Chinese Defense Expenditures: Implications for Naval Modernization

By: Andrew S. Erickson
The
extent and nature of Chinese defense spending can serve as the
parameters for the future course of China’s military power and China’s
intentions as it continues military modernization. Recent scholarship
on China’s defense spending concludes that its military budgets have
been understated in official sources, although there is enormous
controversy concerning how much and why [1]. Even more controversial
have been Western interpretations of China’s defense budget. Some
believe there is now firm evidence that Beijing fully intends to
challenge Washington for regional leadership in the Asian littoral and
may even reach further to conduct extensive operations. Others have
concluded from recent budgets that China is pursuing military power
commensurate with its economic strength and sufficient to allow
military actions to achieve reunification with Taiwan. Studying PLA
funding can offer insights into the trajectory and dimensions of the
People’s Liberation Army Navy (PLAN)’s modernization.

Current Spending

The
People’s Liberation Army (PLA)’s official 2010 defense budget is $78
billion [2], ahead of Russia and Japan, and second only to that of the
United States at $685 billion. Since 1990, the budget has enjoyed
double-digit growth, with the exception of 2003 (in which growth was
9.6 percent) and 2010 (7.5 percent). From 1998-2007, China’s annual
increase in defense expenditures averaged 15.9 percent, outpacing
growth in GDP at 12.5 percent, but not government expenditure, at 18.4
percent. This episode followed a period of slightly slower defense
budget increases averaging 14.5 percent from 1988-97, which nearly
matched increases in state financial expenditure at 15.1 percent, but
amid GDP growth of 20.7 percent and significant inflation. That period
in turn represented a major transition from the 1978-87 era, when
prioritization of economic development held defense expenditure growth
at 3.5 percent and government budgets at 10.4 percent while focusing on
GDP growth of 14.1 percent [3].

Much has been made of the 2010
reduction 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 need
for economic spending during the financial crisis [5]. General Luo also
states that defense budgets should not be based on international
opinion, perhaps implying that he believes this consideration may have
influenced the PLA’s 2010 budget [6].

The bottom line is that no
other major power is approaching even this level of defense spending
growth. Expenditures in both the overall budget and on equipment (which
includes procurement, and, to some extent, research and development)
have increased several fold during this period. China’s defense
industry, while is still uneven in efficiency and quality of output, is
improving steadily. Together, these factors enable consistent increases
in overall PLA capabilities, with particularly rapid progress in niche
areas.

The PLA’s budget remains veiled and apparently does not
include at least some major items found in many Western defense
budgets. These include foreign weapons purchases; defense industry
subsidies for research and development; certain retiree benefits; and
extra-budgetary revenues and resources from a limited number of
surviving military commercial enterprises (e.g. hotels and military
hospitals) and unit-level production. Also excluded are paramilitary
forces, such as the 660,000-strong People’s Armed Police (PAP), and
substantial military contributions from regional and local governments.
China has never released budgetary breakdowns for individual PLA
services. The closest equivalent is Beijing’s annual submission to the
UN via the Simplified Reporting Form, which only enumerates respective
active forces, reserve forces and militia spending on personnel,
training and maintenance, and equipment.

At the same time, the
PLA budget may contain costs not included in those of its Western
counterparts. It contributes to national economic and infrastructure
development, social welfare, crisis management and disaster relief in
ways often covered by non-military organizations in the U.S. and other
Western countries.

Much remains uncertain: the precise extent to
which the PLA, as opposed to local governments, should fund such areas,
including reserve forces and militia training and organization, is
apparently under debate. For example, it has sought to transfer its
retirement homes to local communities for the past decade, with no
resolution in sight.

