat until recently.

Roger Cliff, a professor of Indo-Pacific affairs at the U.S. Army War College. 

“It falls to the policy community and business leaders to make the decision about where those lines need to be drawn,” says Funaiole. “What level of engagement should we have? What kind of technology transfers should be allowed?” 

In the shipbuilding industry — the nervous system of our globalized world — such lines remain decidedly faint. Only a handful of companies build large, merchant ships, and until recently, the industry was mostly dominated by the “Big Three” in South Korea (Hyundai, Daewoo and Samsung) and a few in Japan. But since the 1980s, Beijing has funneled billions to its state-owned shipbuilders, and CSSC’s commercial operations have swelled in size, constituting around 60 percent of its orders today. After its merger last year, the company now boasts 22 percent of the global market, while China as a whole claims over 40 percent of global market share, the largest portion of any country. 

“It’s astonishing,” says Martin Stopford, an economist and director of Clarksons, the world’s biggest shipbroker. “The Chinese pursue things and everyone says, ‘Oh, it’s a complete cock-up.’ But in the end, it shakes down.” 

Equally impressive, experts say, is the transformative effect these commercial endeavors have had on China’s navy. CSSC is the PLAN’s top supplier, and last year, the U.S. Department of Defense published a report officially declaring China’s navy the world’s largest, with 355 ships to Washington’s 298. Advances in engine production, weapons and electronic systems, the report noted, meant that China was “nearly self-sufficient for all shipbuilding needs.” 

“If you look at the PLA as a whole, it is the navy that’s undergone the most thoroughgoing modernization over the past couple of decades,” says Roger Cliff, a professor of Indo-Pacific affairs at the U.S. Army War College. 

Indeed, for the Chinese Communist Party, there are few causes more vigorously pursued than the development of its navy. Such capabilities are critical to Xi Jinping’s “national rejuvenation” campaign, which seeks to transform China into a military superpower on par with the U.S. by 2049, the P.R.C.’s founding centennial. “The task of building a powerful navy has never been as urgent as it is today,” Xi proclaimed in 2018.

“They look at the U.S. navy and they say, ‘I want what they’re having,’” says Richard Bitzinger, a senior fellow with the S. Rajaratnam School of International Studies in Singapore. “They want a true ‘blue water navy’, one that can go out into open oceans and operate for months on end, independently.” 

The U.S., however, isn’t as enamored with this prospect, and it’s taking aim at CSSC, hoping to rock the boat of China’s naval modernization. Last June, the Biden administration banned American firms from investing in CSSC, alongside three other Chinese maritime companies. The ban, which tackles “the threat posed by the military-industrial complex of the [PRC] and its…Military-Civil Fusion strategy,” widens a preexisting Trump administration ruling, and experts say they expect the administration will take further actions to discourage or prohibit American or allied money from entering China’s shipbuilding industry. 

Such discouragement isn’t new. Americans have been restricted from dealing with Chinese defense-adjacent companies since the arms embargo and related sanctions imposed on China following the 1989 Tiananmen Massacre. But why the focus on CSSC now? 

“Really, it is Xi Jinping,” adds Bruce Elleman, a China-focused scholar with the U.S. Naval War College. “He gave the Chinese military the green light to be more pushy.” 

“The U.S. and other governments haven’t taken China seriously as a naval threat until recently,” adds Cliff. 

Still, some critics say kneecapping CSSC’s commercial operations won’t do enough to counter China’s naval blitz. This year, for instance, Beijing is constructing 22 new naval ships to Washington’s nine. The Pentagon report forecast 460 ships in China’s total fleet by 2030, and the U.S. with half that. With Beijing unstoppably determined, some say Washington is slipping behind on the high seas. 

“America can slow China down a little bit on the margins,” says Tai Ming Cheung, a Chinese defense expert at the University of California, San Diego, “but the Chinese shipbuilding industry has reached a takeoff point.”

RISING TIDES 

With 11,000-miles of coastline and some 6,000 islands, China has long been a seagoing nation. Its ancient mariners invented sails, rudders and dry docks. They were the first in recorded history to paint their boats to prevent wood rot as well as divide their hulls into water-tight subdivisions. Chinese ships were so advanced that by the end of the Tang dynasty, in 907 AD, traders had established regular commercial sea routes as far away as west Africa. In the early 15th-century, fleets led by the legendary Ming explorer Zheng He brought back riches from Africa and the Middle East.

