The Budget This Time: Taking the Measure of China’s Defense Spending

¹Early last month, China announced its projected 2014 defense budget of 808 billion yuan (roughly USD 132 billion), a 12.2 percent increase over the previous year. This continues the double-digit spending increases in nominal terms since 1989 (2010 was the exception, most likely because of priorities adjusted in the wake of the global financial crisis). China’s rapid rise in national power across the board and the pace and scale of its increasing investment in the PLA, together with its limited willingness to release a breakdown of how this money is spent, ensure that the annual announcement of its official defense budget for the forthcoming fiscal year attracts considerable attention. Annual multibillion-dollar increases suggest strong interest in furthering core strategic objectives, such as upholding island and maritime sovereignty claims in the East and South China Seas.²

By any measure, China already has the world’s second largest defense budget. While US aggregate military spending remains much higher, unlike the globally distributed US military the PLA is focused primarily on its immediate region, while seeking gradually to project military power globally. When thinking about a possible conflict on China’s periphery a comparison of aggregate defense budgets is not especially useful—the potential flashpoints are much closer to China. Fundamentally different US and Chinese military force postures and priorities likewise limit the usefulness of direct comparisons of force structures for assessing relative capabilities for peacetime influence or scenarios in a military conflict: in the Yellow, East, and South China seas and the airspace above them. The PLA has acquired growing numbers of increasingly capable weapons with this proximate theater in mind, as it strives to strengthen its ability to wield them effectively to uphold its unresolved island and maritime claims if the leadership judges it necessary to do so. Yet critical uncertainties remain concerning Beijing’s capabilities and intentions. While China’s limited budget transparency leaves much unknown, this article analyzes what is known about its military spending and suggests some implications.

Funding the PLA

While China’s official defense budget does not reflect all defense-related spending, given the absence of any consensus about how “defense spending” should be defined, the same is true (if often to a lesser degree) for all nations, including the United States. Nor should the official PLA budget be expected to include at least one of the major categories that are included in the calculations of two organizations that produce some of the best analysis available on China’s defense spending. The International Institute for Strategic Studies (IISS) and the Stockholm International Peace Research Institute (SIPRI) include the budget of the 660,000-strong People’s Armed Police (PAP) in their estimates of China’s military spending.³ This inclusion is puzzling, as the PAP is tasked primarily with domestic, stability-oriented security and its budget is therefore included elsewhere in official statistical yearbooks on government spending. It is also significant for assessments of China’s defense budget transparency, as the PAP budget is one of the largest expenditures for which China is frequently criticized for “inappropriately” excluding from the official defense budget.⁴ In short, while transparency (or lack thereof) remains a major issue, there is little consensus even outside China over what should, or should not, be included in measurements of China’s defense budget. While typically devoid of specifics, official Chinese statements accurately reveal the basic drivers of the PLA’s rapidly expanding resources:

• to compensate for past austerity, including revenues “lost” since 1998, when the civilian leadership ordered the PLA to abandon most of its network of commercial businesses;
• to modernize China’s military, which as recently as the 1990s consisted primarily of obsolete weapons and platforms acquired from the Soviet Union early in the Cold War and indigenized;
• to develop and deploy new platforms and weapons systems, particularly capabilities designed to deter third party involvement in Chinese disputes by threatening enemy access to contested areas near China and to operate effectively from there, all networked with information technologies;
• to develop the capabilities to conduct long-distance operations in accordance with “New Historical Missions” introduced in 2004 by Hu Jintao, which include unprecedented emphasis on safeguarding Chinese overseas interests and international security;
• to attract and retain qualified personnel, many of whom now have access to more lucrative private sector career opportunities;
• to keep pace with inflation; and
• to improve management and accounting, and to place more spending “on the books.”

