What does China really spend on its military?
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A country’s defense spending represents the most direct way of measuring its potential military capability. In terms of gauging relative military strength, the size of defense budgets can be compared between countries over a set period of time. These comparisons are particularly insightful when tracing regional trends in military spending and identifying critical political events that have accelerated defense allocations.  Defense budgets also serve to identify the importance of a country’s armed forces relative to other organs of the state. Therefore, it is necessary to consider not only gross defense spending but also the size of the defense budget relative to a government’s overall budget and a country’s gross domestic product (GDP). No matter how much a country spends on its military, however, it must still find ways to translate its potential capability for power into power itself.

*For more information on the official Chinese defense figure for 2017, click here.*

Official Chinese defense numbers converted to US$ using current year OECD exchange rate figures. Department of Defense figures represent the lower estimate offered in its annual reports. For more details, please see below content.

Efforts to explore the connection between Chinese military spending and Chinese military power are obfuscated by a lack of transparency. Although China provides official estimates of defense spending each year, outside estimates of China’s defense budget are often significantly higher than Beijing’s official numbers. Furthermore, China provides limited information on the distribution of its military spending, which obscures spending patterns that may indicate the relative importance of a particular branch of the Chinese military, how China might be responding to perceived external threats, and where China is investing in new technologies. Nevertheless, even modest estimates reveal that Chinese defense spending is on the rise. China now spends more on its military than any other country in the world save the United States. This question explores both the issues in calculating Chinese defense spending and China’s spending relative to other regional actors.

What explains the inconsistencies in tracking Chinese military spending?

Adam P. Liff and Andrew S. Erickson, “Demystifying China’s Defence Spending: Less Mysterious in the Aggregate,” The China Quarterly, March 2013, 812.
Michael Kiselycznyk and Phillip C. Saunders, “Assessing Chinese Military Transparency,” China Strategic Perspectives 1, June 2010, 4.

There is no universally accepted standard for reporting military spending. Although reporting mechanisms for military expenditure exist through the United Nations and other international organizations, the reporting of military expenditure data is voluntary. Since the decision to release military expenditures is left to individual countries, states report expenditures with varying degrees of detail.  Some countries provide detailed breakdowns of their defense budgets, while others may report only one line in their budgetary reporting.  As a result, estimating Chinese defense spending remains partially contingent upon Beijing’s willingness to report its defense outlays.

United Nations Office for Disarmament Affairs, “Promoting Further Openness and Transparency in Military Matters,” UNODA Occasional Papers No. 20, November 2010, 1.

Vice Foreign Minister Fu Ying announced at a March 4, 2017 press conference that China’s defense budget for the year would increase by about 7 percent from the previous year. Given the 2016 budget of 954 billion yuan ($146.6 billion), a 7 percent increase would total 1.021 trillion yuan ($148.1 billion). However, a Ministry of Finance official noted on March 6 that the 2017 defense budget would total 1.044 trillion yuan ($151.5 billion). A report released by the Ministry of Finance in late March clarified that the central government defense budget for 2017 totaled 1.0226 ($148.3 billion) trillion yuan, while total expenditures (presumably including costs incurred by provincial authorities) stood at 1.0444 trillion yuan ($151.5 billion). Estimates for China’s 2017 defense budget have yet to be released.

Official figures released by the Chinese government peg the country’s 2016 defense budget at 954 billion yuan ($146.6 billion), an increase of 7.6 percent from the 2015 budget of 887 billion yuan ($144.2 billion). The Stockholm International Peace Research Institute (SIPRI) estimates the overall 2016 figure at $226 billion and the 2015 estimate at $214 billion. Estimates from other organizations as to what China actually spent on its military in 2015 vary.  The U.S. Department of Defense (DOD) places the 2015 defense budget at more than $180 billion, and the International Institute for Strategic Studies (IISS) puts the number at $193 billion. 

