An Analysis of China’s 2011 Defense Budget and Total Military Spending — The Great Unknown

On March 4 , Li Zhaoxing, spokesman for the National People’s Congress of the People’s Republic of China (PRC), announced a 601 billion yuan (~ $91.5 billion) defense budget, a 12.7 percent increase over the 533 billion yuan (~ $81.3 billion) authorized in 2010 (English.gov.cn, March 4). In comparison, the country’s Gross Domestic Product (GDP) grew at about 10.3 percent in 2010, with an inflation rate estimated between three and five percent [1].As such, the growth of the defense budget appears to be coordinated with the growth of the Chinese economy and not increasing at a rate that would interfere with expansion of the civilian sector.

The increase in the size of the announced defense budget is a prime example of the People’s Liberation Army’s loyalty to Chinese Communist Party (CCP) rule. While there have been calls for defense spending to increase at an even faster pace than has been seen over the past decade, the official government emphasis has been on the coordination  of military modernization with national economic development. All the Chinese White Papers on National Defense have emphasized this principle. The 2008 White Paper states: “In the past three decades of reform and opening up, China has insisted that defense development should be both subordinated to and in the service of the country’s overall economic development, and that the former should be coordinated with the latter” (Eng.mod.gov.cn/).

Nonetheless, nearly all foreign analysts believe that the announced defense budget does not represent the totality of Chinese defense-related spending. Some Chinese sources suggest that a variety of line items augment the announced defense budget, but the specific amounts generally are not quantified. Accordingly, many governments, think-tanks, and individual analysts attempt to estimate China’s actual defense spending; however, each of these estimates includes a different mix of extra-budgetary sources of income, if they are enumerated at all. As a result, large discrepancies exist between the officially announced defense budget and most foreign estimates. In reality, though, the true size of Chinese defense expenditures is unknown (perhaps even to the Chinese government) and foreign various attempts to estimate total defense-related spending do not use a consistent analytical methodology. Most foreign media attention focuses almost exclusively on high-side estimates as a measure of the pace of Chinese military modernization without mentioning the imprecise process by which such estimates are made. Such “fact-free” analysis adds little to the understanding of the Chinese defense budget, whatever its size, and its implications.

An Introduction to the Chinese Defense Budget

During the 1980s as the civilian economy grew rapidly, the official defense budget was relatively stagnant. At the same time, the government encouraged the PLA to find extra-budgetary means to augment official funds available. From this low base, the rate of growth increased significantly in the 1990s averaging over ten percent annual growth (not considering inflation) for most of the next two decades.

Since 1998, the White Papers have offered a number of reasons for these increases. The most common factor has been increases in personnel pay and subsidies as well as  improvements in living conditions, such as better food, barracks, and communications. In reality, this explanation is accurate. Large pay raises were authorized in 2006, 2008, and 2011. In 2011, non-commissioned officer salary and benefits will be increased up to 40 percent. Moreover, the amount of money granted to the large number of ground force personnel will not be as large as for the smaller numbers of personnel in the other services (Huanqiu, March 3). The improvements to the barracks and living facilities for PLA personnel in all parts of the country, especially in remote border areas, are readily apparent to anyone who has visited China over the past two decades or who reads military newspapers or watches Chinese television. The continuous enhancement of the military’s standard of living is essential if the PLA is to maintain the morale of the troops as the domestic economy booms.

Other reasons cited by Chinese officials for budget increases include new equipment costs; higher training, operations, and maintenance costs; compensation for higher prices of food and oil; improvements in the social security system; compensation for funds lost as a result of the PLA’s divestiture of commercial enterprises; and increased expenses for international cooperation [2]. Unfortunately, the Chinese government has not provided specific details as to how much money has been allotted for any of these factors.

The White Papers generalize that about one-third of the announced budget goes to each of the three main categories of 1) personnel, 2) training and maintenance, and 3) equipment. Analysis of data provided for these categories for most of the years since 1994 shows that such a breakdown is roughly accurate with percentages in each category varying from year to year between approximately 31 and 36 percent [3].

The Chinese government, however, has not disclosed how funds are spent within each budgetary category or how much money is allocated to the individual services.

Sources of Extra-budgetary Funding

Chinese spokesmen usually do not acknowledge any sources of extra-budgetary income that add to the amount of money available to the PLA. Yet, additional funds to support the military may come from other central government ministries, local governments, or from legitimate, sanctioned functions performed by PLA units, such as selling off land or providing personnel as extras for motion pictures made in China [4].

