Chinese Defense Expenditures: Implications for Naval Modernization

By: Andrew S. Erickson
Theextent and nature of Chinese defense spending can serve as theparameters for the future course of China’s military power and China’sintentions as it continues military modernization. Recent scholarshipon China’s defense spending concludes that its military budgets havebeen understated in official sources, although there is enormouscontroversy concerning how much and why [1]. Even more controversialhave been Western interpretations of China’s defense budget. Somebelieve there is now firm evidence that Beijing fully intends tochallenge Washington for regional leadership in the Asian littoral andmay even reach further to conduct extensive operations. Others haveconcluded from recent budgets that China is pursuing military powercommensurate with its economic strength and sufficient to allowmilitary actions to achieve reunification with Taiwan. Studying PLAfunding can offer insights into the trajectory and dimensions of thePeople’s Liberation Army Navy (PLAN)’s modernization.

Current Spending

ThePeople's Liberation Army (PLA)’s official 2010 defense budget is $78billion [2], ahead of Russia and Japan, and second only to that of theUnited States at $685 billion. Since 1990, the budget has enjoyeddouble-digit growth, with the exception of 2003 (in which growth was9.6 percent) and 2010 (7.5 percent). From 1998-2007, China’s annualincrease in defense expenditures averaged 15.9 percent, outpacinggrowth in GDP at 12.5 percent, but not government expenditure, at 18.4percent. This episode followed a period of slightly slower defensebudget increases averaging 14.5 percent from 1988-97, which nearlymatched increases in state financial expenditure at 15.1 percent, butamid GDP growth of 20.7 percent and significant inflation. That periodin turn represented a major transition from the 1978-87 era, whenprioritization of economic development held defense expenditure growthat 3.5 percent and government budgets at 10.4 percent while focusing onGDP growth of 14.1 percent [3].

Much has been made of the 2010reduction in growth, with American scholars citing internal politics,domestic priorities in the 12th Five Year Plan, low inflation,corruption crackdowns and PLA achievements of mid-range goals [4].Senior PLA scholars, including Major General Luo Yuan, cite the needfor economic spending during the financial crisis [5]. General Luo alsostates that defense budgets should not be based on internationalopinion, perhaps implying that he believes this consideration may haveinfluenced the PLA’s 2010 budget [6].

The bottom line is that noother major power is approaching even this level of defense spendinggrowth. Expenditures in both the overall budget and on equipment (whichincludes procurement, and, to some extent, research and development)have increased several fold during this period. China’s defenseindustry, while is still uneven in efficiency and quality of output, isimproving steadily. Together, these factors enable consistent increasesin overall PLA capabilities, with particularly rapid progress in nicheareas.

The PLA’s budget remains veiled and apparently does notinclude at least some major items found in many Western defensebudgets. These include foreign weapons purchases; defense industrysubsidies for research and development; certain retiree benefits; andextra-budgetary revenues and resources from a limited number ofsurviving military commercial enterprises (e.g. hotels and militaryhospitals) and unit-level production. Also excluded are paramilitaryforces, such as the 660,000-strong People’s Armed Police (PAP), andsubstantial military contributions from regional and local governments.China has never released budgetary breakdowns for individual PLAservices. The closest equivalent is Beijing’s annual submission to theUN via the Simplified Reporting Form, which only enumerates respectiveactive forces, reserve forces and militia spending on personnel,training and maintenance, and equipment.

At the same time, thePLA budget may contain costs not included in those of its Westerncounterparts. It contributes to national economic and infrastructuredevelopment, social welfare, crisis management and disaster relief inways often covered by non-military organizations in the U.S. and otherWestern countries.

Much remains uncertain: the precise extent towhich the PLA, as opposed to local governments, should fund such areas,including reserve forces and militia training and organization, isapparently under debate. For example, it has sought to transfer itsretirement homes to local communities for the past decade, with noresolution in sight.

Comparing China

Foreign analystsoffer a variety of estimates—all higher—for China’s actual defensespending; these vary substantially with assumptions concerning exchangerate, purchasing power parity (PPP) indices and inflation. At the lowerend of the spectrum, the Stockholm International Peace ResearchInstitute (SIPRI) estimates the PLA’s 2008 budget at 1.4 times theofficial figure. At the higher end, the U.S. Department of Defenseestimated in 2009 that the PLA’s 2008 budget could be roughly 1.8-2.6times higher in practice than official figures state [7].