Leading the pack: China’s exceptional defense spending growth
Even inflation-adjusted, the pace and scale of growth in China’s defense budget far exceeds those of its neighbors. Defense spending among most advanced industrial democracies is either stagnating or declining absolutely (as in most of Europe). Since the 2008 financial crisis, as IISS calculates in its 2014 Military Balance, the US base budget has only registered a net (cumulative) real defense spending change of +0.1 percent.⁵ Even Japan, whose 2013 and 2014 budget increases made global headlines, is only marginally increasing spending on its military—after a decade of perennial reductions. At a modest nominal annual growth rate of +0.8 percent and +2.2 percent, respectively, these rare increases pale in comparison to China’s double-digit increases.⁶ This is part of a limited real net growth rate of +6.6 percent for Japan’s defense budget since 2008, a rate whose relatively large size despite annual reductions between 2008 and 2011 is largely an artifact of Japan’s severe deflation. The post-2008 real net growth of the defense budgets of India (+3.0%), Brazil (+10.0%), and even Russia (+31.2%) do not approach China’s +43.5 percent.

Intra-regional comparative trends

Further context for the pace and scale of China’s rapidly increasing defense spending relative to the rest of the world is evident in the fact that it enjoyed 17.6 percent of global real defense spending increases in 2012-2013. While Russia came close at 12.0 percent, with an economy that grew 1.3-percent in 2013, such increases are likely to be far less sustainable.⁷ All other countries contributed less than 10 percent to global real defense spending increases, including India (5.4%), Indonesia (4.1%), Japan (2.2%), South Korea (2.0%), and the rest of Asia (6.9%). For its part, the United States accounted for a staggering 77.44 percent of global real defense spending reductions (52.1% in overseas contingency operations, 25.34% in base budget). Its NATO allies accounted for most remaining reductions. Australia had a reduction of 1.2 percent.

China’s rapid economic growth has facilitated military spending far exceeding that of its neighbors, as it acquires capabilities in many cases superior to them, particularly to its south and west. David Kang interprets the fact that other states in the region are not keeping pace as evidence that its neighbors do not feel sufficiently threatened to balance against Beijing,⁸ but the reality is more complicated. First, Asia is the world’s fastest-aging region; costly societal transformations place severe constraints on leaders. Second, two neighbors facing a potential threat from China’s growing military capabilities—Russia and Vietnam—have in fact increased their defense spending rapidly. Third, three other neighbors that feel threatened by Beijing’s burgeoning military face substantial, specific constraints that limit their spending regardless of threat perceptions. Tokyo remains limited by domestic political and normative constraints, but has made changes within these constraints, such as shifting force posture from northeast to southwest—closer to the most likely clash with China—a transformation not captured in aggregate budgets. South Korea has long spent significantly on capabilities aimed at its belligerent northern neighbor, a focus that it must continue to prioritize. And Taiwan lacks status as an independent nation, has a complex and contested identity and population 1/60th the size of mainland China, and faces an increasingly daunting cross-Strait military balance—all factors that have caused it to move away from acquiring symmetric defense capabilities designed to go toe-to-toe with the better funded PLA. Finally, defense spending among ASEAN member states is rising, but from a much lower base than China’s. According to SIPRI, even though China’s official nominal 2011 defense spending was 4.28 times greater than that of the ten ASEAN states combined, expenditures as a percentage of GDP were virtually equal.⁹

Inter-regional comparative trends
Two region-specific dynamics suggest that a strategic sea change is afoot, with China and Asia ascendant and the United States struggling to maintain preeminence amid declining defense investments by its traditional European allies. First, broadly defined, East and West have traded places: initially, in the aggregate size of each region’s economy, and subsequently in aggregate region-wide defense spending. Between 2010 and 2013, defense spending in Asia rose 11.6 percent in real terms, with the bulk of the increase coming from China.¹⁰ The region of Asia and Australasia has become the world’s second most-funded military region, with 20.6 percent of planned global defense expenditure in 2013. While North America still leads at 39.5 percent, its margin is shrinking. Europe has fallen to 17.9 percent. Since 2010, aggregate European military spending has decreased by 2.5 percent annually. Finally, the Middle East and North Africa is fourth at 11.1 percent, and Russia and Eurasia is fifth at 5.0 percent.¹¹

Second, for all of China’s recent increases to defense spending, as noted earlier on a global basis the US figure of 38.4 percent well exceeds China’s 7.2 percent. Other major powers surrounding China are able to afford significant capabilities that could be oriented against China if necessary, with Russia at 4.4 percent, India at 2.3 percent, Japan at 3.3 percent, and the rest of Asia and Australasia at 7.8 percent—a combined figure that exceeds China’s.¹² The PLA looms larger and larger in its immediate region, but far less so in the world beyond.