The number and amounts of extra-budgetary sources of income vary from year to year while sufficient data is not available to evaluate the full scope of extra-budgetary funding that may augment the announced budget. In order to make an accurate estimate of actual Chinese defense expenditures each separate source of extra-budgetary income must be evaluated for each specific year. Yet sufficient data are not available for most sources extra-budgetary income to make such an estimate.

Perhaps the best illustration of this dilemma is demonstrated by the value of Chinese arms purchases from Russia, commonly cited as one of the largest sources of extra-budgetary funding available to the PLA. Unfortunately, little clarity results from digging deeper into the numbers. For example, the Stockholm International Peace Research Institute database shows a “Trend Indicator Value” total of $21.9 billion in arms sales from Russia to China from 2000 to 2009, averaging about $2.2 billion per year. Yet yearly amounts varied from a high in 2005 of $3.224 billion to a low of $401 million in 2009. From 1992 (when the first major shipments of arms imports arrived) to 1999, that total number was only $6.2 billion or an average of about $776 million per year [5]. Over all 18 years, the average was about $1.6 billion. Which yearly average best represents the trend over the past two decades and should be applied to today’s defense budget?

Other sources of extra-budgetary income include funds from the central government and local governments for defense mobilization preparations, conscription, and demobilization. The PLA budget includes some funding for research and development, but most observers assess that the civilian-run defense industrial sector also receives additional funding to conduct military-related research and development. The central government provides funding for college students who enter the PLA (Xinhua News Agency, April 9, 2010). People’s Armed Forces Departments (PAFD) cadre at township or sub-district levels (grassroots level) are non-active-duty, government organizations manned by local civilians. These PAFD personnel, whose total numbers are not known, are responsible for conscription and demobilization in support of the PLA as well as commanding local militia units. While these PAFD personnel clearly support national defense efforts, they are paid by local governments. About three percent of the defense budget is used to fund reserve and militia personnel, training, and equipment, but these funds undoubtedly are augmented by local governments. The value of food produced and consumed by PLA units is not included in the defense budget. Units may also sell excess produce on the market and keep the profits for use by the unit. Though not part of the PLA and with a primary mission of internal security, some analysts include the budget for the paramilitary People’s Armed Police, which come mainly from the Ministry of Public Security, as part of overall defense spending. Nor is the impact of “relative buying power” (purchase power parity) of less expensive Chinese produced goods and exchange rates factored into Chinese government figures.

Therefore, foreign analysts often propose applying a multiplication factor to the announced defense budget to estimate the size of actual Chinese defense expenditures. Yet, despite the perceived need to do so, no arbitrary multiplication factor can be applied to the announced budget. Unless one can enumerate and quantify each of the potential sources of extra-budgetary income as they vary from year to year, any estimate of total defense-related spending is merely a guess—some guesses are more well-informed than others, but all are lacking the comprehensive database necessary to perform such a calculation. The true amount of actual defense-related spending remains a great unknown.

External Estimates of Chinese Military Spending

In recent years most reputable outside estimates of total Chinese defense-related spending have ranged from less than two to around four times the announced defense budget [6]. Both the Stockholm International Peace Research Institute and the International Institute for Strategic Studies in London provide estimates and justify their figures with data, limited as it may be. Figures from the U.S. Defense Department’s annual report to Congress on the Chinese military, however, usually attract the most attention.

In 2002, the Pentagon report stated, “China’s defense spending may be some four times larger than its public announcement in March 2002 of a defense budget of about $20 billion.” In 2010, the Department estimated, “China’s total military-related spending for 2009 to be over $150 billion,” but did not provide an explanation as to how it made this judgment. The officially announced 2009 Chinese defense budget was 480.686 billion yuan or about $70 billion (Xinhua News Agency, March 4, 2009). Accordingly, the Pentagon’s multiplication factor was about 2.14 times the announced budget, slightly over half of the factor estimated earlier in the decade. No explanation was given for why the multiplication factor in 2010 differed from that of 2002.

The gradual downward trend in budget multiplication factors suggests that the officially announced Chinese defense budget now includes funds that previously were off-budget. In effect, as time has progressed, the announced Chinese defense budget actually better represents total military spending than official numbers from a decade ago.