China’sgovernment and analysts are clearly worried about foreign perceptions.Chinese attempts to justify increased PLA expenditure are driven inpart by concerns that foreign countries will cooperate to contain aso-called “China Threat.” Official statements regarding China’s defensebudget seek to justify its recent rise, citing as the major drivers (1)personnel costs (e.g. education, training and salaries), (2)compensation for rising prices of oil and other inputs, and (3)furthering China’s Revolution in Military Affairs, includingimplementing informatization and increasing equipment and supportingfacilities. Other factors cited include logistics and infrastructuredevelopment and international cooperation [8]. Such costs likewisecomprise a significant percentage of the defense budget of the U.S. orany other modern military. The PLA is just now trying to get personnelpay in line with societal trends requiring large increases for manypeople, whereas the U.S. and other countries made those large increaseslong ago and are now keeping up with inflation.

Chinesesources use a variety of statistical comparisons to explain andminimize Chinese military spending. China’s 2008 Defense White Paperemphasizes “both the total amount and per-service-person share ofChina’s defense expenditure remain lower than those of some majorpowers” [9]. Much is made of the idea that China’s official defensebudget does not correspond to ‘Western standards,’ and therefore cannot be readily compared.

China’s defense economy issubstantially different from that of Western nations, and perhaps moreprepared to assume a war footing in certain respects. According toChina’s 2006 Defense White Paper, “In building … infrastructures, Chinapays close attention to the requirements of national defense, andensures that peacetime needs and wartime needs are properly balanced”[10]. Of course, to the extent that the U.S. engages in equivalentspending, it would come from the budgets of other organizations (e.g.the Department of Homeland Security).

Chinese economists offermixed data when attempting to compare China’s military spending withthat of other nations. There is significant, if very limited,disagreement concerning China’s actual level of defense expenditures,however, even inside China. One Chinese scholar not only maintains thatdirect comparison is possible, but also contends that DoD significantlyunderstates China’s annual defense spending, which may be equivalent toover $150 billion in U.S. spending in his view. He further contendsthat China’s defense budget should not only be calculated using PPP ingeneral, but should also be further adjusted based on China’s relativedegree of self-reliance. For instance, defense spending fromnon-military organizations (e.g., State Council “special budgets,”weapons sales, and previous military business activities) should beestimated and added to China’s official defense budget, which does notinclude these categories. Based on current exchange rates, personnelcosts should be multiplied by seven. Foreign weapons purchases shouldbe multiplied by one. Indigenous weapons development and productionshould be multiplied by a factor somewhere between seven and one,depending on actual degree of indigenization [11]. Regardless of theaccuracy of this scholar’s claims, it is useful to examine the methodssuggested for calculating China’s defense budget. China’s secretivebureaucracy and low material and labor costs must be considered whenattempting to estimate its true military spending.  

Ongoing Reforms

China’sdefense development remains hampered by an unwieldy defense economy andbudgeting process. While China’s complex and sometimespoorly-coordinated bureaucracy inhibits outsiders’ ability to determineits total military spending, perhaps China itself still has difficultycalculating its own total defense spending. As DoD assesses, “Whatlittle public information China releases about defense spending isfurther clouded by a multitude of funding sources, subsidies, andcutouts at all levels of government and in multiple ministries. Realspending on the military, therefore, is so disaggregated that even theChinese leadership may not know the actual top line” [12].

Thismay gradually be changing, however. Since the mid-to-late 1990s,comprehensive reforms have increased PLA financial standardization: (1)divestiture of commercial assets, (2) regularization of accounting andauditing, (3) marketization of defense procurement, and (4) zero-basedbudgeting to bring budgetary and extra-budgetary funds undercentralized management. Rising defense budgets place more and moredefense-related expenditures ‘on the books’ [13]. A complex network ofoften corrupt commercial transactions that proliferated after DengXiaoping encouraged military entities to engage in private business inorder to supplement reduced defense budgets has been gradually replacedby increased official spending following Jiang Zemin’s ordering of thePLA to extricate itself from most commercial businesses in the late1990s and instead “eat imperial grain” (i.e. enjoy increased statefunding).

Economic Foundation

At 1.4 percent of GDP (6.4percent of total fiscal expenditure) officially, China’s 2010 defensespending is clearly sustainable, and could be increased proportionallyshould Beijing deem it necessary. China’s national debt is equal toonly 18 percent of GDP. By contrast, U.S. national debt approaches 100percent of GDP; defense spending represents 4.7 percent of GDP and 19percent of total fiscal expenditure. The rising tide of Chineseeconomic growth is likely to steadily lift the PLA’s boat, at least forthe next few years. Liu Yingqiu, dean of the Graduate School at theChinese Academy of Social Sciences, recently predicted that China’sGDP, growing at 9 percent per year, combined with changes in theexchange rate, could overtake that of the United States in 2020 (GlobalTimes, March 9).