Avoiding tough choices, for now
Over the past two-plus decades, the rapid, albeit slowing, pace of China’s GDP growth and government revenue has served effectively as a rising tide lifting most budgetary boats, obviating the need for leaders to make otherwise painful budget cuts or even tough allocation decisions about priorities. This is coupled with an authoritarian system that encourages nationalism while suppressing criticism of many areas of government policy, and apparently widespread domestic support for China’s growing military power.¹³ Despite domestic opportunity costs, there is no Chinese equivalent to America’s robust debate about the extent to which defense spending should be a priority. In fact, military development appears to be widely regarded as essential to furthering the leadership’s abstract, nationalistic goals of achieving the “great rejuvenation of the Chinese nation” and “military power commensurate with China’s international standing.”

Throughout the post-1978 “reform and opening up” period economic growth has been Beijing’s top priority, and China’s annual rate of official defense spending growth has been roughly on a par with GDP growth, remaining largely in single-digits when inflation is factored in. For the next few years, as well, increases appear to be sustainable. Even during particularly rapid defense spending increases over the last ten years, official spending has remained relatively low as a percentage of the overall economy, accounting for just 1.3-1.5 percent of GDP. Even high-end foreign estimates of actual defense budgets yield estimates of only 2-3 percent, lower than US defense spending as a percentage of GDP. These parameters suggest that while core national defense objectives are secondary only to regime continuity and domestic stability in Beijing’s priorities, marginal military developments beyond these foundational imperatives take a back seat to economic development. China’s leaders have internalized Soviet lessons on the dangers of military over-prioritization and strategic overextension, and appear determined not to repeat them. Particularly since the 1980s, they have coordinated military spending with economic trends.

For the past several years, however, defense spending increases have outpaced GDP growth, including a nearly twice-as-fast projected increase in 2014. Nevertheless, at least for now China’s leaders appear to have judged that double-digit defense spending increases are worthwhile and sustainable despite annual GDP growth rates widely predicted to be seven-percent or lower for the foreseeable future.

Patterns of Investment

Two decades of increasing budgets have given the PLA resources sufficient to develop formidable military capabilities for use on its immediate periphery and in its general region. Nevertheless, it is years (and hundreds of billions of dollars) away from possessing a top-caliber, globally deployable force with capabilities remotely comparable to those of the United States. By largely, if decreasingly, focusing on potential conflicts on and over China’s borders and immediate terrestrial and maritime periphery, such as over Taiwan’s future status and island and maritime claims in the South and East China seas, the PLA has exploited geographical proximity and the vulnerabilities of potential adversaries’ technologies and force structures, potentially placing them on the costly end of a capabilities competition. This approach has afforded China asymmetric capabilities, disproportionately efficient in asserting its interests close to home, even though its overall defense spending still remains a distant second to America’s. For instance, while it is difficult to determine the cost of the DF-21D anti-ship ballistic missile (ASBM), which has been deployed in small numbers, procuring many missiles would be far cheaper than the US aircraft carrier they are designed to disable. One Chinese source estimates the cost with its launcher at USD 5-10.5 million per unit.¹⁴ Captain Henry Hendrix, USN, emphasizes that even at an upper-end estimate of USD 11 million per unit, China could produce 1,227 DF-21Ds for the cost of a single US Ford-class aircraft carrier. Because only one ASBM would have to penetrate US defenses to produce a mission kill, cost/benefit analyses of the usefulness of aircraft carriers in contested environments does not augur well for the platform’s future.¹⁵