Notwithstanding the gap between estimates of Chinese defense spending and the officially reported budget, China’s defense figures may now more accurately represent its defense expenditures than in the past. In 2002, DOD reported that China’s actual defense spending may have been upwards of four times larger than its officially announced figure. The DOD estimates that China’s 2015 defense spending represents a baseline increase of roughly 1.2 times the official budget figure.

It’s hard sometimes to be able to get too much out of the overall budget because the Chinese aren’t very transparent. Basically they only give us a top line figure.
Richard Bitzinger

 

The Chinese government has published defense white papers every two years since 1998 amidst regional calls for greater transparency. Research from Michael Kiselycznyk and Phillip C. Saunders indicates that China’s degree of transparency increased gradually from 1998 to 2008, with slight improvements in announcements of planned acquisitions. For instance, the 1998 defense white paper broke down Chinese spending into three roughly equal categories: human resources, operations, and equipment. This breakdown was repeated in white papers released every two years between 2004 and 2010. This rudimentary budget breakdown was excluded from the 2012 and 2014 defense white papers. In early 2016, a high-ranking officer in the Chinese military stated that in general Chinese spending is “divided into about three equal parts made up of personnel expenses, activity expenses to pay for training and military exercises and expenses to purchase and repair weapons and other military equipment.” Moreover, in white papers published between 1998 and 2008, China included comparative budget breakdowns between China and countries such as Japan and Russia. However, as China began to outspend these countries, these comparisons were dropped from the 2010 white paper onward.

Part of the discrepancy between official figures and other estimates results from differences in what expenditures are included in the defense budget. Chinese official figures do not account for a number of military-related outlays that are often included in the budgets of other countries. Expenditures may include foreign military procurement, government subsidies for military production, funds for strategic and nuclear forces, and paramilitary organizations. Military-related aspects of Beijing’s space program, extra-budgetary revenues from military-owned commercial enterprises, defense mobilization funds, authorized sales of land or excess food produced by some units, recruitment bonuses for college students, and provincial military base operating costs are absent from China’s officially announced numbers. Estimates by DOD, IISS, and SIPRI account for many of these expenditures. Both IISS and SIPRI estimates explicitly include the cost of foreign military procurement, military research and development, and paramilitary funding, while DOD estimates mention these categories but do not confirm the inclusion of these items in their estimates of Chinese military spending.

A Conversation With Richard Bitzinger

 

0:06 - China’s defense budget has increased every year for over a decade. Will the slowing of China’s economy change this trend and if so, how could it affect China’s ongoing military modernization?

1:35 - How much can we infer about China’s defense priorities by looking at trends in its military spending?

3:28 -In recent year, has the Chinese government become more transparent regarding China’s military spending, and if so, in what areas, and why?

4:31 - Does China’s limited military transparency present a challenge to regional stability?

5:36 - Is the allocation of China’s military budget likely to change as a result of President Xi's reforms?

Estimates of China’s military budget are further complicated by what China does include in its budget reporting. China’s official defense figures likely include costs not typically included in many Western defense budgets. For instance, expenses incurred by military infrastructure construction is assumed to be included in the official figures, although many of these projects are designed to be dual use and draw funding from local and national nondefense coffers. Disaster relief is also ostensibly funded through the defense budget and is to be reimbursed by nondefense agencies, but the mechanism and effectiveness of this reimbursement remains unclear. Perquisites for retired senior officers, including offices, assistants, cars, and special access to hospital facilities, are all funded through China’s defense budget. Many of these functions and associated costs are typically incurred in Western countries by nonmilitary organizations, a discrepancy that further complicates estimates of China’s military budget. Despite these factors, it remains unclear what percentage these expenditures constitute of China’s total defense budget.

Richard A. Bitzinger, “Just the Facts, Ma’am: The Challenge of Analyzing and Assessing Chinese Military Expenditures,” China Quarterly, March 2003, No. 173, 184.