“We have traversed more than 100,000 li of immense waterscapes…while our sails, loftily unfurled like clouds day and night, continued their courses as rapidly as a star traversing those savage waves,” the famous explorer wrote in 1432. 

But as maritime investment plummeted during China’s last dynasty, the Qing (1644–1912), rival powers rapidly developed their own naval capabilities. In the first and second Opium Wars (1839, 1856), Qing fleets found themselves woefully outmatched against British and American warships. The painful losses spelled an end to Qing rule, ushering in decades of instability. If a strong shipbuilding apparatus had served to empower China during dynastic times, the lack of it helped ruin it.

In 1949, Communist forces prevailed in the Chinese civil war, declaring an end to China’s “century of humiliation.” The PLAN was founded the following year “to safeguard China’s independence, territorial integrity and sovereignty against imperialist aggression,” founding commander Zhang Aiping said.

Most early PLAN vessels were imported from the Soviet Union, which also helped China establish its own shipyards. But China’s tumultuous final decades under Mao stalled indigenous development. 

It was not until 1982, with a renewed focus on defense under Deng Xiaoping, that CSSC was established, as a commercialized rebirth of the government ministry that oversaw naval shipbuilding.

 “The way they sold it was, ‘Look, there’s money to be made in the global commercial shipbuilding industry because global trade is a big deal and you need to move this stuff around by ships,’” says Bitzinger. “‘If that helps us build better military ships, all the better.’” 

But a Chinese ship was considered second-rate, especially compared to Japanese and South Korean competitors, which had collectively overtaken the U.K. as the world’s biggest shipbuilding nations in the ’70s and ’80s. In the late ’90s, Chinese shipbuilders gained some ground following the 1997 Asian financial crisis and the dot com bubble. In a global bear market, orders for new ships plummeted, but Japanese shipbuilders refused to lower prices. Inexpensive Chinese shipbuilders filled the void for the small, but lingering demand. China’s higher production capacity, with vastly more workers and hundreds of shipyards, also helped.

The big surge, however, came with China’s entry into the World Trade Organization, in 2001, which sparked a huge demand for ships, domestically and abroad. Hundreds of small, private shipbuilders sprung up across China, eager to help sail their country into the global economy. 

“They would literally build ships on bare earth on a riverbank and launch them from there,” recalls Stopford. “It was extraordinary.” 

From 1981 to 2003, the output of Chinese shipbuilders swelled from 135,000 gross tons to 3.7 million. In 2004, the China Shipbuilding Industry Corporation, a precursor to the modern CSSC, built over 2 million tons of ships, a 30 percent increase from the previous year. Around this time, China also began hosting the Marintec conference in Shanghai, which has grown into one of the largest shipbuilding trade shows in the world.

Through joint-ventures with Japanese and Korean shipyards, Chinese shipbuilders gained technology and engineering know-how, such as the use of modular shipbuilding and computer-assisted machining. PRC technocrats, meanwhile, developed a roadmap, the Long and Medium-Term Plan for the Shipbuilding Industry (2006–2015), which set ambitious targets. Most were exceeded. No other newcomer to the shipbuilding industry, notes Andrew Erickson, a Chinese shipbuilding expert with the U.S. Naval War College, has developed at a faster rate. 

As China’s shipbuilders expanded into the global market, Chinese finance followed. Leasing companies typically buy vessels from shipbuilders and rent them out to shipping companies. China, rich in both shipyards and home to a roaring manufacturing and export sector, was a natural fit for the industry. With the 2008 financial crisis, Chinese leasing companies began to replace weakened American and European players like Chase, Bank of America and Citibank, which had previously dominated the field. “They popped up all over the place,” says Stopford. “They’d tell two guys to set up a leasing company and go find some assets and they’d end up in the shipyards.” 

Today, China is a significant player in the ship leasing space, with Chinese leasing transactions accounting for around 10 percent of global ship financing. Major groups include ICBC Bank (the first to enter the field), the Bank of Communications and the China Development Bank, which reportedly boasts $5.2 billion in ship assets. Many large shipbuilders, including CSSC, also have their own leasing companies. 

Chinese firms found other creative ways to sink further into the global shipbuilding market. In the early 2010s, CSSC embarked on a major campaign of “asset securitization,” selling off corporate assets on Chinese stock markets and private listings. It was a great success. 