Over the past decade PLA forces have also become increasingly active further afield, making positive contributions to cooperative security. Relevant “New Historic Missions” are to “provide a solid security guarantee for sustaining the important period of strategic opportunity for national development”; to “provide a strong strategic support for safeguarding national interests”; and to “play an important role in maintaining world peace and promoting common development.”¹⁶ Since 2008, PLA Navy (PLAN) vessels have protected Chinese and foreign merchant vessels from pirates through a series of sixteen task forces to the Gulf of Aden. The PLAN has also escorted Syrian chemical weapons and Chinese evacuees in the Mediterranean—the latter as part of a noncombatant evacuation operation from Libya of 35,000 citizens, to which China’s air force also contributed. China’s hospital ship Peace Ark has participated in humanitarian assistance and disaster relief operations around the world. Beijing has contributed over 22,000 military personnel to UN peacekeeping missions, the most of any permanent Security Council member, and even deployed combat troops to support a UN operation in Mali in late 2013.¹⁷ These global operations are limited, low-intensity, cooperative, noncombat activities.

Developing the capabilities necessary to project significant military power and to wage high- or even medium-intensity warfare beyond China’s immediate region would require significantly ramped-up spending on new platforms, weapons, and supporting infrastructure (e.g., logistics); as well as on enhanced training, operations, and maintenance. Such investments are likely to provide much less “bang” for a significantly larger “buck.” While currently nascent, China’s aircraft carrier development program (and associated expenses) also has the potential to consume an increasingly significant chunk of the budget pie. Based on US Navy benchmarks and Chinese sources, Nan Li and Christopher Weuve estimate the cost of acquiring a PLAN carrier group at USD 10 billion and operating costs (training, maintenance/repair, and fuel) at USD 200 million per year. Chinese analyst Lu Ting offers a much higher annual estimate of operating costs: USD 750 million, a figure that may include infrastructure.¹⁸ While hulking carriers with limited capabilities seem to be increasingly vulnerable given rapidly changing military technology, some retired Chinese navy officers and other specialists apparently believe that they can be protected and made useful as part of a “system of systems.” China has already procured one carrier, the Liaoning, and has reportedly begun construction of its first indigenous aircraft carrier.¹⁹ More capable carriers, e.g., catapult assisted takeoff but arrested recovery (CATOBAR), are likely to follow, as they offer China its only source of long-range airpower projection absent overseas airbases. More advanced carriers would require even greater spending. China would also need to develop logistics and global force protection capabilities. Its lack of allies—North Korea a technical, but mostly burdensome exception—and overseas bases would make this extremely difficult. Beyond the expense, policy innovation and political capital would also be crucial to achieving and maintaining access to overseas facilities.

Stiffening Headwinds?

Barring a major crisis or conflict PLA funding growth rates are likely to slow, and the government’s largesse will increasingly buy less and less “bang for the buck.” There are widespread concerns that corruption dissipates Chinese capability accretion significantly. In perhaps the largest publicly announced PLA corruption scandal thus far, General Gu Junshan has been charged with “bribery, embezzlement, misuse of state funds and abuse of power.” “The PLA spends a lot of money,” states Zhu Feng, “but the question is, how are they following up on all the spending?”²⁰ Perhaps Xi Jinping’s current campaign cracking down on corruption will improve discipline, but China’s leaders have an extensive track record of attempting, yet failing, to eliminate the problem. Xi is unable to meaningfully alter other significant headwinds. China’s rapidly aging society requires increased government spending on healthcare and pensions. Environmental and resource challenges, and efforts to resolve them, are likely to further slow economic growth. Historical patterns suggest that the cost of maintaining constant numbers of increasingly advanced weapons systems rises significantly faster than inflation.

Limited Transparency

China’s civilian government and military have rightly been widely criticized for their opacity about defense spending and capabilities. Beijing’s position has long been that transparency concerning strategic intentions is more important than transparency concerning specific capabilities at the operational and tactical levels. In that spirit, it does indeed make general statements that largely, albeit vaguely, describe the basic trajectory and objectives of its military development. China’s 2004 Defense White Paper offers an example: “The PLA will promote coordinated development of firepower, mobility and information capability, enhance the development of its operational strength with priority given to the Navy, Air Force and Second Artillery Force, and strengthen its comprehensive deterrence and warfighting capabilities.”²¹ Yet, Beijing makes categorical statements that may not hold in the future (“China lacks overseas military bases”) or are vague, platitudinous, and do little to address other nations’ legitimate concerns ( “China will never seek hegemony”; “China’s military is for defensive purposes”).