The inconsistencies in estimates of Chinese defense spending are further complicated by the lack of pricing information. Beijing does not release accurate cost data on military goods and services, making estimations that rely on purchasing power parity (PPP) difficult. It is possible that assumptions for the country’s largely state-run market for military equipment and services are significantly different from average PPP assumptions used to calculate China’s defense expenditure, and PPP assumptions for China vary widely as outside experts have no clear idea what assumptions are most accurate. Attempts to estimate the market cost of military expenditures without pricing information can be unreliable. For instance, a lower cost may be assigned to domestic military purchases in China than would be determined by an economy with greater market competitiveness. Some of the chief challenges are uncertainty over which goods to place in China’s defense spending basket, and which goods to compare between China and other countries. Independent organizations, such as IISS, caveat their PPP estimates, noting that no specific PPP rate applies to the Chinese military sector and that there is no definitive means through which elements of military spending can be calculated using PPP rates.

China is not alone in accounting for elements of military-related spending in other places. The United States funds its nuclear weapons through the Department of Energy and does not include these details in its defense budget. However, the U.S. government maintains a high level of budgetary transparency, which enables analysts to readily account for these discrepancies.  For instance, a recent study designed to estimate the total U.S. national security budget (including the budget for the Department of Veteran Affairs) used publicly available data published by the Department of Homeland Security and placed U.S. spending at roughly $1 trillion. Low levels of transparency also hinder efforts to estimate other countries’ defense budgets. Similar to China, India’s defense budget omits spending on paramilitary forces and military research and development, and both countries are not forthcoming about their space and nuclear weapons expenditures. Other developing countries are likewise reticent to publicly reveal details of their defense spending.

George J. Gilboy and Eric Heginbotham, Chinese and Indian Strategic Behavior: Growing Power and Alarm (Cambridge: Cambridge University Press, 2012), 130.
Gilboy and Heginbotham, Chinese and Indian Strategic Behavior: Growing Power and Alarm, 131.
Michael Kiselyczynk and Phillip C. Saunders, “Assessing Chinese Military Transparency,” 30.

 

How does Chinese military spending compare to that of its neighbors?

Calculations in this section are derived from the SIPRI Military Expenditure Database.

According to figures provided by SIPRI, China has increased its defense spending nearly fivefold over the last decade. China currently spends more on defense than Japan, South Korea, the Philippines, and Vietnam combined, and China’s military spending is second only to the United States.

The growth in Chinese military spending is tied to its rising gross domestic product. China’s estimated military budget was $52 billion in 2001 and $226 billion in 2016 (2015 base year USD). Although this number represents over a 330 percent increase, these figures run generally parallel with Chinese economic growth. Over the same period, the Chinese economy grew by approximately 950 percent, resulting in a rate of Chinese military expenditure as a percentage of GDP that remained steady around 2 percent. By comparison, Japan’s military spending remains set at approximately 1 percent of its GDP. Smaller economies like South Korea generally spend a larger percentage of their GDP to address their security needs and regional interests. South Korea must contend with instability on the Korean peninsula and averages around 2.6 percent spending on its military.

China’s rising defense spending follows from almost two decades of modernization efforts. China began military modernization in earnest after the 1995–1996 Taiwan Strait crisis, an event that exposed fundamental weaknesses in China’s ability to deter foreign intervention in China’s sovereignty disputes. Additionally, the marked increase in China’s defense spending during this period was, in part, a response to domestic policies that left China’s defense budget relatively low. Throughout the 1980s and early 1990s, the Chinese defense budget languished even as economic reforms increased China’s overall wealth, which prompted the PLA to supplement its low funding through business investments. Due to corruption and a host of other problems, the PLA was forced to divest in 1998, a move that resulted in increased defense costs for the Chinese government.

Dennis J. Blasko, The Chinese Army Today: Tradition and Transformation for the 21st Century, 2nd Edition (New York: Routledge, 2012), 239.

