China would give subsidies and preferred treatment to companies that manufacture products for national defence under a draft law now under review, state-run Xinhua news agency said Wednesday.
The report comes amid a major expansion and modernisation of the nation's massive armed forces in recent years that has raised concern overseas over China's military intentions.
Xinhua said the subsidies were part of a national defence mobilisation bill under consideration this week by a committee of the National People's Congress, the nation's rubber-stamp legislature, ahead of its full meeting next month.
Firms that invest in product research, development, or the manufacture of major defence-related items will "enjoy subsidies or other preferential policies", it said.
The annual meeting of the full congress opens on March 5.
The smaller Standing Committee, which actually approves legislation, is meeting this week to consider various proposals.
After relying for decades on purchases of Soviet weapons or on homegrown arms based on Soviet designs, China has in recent years developed advanced weapons systems of its own, military analysts say.
Beijing has announced a series of double-digit military budget increases over the past several years and is expected to announced its 2010 budget next week.
The United States and some of China's regional neighbours have expressed concern about the build-up, which Beijing stresses is defensive in nature.
China last month suspended military and security contacts with the United States out of anger over a 6.4-billion-dollar US sale of Patriot missiles, Black Hawk helicopters, mine-hunting ships and other weaponry to Taiwan.
China claims the self-ruled island as its own.