Chinese media reports tend to summarily dismiss reasonable foreign (and some domestic) concerns about Beijing’s limited transparency and rapid military development, failing to recognize the obvious potential threat that China’s increasingly capable military poses to its neighbors, the fact that these neighbors have legitimate rights and interests, and the extent to which this lack of transparency unnecessarily exacerbates uncertainty—and therefore concern about—China’s rise. Especially in the case of China’s official mouthpieces, there is very little room for alternative views or expressions of concern about Beijing’s actions and their external consequences; criticisms are routinely rejected as machinations of “anti-China” elements aimed at hyping a “China military threat theory” for craven motives. In short, China’s leaders appear to be unaware of or unconcerned about the risks of the security dilemma, or to believe that the potential benefits of exacerbating one outweigh the costs.

As discussed above, there is no universal standard for military budget categorization or transparency. There are many developing nations with commensurate, or worse, records. At the margins, Beijing has increased transparency slightly over time concerning defense budget reporting. As in so many other areas of Chinese development, however, this progress is from a very low baseline. With the world’s second largest defense budget, China is already in a very different category from the vast majority of nations—developing and developed—and should therefore be held to a higher standard and expected to be far more forthcoming about its capabilities to address others’ concerns. A good next step, in keeping with Beijing’s emphasis on the United Nation’s paramount importance, would be to begin submitting annually the Standardized Reporting Form on military expenditures to the UN Secretary General.²²

The Challenge of Gleaning Insights from Limited Information

Given China’s persistently low levels of transparency, it remains impossible to assess reliably many important details about the specific consequences of its growing military spending and evolving capabilities, such as how much Beijing spends in aggregate on the PLA, much less what that money is spent on; how far that money goes given China’s generally lower personnel and other costs; and the quality and performance of the outputs. It is possible to draw some meaningful inferences from macro-level data and strategic trends. Multiple factors suggest that China’s official budget increasingly captures total military spending, increased professionalism and accounting reforms suggest that an increasing portion of the PLA’s total revenues and expenditures are captured in the official figure. Yet, the dearth of specific data leaves obtaining internal information by other means or inductive estimation as the only alternatives for determining the precise extent and nature of Chinese defense spending. Both these approaches are extremely difficult, and beyond the capacity of individual civilian researchers.

When China procures weapons and platforms from overseas, existing literature usually offers some details on costs and capabilities. Because China increasingly develops systems indigenously, however, it is often difficult to assess the costs and capabilities of even its most conspicuous investments. Measuring the ability of a country to employ sophisticated equipment in a challenging environment necessitates estimation of effective capability, an extremely difficult challenge. Reliably assessing net capability by factoring in opposing systems is often impossible using open sources, even with significant simplifying assumptions. Numerous practical problems that inevitably crop up once a military tries to employ equipment under actual combat conditions are difficult to predict. This is true for the military of any nation, including China’s. The limited availability of details make meaningful comparisons particularly difficult, e.g., open sources indicate that the PLAN’s Type 093 nuclear-powered attack submarine (SSN) was launched in 2002,²³ that an improved Type 093A variant was launched in 2013,²⁴ and that a submarine—almost certainly an 093—became the first Chinese SSN to conduct an Indian Ocean patrol in late 2013/early 2014.²⁵ What remains unknown in open-source materials is precisely how quiet these submarines are or how well their sonar works. All that is known is that at least one hull has been capable of moving from point A to point B several thousand miles away without obviously malfunctioning. Consequently, analysts do not have data necessary to assess these submarines’ capabilities relative to existing systems of potential adversaries, particularly as it concerns actual efficacy in a military conflict.