Although China’s defense spending as a percentage of GDP has not risen significantly, China’s aggregate spending increase has corresponded with several high-profile procurement programs, military reforms, and doctrinal and strategic shifts within the PLA. These shifts have facilitated China playing a larger role in regional and international security. Some of these efforts, such as China’s participation in UN peacekeeping operations, antipiracy efforts, and humanitarian assistance and disaster relief are welcomed contributions to global governance. On the other hand, defending China’s security interests in the East and South China Seas may strain relations with other regional actors.

While Chinese military spending has increased considerably over the past decade and a half, China’s military budget pales in comparison to the U.S. military budget. The United States spent 3.3 percent of its GDP on defense in 2016, with a nominal expenditure more than two and a half times higher than China’s figure. Even when considering the reporting discrepancies discussed above, China would have to spend a great deal more to match U.S. defense spending. It is important to note, however, that the United States maintains a global military presence while China has no bases on foreign soil and its defense interests are primarily focused within the Asia-Pacific.

 

[The Chinese] used to say their defense budget was really low because other countries such as Japan or India were spending more on defense, but after they’ve outstripped these countries in terms of defense spending . . . they don’t want to draw too much attention to that . . . and because of that they’ve actually been revealing less information.
Richard Bitzinger

 

When considering military spending as a percent of total government expenditure, Chinese military spending drops noticeably—from 11.98 percent in 2001 to 6.20 percent in 2016.  After a marked increase from 2002 to 2011, U.S. spending has returned to close to pre-September 11 levels (9.00 percent in 2001 and 9.30 in 2016). Interestingly, the Philippines and China have converged at around 6 percent of total government expenditure. Russia increased its share to 15.5 percent in 2016, compared to 13.8 percent in 2015.

Within the region, some of the largest year-on-year increases in military spending have come from countries that have overlapping territorial interests with China. Russia and China share the sixth-largest international border in the world and after decades of unresolved territorial issues the two countries finally settled their last territorial issue in 2004. Russia spent $70 billion on defense in 2016, which is nearly a third of China’s budget; however, Russian military spending increased nearly 50 percent from 2010 to 2016. While much of this uptick in spending resulted from Russia allocating resources to secure its interests outside of Asia, Russia has also stepped up its military presence within the Asia-Pacific.

Over the same period (2010–2016), the Philippines increased its military spending by 40 percent. The Philippines has also increased partner capacity with the United States through the Enhanced Defense Cooperation Agreement (EDCA), which has significant ramifications for the Philippines’ relatively small, defense budget.  Under the EDCA, the United States is permitted to rotationally deploy forces to Philippine bases, pre-position humanitarian assistance and disaster relief (HADR) materials and defensive supplies, and make upgrades to infrastructure in the Philippines to enable these changes. The six-year 40 percent increase to the Philippines’ defense spending is a nominal increase of just over a billion dollars; however, the Philippines spends only 0.66 percent of what the United States does on defense. Bringing only a fraction of U.S. defense capabilities on a rotational basis could serve to dramatically increase the defense capabilities of the island nation.

When considering broader regional trends, East Asia spends close to Western and Central Europe combined. Over the past two and a half decades East Asian spending has increased from $86 billion in 1990 to $315 billion in 2016. While spending in Western Europe has also increased, East Asia surpassed Western Europe in overall spending in 2012. Much of this growth in expenditures has been driven by China. In 1990, China constituted 25 percent of the total East Asian expenditures. As of 2016, this number stands at 71 percent. In terms of the broader regional context, the Chinese military budget constitutes just over 50 percent of the total cumulative spending of East Asia, South Asia, Southeast Asia, Central Asia, and Oceania combined.

Should China’s military budget continue to grow, even at a rate substantially lower than its current level, China’s spending may converge with that of the United States within the coming decades. However, key questions remain about China’s future. Will Chinese military spending continue to grow if GDP growth slows? How will China’s leaders balance the need to provide social services and provisions to its aging population with the costs of its ongoing military modernization? Does China have ambitions to become a military superpower? All of these questions paint an uncertain future for defense spending, and by extension power politics, in the Asia-Pacific.

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