Competing Factors

Nevertheless, in thelonger term, a variety of factors may limit PLA budget growth, at leastto some extent. Various structural and demographic dynamics couldgreatly restrict China’s ability to sustain rapid military spendinggrowth, regardless of its leaders’ intentions. They are likely to facetradeoffs unprecedented since the post-1978 reforms as Chinese societyages, expects higher standards of living and perhaps includes moreindividuals who are disaffected.

Additionally, even if the PLAbudget continues to grow steadily, factors internal to the PLA willlikely limit its overall force structure and capabilities. The PLA isalready wrestling with increased personnel costs, which will likelyconsume an increasing percentage of its overall budget. As NCOsincrease, for example, they will be paid more than the conscripts theyoften replace. Combined with more capable and thus more expensiveweapon systems and the higher operations and maintenance costs thatcome with missions such as the anti-piracy patrols in the Gulf of Aden,predicting the future force of the PLA is far more complex than simplestraight projections that claim an expansive PLA twenty years from now.

Leading indicators of changes in the parameters of China’sdefense spending include the Chinese economy’s growth, the centralgovernment’s ability to collect revenues and propensity to spend themon non-military programs (e.g. a future national pension system andother welfare benefits for China’s increasingly socially stratified andrapidly aging population), personnel salaries (e.g. competitive pay toattract a dwindling population of draft-eligible individuals amidincreasingly attractive private sector alternatives), national spendingon research and development, and weapons imports. Of course, even at alower level of defense spending, China could still increase its powerand influence substantially in East Asia and even challenge U.S. andallied interests there.

Naval Implications

Regardless ofexact figures, China is clearly developing and procuring the weaponsand nurturing the manpower to modernize its military significantly. AsRichard Bitzinger concludes, “One does not need to count all the beansto know that China is an emerging military (as well as economic andpolitical) power in the Asia-Pacific to be reckoned with” [14].Increasingly capable Chinese submarines, ships, aircraft, satellites,missiles, and other platforms emerge constantly, underscoringBitzinger’s point.

China’s navy thus far has been focusedlargely on developing a variant of regional anti-access to preventTaiwan from declaring independence, in part by achieving crediblecapabilities to thwart U.S. forces should Washington elect to intervenein a cross-Strait crisis. To assess related scenarios, one must comparethe actual assets that relevant militaries could deploy; overallcomparison of Chinese and American defense budgets is misleading unlessone envisions an all-out conflict between the two, which fortunately isnot a realistic possibility. The PLAN’s current order of battle isstill clearly sized and shaped primarily for defending claims onChina’s disputed maritime periphery as opposed to conductingextra-regional blue water sea control operations.

Yet whileconcerns about Taiwan’s status have played a large role in drivingChinese defense spending since at least the mid-1990s, the PLA’sdefense interests are now necessarily greater. Taiwan President MaYing-jeou’s March 2008 landslide election has greatly reduced the riskof conflict. Now, with cross-Strait relations stabilizing and Chinacontinuing to grow as a global stakeholder, China’s navy is likely tosupplement its Taiwan and South China Sea-centric access denialstrategy that its current naval platforms and weaponry largely supportwith “new but limited requirements for protection of the sea lanesbeyond China’s own waters, humanitarian assistance/disaster relief, andexpanded naval diplomacy” [15].


Regardlessof its exact size, which remains uncertain to outsiders, China’sdefense budget is on track to continue funding an increasingly capablemilitary/navy that is gradually increasing focus on areas beyondmainland China. This is part of a two-level process, however, withnearby priorities still at the core. Preparing to defend China’sterritorial and maritime claims by asymmetric means is likely to remainthe PLAN’s focus for the foreseeable future, even as it pursuessecondarily lower intensity missions further afield. Developing robustlong-range combat capabilities would require new platforms, forcestructures, training and operations to such a degree as to requiresignificant increases in the PLAN’s budget. As the most naturallyinternationally-oriented of the services, the PLAN may stand to benefitmost the PLA’s increasingly “externalized” orientation. It is possiblethat it might win a larger portion of a growing PLA budget, but therewould likely be resistance to such changes, including from China’sother services, which are likely to press their own claims. China’sground forces, though no longer dominating the PLA to the same degreeas they have previously, are still vital to the all-importantobjectives of domestic stability and border security. China’s SecondArtillery’s conventional missiles are critical to holding regional landand, increasingly, sea-based assets at risk. China’s Air Force appearsto be laying claim to military space missions, and a space force may bedeveloped in the future. Even the most basic data on service budgetsremain unavailable to foreign researchers, however, so for now thismust remain speculation. China’s capabilities are clearly growing, butits naval intentions—at least beyond asserting control over its claimedterritorial waters, to include Taiwan—are somewhat unclear.
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