The best evidence of the tremendous challenges in this regard is the paucity of published studies on related issues. Truly detailed, reliable, inductive estimation has not been achieved even by research organizations capable of devoting multiple specialists to making relevant calculations. Even some of the most comprehensive, sophisticated efforts, by IISS and SIPRI, have yielded only general estimates. A prime example of the barriers to inductively estimating China’s defense spending is the challenge of calculating something as basic as the cost of producing a given platform or weapons system. Simply extrapolating from equivalents in other countries’ militaries may not yield reliable estimates given China’s very different, poorly understood, and possibly still unsystematic input pricing. There are also the questions of whether, to what extent, and how to factor in purchasing power parity. As a result, truly intensive, systematic efforts may yield cost estimates of some platforms with commercial analogues (e.g., simple surface ships), but not those with few commercial connections (e.g., missiles). Even achievement of a few rough estimates leaves vast areas uncovered, and the task of overall estimation unmanageable.

Specialists who have attempted such investigations suggest that one of the few reliable conclusions of their immense efforts was that China enjoys great cost advantages in certain defense industrial areas (e.g., electronics, missiles, space, and shipbuilding; perhaps less so with aircraft), especially for capital costs like tooling. It may, thus, be able to afford remarkable capabilities even at its announced budgetary levels. Nevertheless, productivity and the quality of outputs remain uncertain. For instance, AMI International estimates the “total acquisition cost” for a Yuan-class (041/039A) conventionally-powered submarine at USD 200 million and a Jin-class (094) SSBN at USD 1.3 billion. Yet, it acknowledges that “a core assumption behind our estimate” is “that the Chinese are able to build their submarines at lower acquisition cost than comparable products from Europe (much less the United States)…the Chinese have not stated or published their spending on submarines or any other naval platforms.” Specific factors include “lower cost of labor and materials in China, construction in state-owned shipyards, and use of systems and weapons developed ‘in house’ rather than more expensive sourcing from (foreign) commercial subcontractors…”²⁶ Similarly, uncertain estimates suggest that China’s J-10 fighter may cost roughly USD 28 million per aircraft and the J-20 low-observable fighter currently under development approximately USD 100 million per unit. This would make them cheaper than more advanced American counterparts, but approaching Russian systems of similar configuration and intended function.²⁷

China also has the potential to use autonomous underwater vehicles (AUVs) to conduct wartime missions (cutting seabed cables, laying mines, and hunting submarines). Civilian AUVs rely on similar underlying technologies, and China is engaging in considerable research in this area.²⁸ Even this discrete capability still defies quantification, however, as open sources offer insufficient details to permit an accurate cost assessment. It is important to keep track of the progress made in the many programs that China currently has under development, and to follow this progress through the end of these programs’ research, development, and acquisition cycles to see what end results are actually achieved. China has an impressive number of new, advanced systems simultaneously under development (including the J-20 and J-31), but—particularly in the case of fighter aircraft—the rapidity with which they will be able to transition from development to deployment with full operational capabilities remains to be seen.

Conclusion

Given the immense aforementioned challenges confronting analysts who want to better understand China’s rapidly increasing defense budget and its significance, it is instructive to consider analyses published by the US Department of Defense (DoD). Although DoD is arguably the foreign organization with the best access to relevant data and with at least some flexibility to make its analyses public, even DoD candidly recognizes that “it is difficult to estimate actual PLA military expenses due to China’s poor accounting transparency and incomplete transition from a command economy.”²⁹ As cases-in-point, DoD estimates of the ratio of China’s “total actual military-related spending” to Beijing’s official figure evince a very large range, falling from 3.25 in 2002 to 1.43-2.14 in 2008 to 1.13-1.70 in 2011, before climbing back up to 1.27-2.02 for 2012 (USD 135-215 billion vs. the official defense budget of USD 106.7 billion).³⁰ While DoD does not disclose its methodology or related details, the decline in its estimated ratios over time gives strong reason to believe that China’s official figure does increasingly reflect actual defense-related spending. This suggests that, while much uncertainty remains concerning how efficient and effective China’s rising defense spending is at translating inputs into outputs, it is: 1) the world’s second highest; 2) extremely difficult to calculate accurately but increasingly “on the books” and reflective of actual spending, though the gap above the official figure remains large; 3) affording the PLA significant combat capabilities, especially in its immediate environs but far less so further afield; 4) sustainable in its rate of increase, at least economically; and 5) and could even “surge” significantly in the near future if Beijing saw fit to do so; although in the longer term China’s leaders will likely face more, potentially costly tradeoffs in sustaining rapid increases.