“Defense companies have been darlings on the Chinese stock market,” notes Cheung. “Whether it’s ordinary citizens or other state-owned companies that want to invest, there’s been a lot of public interest. They haven’t had any problems raising funding.”

Such infusions of capital allowed big state-owned shipbuilders like CSSC to expand beyond their traditional dependence on government funds and tap into capital markets, bringing in billions for use in military projects. It was the country’s civil-military fusion strategy à la bourse. 

“The U.S. navy needs to grow larger and get a larger share of the U.S. federal budget in order to better meet the sea control challenge posed by the Chinese military.” 

Steven Wills, a navalist with the U.S. Navy League, an advocacy group

Involving a handful of industries — from AI to aerospace — civil-military fusion refers to a concerted sharing of funding and expertise between private and public sectors to further national defense capabilities. The shipbuilding industry is particularly well-suited to this, experts say, because production processes between civilian and naval shipbuilding are relatively similar, a strategic convenience known as “dual-use production.” Engineers can largely toggle between the two; often, military ships are built right alongside civilian ones, as the Evergreen example showed. In China’s 2013 three-year shipbuilding plan, an entire section focuses on increasing civil-military integration. 

Fresh funds from asset securitization propelled Chinese shipbuilders even deeper into industry dominance. Though state-owned firms CSSC and CSIC dominated the market, nearly 2,000 private yards appeared to compete with them. China’s shipbuilding peak, in terms of delivered ships, came in 2012. Since then, the industry has consolidated into a handful of state-owned mega-yards: Jiagnan, Dalian, Hudong Zhonghua and Guangzhou Shipyard International. Crucially, shipbuilders have focused on increasingly larger and more complex ships: very large crude carriers (VLCCs), liquid natural gas (LNG) and liquid propane gas (LPG) tankers and high-capacity container ships (TEUs).

The shift was an intentional one, pushed by former CSSC CEO Hu Wenming and driven by national aims to “build China into a strong maritime power,” as president Hu Jintao announced in 2012. And it has been a good plan for PLAN. Producing such vessels, notes Erickson, “can be directly relevant to warship production in a way that building simple ships like bulk carriers is not.” Such ships also cost more, funneling greater capital into the Chinese military-industrial complex. One record-setting deal in January, between CSSC and a Japanese energy firm for six LNG carriers, totals $1.1 billion. 

Other countries, of course, employ similar strategies to China’s civil-military fusion. Boeing, for instance, often builds planes for the U.S. military. Commercial Japanese and Korean shipyards do navy work. The big difference with CSSC, notes Bitzinger, is that it is state-owned. “They’re going to be subsidized and protected. They’re going to say, ‘Yes, you should be profitable, but we’re going to control certain things.’” 

SHIPPING OUT

In October 2018, a Chinese warship patrolling in the South China Sea nearly collided with an American destroyer named the Decataur. The Chinese, the Pentagon reported, had performed “an unsafe and unprofessional maneuver” preceding the near-disaster — a characterization the Chinese did not contest. Beijing, it seemed, was flexing.

Just four months earlier, on the 69th anniversary of the PLAN’s founding, China had unveiled its first-ever homegrown aircraft carrier, the Liaoning. (The ship was originally built by the Soviet Union and eventually sold to China by Ukraine and then rebuilt as China’s first aircraft carrier.) The U.S. and its allies, state media teased, “squirmed” at the prestigious unveiling. 

Indeed, Washington was unnerved. In 1890, the American historian Alfred Thayer Mahan published a book that revolutionized global naval strategy, The Influence of Seapower upon History. Nations can only become truly great powers, he argued, once they have secured “command of the seas.” Beijing was heeding Mahan’s advice, and for the first time since World War II, America found itself with a real maritime challenger in the Pacific. 

In the four years since, China has launched “new ships like dumplings into soup broth,” as state-media has put it. Such output is typically measured in tonnage. In 2020, China commissioned three new warships amounting to over 60,000 tons, double the amount commissioned by Japan, France and the U.S. combined that year. In 2021, it surpassed the U.S. in terms of the number of warships. Beijing has even been exporting warships and submarines abroad, to Bangladesh, Thailand, Myanmar, Sri Lanka and Pakistan, where China controls a port. 

“If you look at the shipbuilding programs and the operationalization of naval capabilities, they’ve been moving at a very, very fast rate,” says Cheung. 