Defense Spending as Percentage of GDP

Instead of dollar or yuan amounts, perhaps a better indicator of a nation’s economic commitment to national defense is the percentage of GDP it spends on defense. Over the first decade of the century, according to the 2008 White Paper, that figure for China officially has varied from 1.22 to 1.42 percent. NATO (North Atlantic Treaty Organization) recommends its members spend at least two percent of GDP on defense [7]. For 2010 and 2011, U.S. defense spending was characterized as “remain[ing] flat at 4.7 percent [8].” The PLA does not operate within a web of military alliances as do the United States and NATO countries, and even with some multiplication factor applied to approximately 1.4 percent of GDP, Chinese defense spending does not appear to be interfering with the country’s economic growth.

Given its current fiscal status, if Beijing perceives it necessary to increase the PLA’s share of GDP, such an influx probably would be feasible without seriously undercutting economic development. This calculation could change, however, if any of a number of domestic social, political, economic, environmental, or international factors deteriorates and the Chinese economy slows down significantly.

Conclusion

Whatever the true numbers may be, the Chinese military has much more money to spend on fewer troops than it did 15 years ago. At the same time, personnel, equipment, and training costs for a more modern, technologically-advanced military are significantly higher than in previous decades. These costs will only increase as more advanced equipment enters the force. Compared to other militaries and particularly because of its size, the PLA is still relatively constrained in what it can do with the funds available. Consequently, a common theme for Chinese military leaders is saving money and finding innovative ways to conserve or better spend what they consider to be limited funds and resources [9].

Despite the double-digit increases over most of the last 20 years, the growth of the defense budget in fact appears to be coordinated with the growth of the Chinese economy—just as the Chinese White Papers have said. Defense spending is not increasing at a rate that interferes with China’s primary objective of national economic development. If need be, the government could increase spending even faster. Yet, the Chinese military leadership apparently fully understands that mere money and new equipment will not by themselves modernize the PLA.

Equally or more important is attracting, training, and retaining qualified personnel to operate, maintain, and plan for the employment of the new weapons entering the PLA. The process of training personnel and building a smaller, more technically competent force is the long-term goal of PLA modernization. Even with a resumption of defense budget increases over 10 percent, the PLA leadership has not changed the mid-century timeframe of achieving that goal. As such, the PLA sees itself as halfway down the path of its multi-decade, multi-faceted military modernization program.

Notes:

* This essay draws on research the author is conducting for the second edition of The Chinese Army Today.
1. U.S. Central Intelligence Agency, The World Factbook, at
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html (accessed March 4, 2011). The Factbook estimated the inflation rate at five percent. At the 2011 defense budget announcement, the Chinese spokesman said “Beijing has targeted at 4 percent inflation rate for 2011, as compared to last year’s target of 3 percent.”
2. This list is compiled from all Defense White Papers from 1998 to the present.
3. Dennis Blasko, Chas Freeman, Jr., Stanley Horowitz, Evan Medeiros, and James Mulvenon, “Defense-Related Spending in China: A Preliminary Analysis and Comparison with American Equivalents,” (United States – China Policy Foundation, May 2007):19, at https://www.uscpf.org/v2/pdf/defensereport.pdf (accessed February 5, 2011).
4. For example, the credits to John Woo’s 2008 movie Red Cliff ends with thanks expressed to the “PLA 66336 unit.”
5. Trend Indicator Values for arms sales can be generated by the SIPRI website at https://armstrade.sipri.org/armstrade/page/values.php (accessed February 5, 2011). Trend Indicator Values are not exact amounts for arms transfers, but rather serve as an “indicator of the volume of military equipment transferred.”
6. See Kim Nodskov, The Long March to Power The New Historic Mission of the People’s Liberation Army, (Copenhagen: Royal Danish Defence College, 2010): 56-65 for a discussion of the various estimates of Chinese defense spending.
7. Joris Lok, “NATO: Only Six out of 26 Nations Meet Defense Spending Target,” January 10, 2008, at https://www.aviationweek.com/aw/blogs/defense/index.jsp?plckController=Blog&plckScript=blogscript&plckElementId=blogDest&plckBlogPage=BlogViewPost&plckPostId=Blog%3A27ec4a53-dcc8-42d0-bd3a-01329aef79a7Post%3A3746e462-d9f3-43bd-90d2-769ec8209630 (accessed  February 5, 2011).
8. William Lynn, III, “Submitted Statement on the Budget Before the House Budget Committee,” March 4, 2010, at https://www.defense.gov/speeches/speech.aspx?speechid=1429 (accessed  February 5, 2011).
9. The 2008 White Paper states, “China persists in building the armed forces through diligence and thrift, attaching importance to scientific management, in order to make the fullest use of its limited defense resources.”