Comparing China

Foreign analysts
offer a variety of estimates—all higher—for China’s actual defense
spending; these vary substantially with assumptions concerning exchange
rate, purchasing power parity (PPP) indices and inflation. At the lower
end of the spectrum, the Stockholm International Peace Research
Institute (SIPRI) estimates the PLA’s 2008 budget at 1.4 times the
official figure. At the higher end, the U.S. Department of Defense
estimated in 2009 that the PLA’s 2008 budget could be roughly 1.8-2.6
times higher in practice than official figures state [7].

China’s
government and analysts are clearly worried about foreign perceptions.
Chinese attempts to justify increased PLA expenditure are driven in
part by concerns that foreign countries will cooperate to contain a
so-called “China Threat.” Official statements regarding China’s defense
budget 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, including
implementing informatization and increasing equipment and supporting
facilities. Other factors cited include logistics and infrastructure
development and international cooperation [8]. Such costs likewise
comprise a significant percentage of the defense budget of the U.S. or
any other modern military. The PLA is just now trying to get personnel
pay in line with societal trends requiring large increases for many
people, whereas the U.S. and other countries made those large increases
long ago and are now keeping up with inflation.

Chinese
sources use a variety of statistical comparisons to explain and
minimize Chinese military spending. China’s 2008 Defense White Paper
emphasizes “both the total amount and per-service-person share of
China’s defense expenditure remain lower than those of some major
powers” [9]. Much is made of the idea that China’s official defense
budget does not correspond to ‘Western standards,’ and therefore can
not be readily compared.

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

Chinese economists offer
mixed data when attempting to compare China’s military spending with
that 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 that
direct comparison is possible, but also contends that DoD significantly
understates China’s annual defense spending, which may be equivalent to
over $150 billion in U.S. spending in his view. He further contends
that China’s defense budget should not only be calculated using PPP in
general, but should also be further adjusted based on China’s relative
degree of self-reliance. For instance, defense spending from
non-military organizations (e.g., State Council “special budgets,”
weapons sales, and previous military business activities) should be
estimated and added to China’s official defense budget, which does not
include these categories. Based on current exchange rates, personnel
costs should be multiplied by seven. Foreign weapons purchases should
be multiplied by one. Indigenous weapons development and production
should be multiplied by a factor somewhere between seven and one,
depending on actual degree of indigenization [11]. Regardless of the
accuracy of this scholar’s claims, it is useful to examine the methods
suggested for calculating China’s defense budget. China’s secretive
bureaucracy and low material and labor costs must be considered when
attempting to estimate its true military spending.  

Ongoing Reforms

China’s
defense development remains hampered by an unwieldy defense economy and
budgeting process. While China’s complex and sometimes
poorly-coordinated bureaucracy inhibits outsiders’ ability to determine
its total military spending, perhaps China itself still has difficulty
calculating its own total defense spending. As DoD assesses, “What
little public information China releases about defense spending is
further clouded by a multitude of funding sources, subsidies, and
cutouts at all levels of government and in multiple ministries. Real
spending on the military, therefore, is so disaggregated that even the
Chinese leadership may not know the actual top line” [12].

This
may 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 and
auditing, (3) marketization of defense procurement, and (4) zero-based
budgeting to bring budgetary and extra-budgetary funds under
centralized management. Rising defense budgets place more and more
defense-related expenditures ‘on the books’ [13]. A complex network of
often corrupt commercial transactions that proliferated after Deng
Xiaoping encouraged military entities to engage in private business in
order to supplement reduced defense budgets has been gradually replaced
by increased official spending following Jiang Zemin’s ordering of the
PLA to extricate itself from most commercial businesses in the late
1990s and instead “eat imperial grain” (i.e. enjoy increased state
funding).

Economic Foundation

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

Competing Factors

Nevertheless, in the
longer term, a variety of factors may limit PLA budget growth, at least
to some extent. Various structural and demographic dynamics could
greatly restrict China’s ability to sustain rapid military spending
growth, regardless of its leaders’ intentions. They are likely to face
tradeoffs unprecedented since the post-1978 reforms as Chinese society
ages, expects higher standards of living and perhaps includes more
individuals who are disaffected.