Meanwhile, many U.S. navy insiders are unsatisfied with Washington’s shipbuilding plans. 

“China is building a large blue water navy capable of contesting sea control in the Indo-Pacific region,” says Steven Wills, a navalist with the U.S. Navy League, an advocacy group. “The U.S. navy needs to grow larger and get a larger share of the U.S. federal budget in order to better meet the sea control challenge posed by the Chinese military.” 

“As China continues to prioritize naval modernization, the U.S. leaves its own forces floundering in a new era of Great Power Competition,” Virginia Congressman Rob Wittman, co-chair of the Congressional Shipbuilding Caucus, tells The Wire. “To preserve U.S. naval dominance, we must provide concrete shipbuilding plans to grow the fleet, not manage its decline.”

In one sense, such complaints are unremarkable. “There’s always been a long-standing push by the U.S. navy to say, ‘We need more ships,’” notes Cliff, of the U.S. Army War College. “But the U.S. navy is trying to figure out what to do about the fact that they no longer have a numerical advantage over the Chinese navy.” 

There’s a simple fact here: The United States does not have the shipbuilding industrial base to manufacture, let alone maintain, a navy that can completely — numerically — compete with China. But quantity alone is not the point. It’s quality and capability that matter.

Betty McCollum, member of the U.S. House, representing Minnesota’s 4th Congressional District

Many analysts say they would still bet on the U.S. navy over the Chinese navy since more ships does not necessarily mean better ones. On average, for instance, U.S. ships are bigger than Chinese ones, and its sailors are significantly more experienced when it comes to operating a global navy rather than a regional one. 

“It’s easier to catch up in the technology space than in the personnel space,” says Funaiole. “You need good people. You need operators, engineers and strategists to understand how these new vessels are going to operate in a very practical sense and where they fit into strategy.” 

And though the exact number of Chinese sailors is unclear, the U.S. navy likely has more personnel, adds Bitzinger, especially when taking into account America’s extensive reservist system, an asset China lacks. 

U.S. ships are also better equipped, with more advanced weaponry and electronic systems. In recent years, the U.S. navy has invested heavily in developing unmanned vessels, stealth design and AI systems, betting on its technological superiority to meet the “China challenge.” 

Beijing is also outgunned against America’s vast fleet of nuclear-powered submarines. Elleman notes that Russian naval failings in Ukraine surely have PLAN commanders, whose fleets incorporate Soviet technology, “stunned and in shock.”

With the realization that the U.S. can’t go tit-for-tat in a naval battle, Washington is hoping that leaning into these personnel and technological advantages will be enough to keep its edge. As Minnesota Congresswoman Betty McCollum said at a recent Defense Appropriations meeting, “There’s a simple fact here: The United States does not have the shipbuilding industrial base to manufacture, let alone maintain, a navy that can completely — numerically — compete with China. But quantity alone is not the point. It’s quality and capability that matter.”

But China can innovate too, and CSSC’s deep pockets will surely help it do so. Already China is making major advances in unmanned ships, AI systems and sea mine capabilities — developments that worry U.S. military planners. 

“Chinese naval ship design and material quality is in many cases comparable to U.S. Navy ships, and China is quickly closing the gap in any areas of deficiency,” says a U.S. Office of Naval Intelligence report. Observers have also noted that China, in an invasion of Taiwan, would likely enlist commercial vessels to help transport supplies across the strait, such as ferries or cargo ships, a scenario that has played out in China’s own wargames. 

Still, for buyers like Taiwan’s Evergreen, such concerns might not be enough to alter behavior. In a highly competitive market, Chinese shipbuilders remain economically attractive, and firms follow the interests of shareholders, not national security.

“The awareness here of the security ramifications [of buying from state-owned Chinese shipbuilders] is almost close to zero,” notes Collin Koh, a security researcher in Singapore. “Very often, the governments concerned do not even have the resources to try and uncover or make sense of the downstream problems.”

Evergreen did not respond to The Wire’s request for comment, but the company’s statement following the CSIS report betrayed a certain degree of myopia. Evergreen believes, they told Reuters that, “the civil commercial ship building activities have nothing to do with national naval projects.”

Not all shipyards, however, are tasked with building the world’s most powerful navy. Indeed, if Beijing succeeds in its naval ambitions, it will have the China State Shipbuilding Corporation — and its customers — to thank.

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