Additionally, even if the PLA
budget continues to grow steadily, factors internal to the PLA will
likely limit its overall force structure and capabilities. The PLA is
already wrestling with increased personnel costs, which will likely
consume an increasing percentage of its overall budget. As NCOs
increase, for example, they will be paid more than the conscripts they
often replace. Combined with more capable and thus more expensive
weapon systems and the higher operations and maintenance costs that
come 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 simple
straight projections that claim an expansive PLA twenty years from now.

Leading indicators of changes in the parameters of China’s
defense spending include the Chinese economy’s growth, the central
government’s ability to collect revenues and propensity to spend them
on non-military programs (e.g. a future national pension system and
other welfare benefits for China’s increasingly socially stratified and
rapidly aging population), personnel salaries (e.g. competitive pay to
attract a dwindling population of draft-eligible individuals amid
increasingly attractive private sector alternatives), national spending
on research and development, and weapons imports. Of course, even at a
lower level of defense spending, China could still increase its power
and influence substantially in East Asia and even challenge U.S. and
allied interests there.

Naval Implications

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

China’s navy thus far has been focused
largely on developing a variant of regional anti-access to prevent
Taiwan from declaring independence, in part by achieving credible
capabilities to thwart U.S. forces should Washington elect to intervene
in a cross-Strait crisis. To assess related scenarios, one must compare
the actual assets that relevant militaries could deploy; overall
comparison of Chinese and American defense budgets is misleading unless
one envisions an all-out conflict between the two, which fortunately is
not a realistic possibility. The PLAN’s current order of battle is
still clearly sized and shaped primarily for defending claims on
China’s disputed maritime periphery as opposed to conducting
extra-regional blue water sea control operations.

Yet while
concerns about Taiwan’s status have played a large role in driving
Chinese defense spending since at least the mid-1990s, the PLA’s
defense interests are now necessarily greater. Taiwan President Ma
Ying-jeou’s March 2008 landslide election has greatly reduced the risk
of conflict. Now, with cross-Strait relations stabilizing and China
continuing to grow as a global stakeholder, China’s navy is likely to
supplement its Taiwan and South China Sea-centric access denial
strategy that its current naval platforms and weaponry largely support
with “new but limited requirements for protection of the sea lanes
beyond China’s own waters, humanitarian assistance/disaster relief, and
expanded naval diplomacy” [15].

Conclusion

Regardless
of its exact size, which remains uncertain to outsiders, China’s
defense budget is on track to continue funding an increasingly capable
military/navy that is gradually increasing focus on areas beyond
mainland China. This is part of a two-level process, however, with
nearby priorities still at the core. Preparing to defend China’s
territorial and maritime claims by asymmetric means is likely to remain
the PLAN’s focus for the foreseeable future, even as it pursues
secondarily lower intensity missions further afield. Developing robust
long-range combat capabilities would require new platforms, force
structures, training and operations to such a degree as to require
significant increases in the PLAN’s budget. As the most naturally
internationally-oriented of the services, the PLAN may stand to benefit
most the PLA’s increasingly “externalized” orientation. It is possible
that it might win a larger portion of a growing PLA budget, but there
would likely be resistance to such changes, including from China’s
other services, which are likely to press their own claims. China’s
ground forces, though no longer dominating the PLA to the same degree
as they have previously, are still vital to the all-important
objectives of domestic stability and border security. China’s Second
Artillery’s conventional missiles are critical to holding regional land
and, increasingly, sea-based assets at risk. China’s Air Force appears
to be laying claim to military space missions, and a space force may be
developed in the future. Even the most basic data on service budgets
remain unavailable to foreign researchers, however, so for now this
must remain speculation. China’s capabilities are clearly growing, but
its naval intentions—at least beyond asserting control over its claimed
territorial waters, to include Taiwan—are somewhat unclear.