Balancing China’s Budgetary Priorities: Defense Spending and Domestic Challenges

Publication: China Brief Volume: 7 Issue: 20

The true level of China’s current defense budget is difficult to calculate, but projecting future trends in Beijing’s military spending entails struggling with even greater uncertainties and complexities. Forecasts of Chinese military spending over the next 10-20 years vary widely depending on the methods employed, and underlying assumptions about factors such as China’s future economic performance and the tradeoffs the country’s leaders will face as they decide how to balance military modernization against other budgetary requirements [1].

In 2005, the U.S. Department of Defense predicted a possible three-fold or greater increase in China’s defense spending over the next 20 years, which would place its military budget at $210-$315 billion (in constant 2005 U.S. dollars) or more in 2025 [2]. In contrast, a RAND Corporation report released at about the same time concluded that slowing economic growth and rising domestic pressures to increase social welfare spending would probably impose greater constraints on China’s future defense expenditures. The RAND study projected that in 2025 Chinese defense spending would reach about $185 billion (in constant 2005 U.S. dollars), still an impressive sum, but one that is considerably lower than the Department of Defense forecast [3].

These divergent estimates reflect considerable uncertainty not only about future Chinese economic performance, but also about how China’s leaders will choose to allocate budgetary resources when faced with competing priorities. Military modernization is certainly a very high priority, as reflected by about a decade of double-digit budget increases for the People’s Liberation Army (PLA) since the late 1990s. Moreover, the importance that Beijing attaches to military modernization has also been underscored by the statements of senior Chinese Communist Party (CCP) leaders. For example, addressing members of the PLA delegation to the March 2006 National People’s Congress (NPC) meeting, President Hu said, “We should strive to improve the capability of the armed forces to deal with crisis, maintain peace, contain wars and win victory in possible wars” (PLA Daily, March 12, 2006). Hu urged the PLA to intensify its efforts to equip itself with information technology, improve its combat readiness, push forward organizational and administrative reforms and stressed the importance of developing a capability for rapid and effective national defense mobilization.

How Much Defense Spending is Enough?

Interestingly, despite the increased priority accorded to military modernization since the late 1990s, some PLA officers and Chinese scholars assert that Beijing is still not devoting enough resources to national defense. The comments of PLA deputies to the 2006 sessions of the NPC and Chinese People’s Political Consultative Conference (CPPCC) perhaps suggested some dissatisfaction with the level of resources devoted to the military. According to a report in the PLA’s official newspaper, one PLA officer commented: “The sustainable development of national defense and military modernization must draw on and cash in on the results of national economic development and must ensure a coordinated development between the army building and the national development” (PLA Daily, March 13, 2006). Several think tank analysts and scholars have also called for even greater increases in military spending. Hu Angang, an economist at Tsinghua University, argued that China is not spending enough on defense, especially considering the country’s rapid economic development and recent trends in cross-Strait relations. Hu stated: “China’s military build-up has greatly lagged behind the development of the economy, so that national defense construction has not been in accord with the economy’s development” (Reuters, June 6, 2006). Similarly, Shen Dingli, Executive Deputy Director of the Institute of International Studies at Fudan University in Shanghai, has argued that China needs to devote even greater resources to military modernization to increase its ability to compete with the United States. In particular, Shen argues, China needs a larger military budget “to avoid being bullied” (Shanghai Dongfang Zaobao, February 7, 2006).

The Growing Costs of China’s Domestic Problems

The calls for still greater defense spending are likely to be counterbalanced by growing demands for government spending to cope with a wide range of social problems that have arisen as collateral consequences of Beijing’s economic reform strategy during the Deng Xiaoping and Jiang Zemin eras. Indeed, defense spending eventually may have to compete with domestic spending on problems such as a growing income gap, the glaring inadequacies of the Chinese healthcare system, worsening environmental degradation and the rising social unrest fueled by these other problems, especially if economic growth eventually slows down.

Many of these issues resulted from the CCP’s strategy of economic reform accompanied by only limited political reform, which produced impressive growth rates and kept the CCP in power, but at the expense of creating a host of social and political problems and eroding the capability of the Leninist party-state to cope with these unintended consequences of reform. In particular, the CCP pursued a strategy that emphasized achieving the fastest possible overall growth rates without much regard to the uneven distribution of the benefits of economic reform and opening. The uneven development that resulted risks social unrest and political instability [4]. Dealing with the income inequality problem, which many Chinese social scientists view as potentially destabilizing, is likely to prove very challenging, especially since revised economic estimates suggest that the income gap may be even worse than many economists previously assumed (International Herald Tribune, December 26, 2005).

China’s deepening healthcare crisis represents another serious domestic challenge that will likely begin to compete for a larger share of government spending. The collapse of the socialist healthcare system has left the vast majority of rural residents and even a considerable proportion of the urban population without access to adequate healthcare services due to lack of insurance and the rising cost of medical care, which many people in poorer areas simply cannot afford. The reforms China has implemented thus far have been unable to effectively deal with these problems.

China also faces serious environmental challenges such as deforestation, air and water pollution, desertification and flooding. Pollution, in particular, is causing serious health problems, contributing to rising social unrest and imposing enormous economic costs [5]. The World Bank has estimated that China’s environmental problems are already so severe that they cost about 5.8 percent of China’s GDP every year [6]. This is in large part the result of the healthcare problems that are caused by worsening air and water pollution. Considering that 16 of the world’s 20 most polluted cities are located in China, this is a particularly daunting challenge for leaders in Beijing [7]. The Chinese government recognizes the problem, but seems to have had limited success enforcing environmental laws at the local level, where many officials subvert the regulations. Consequently, according to a recent report by the PRC’s State Environmental Protection Administration (SEPA), the environmental situation is continuing to worsen. As the report laments, “The conflict between environment and development is becoming ever more prominent. Relative shortage of resources, a fragile ecological environment and insufficient environmental capacity are becoming critical problems hindering China’s development” [8].

Another closely related problem that is drawing the attention of Chinese leaders is social unrest, which has been sparked in many cases by the side effects of China’s economic growth strategy. Drawing on public security sources that detail internal debates over unrest, political scientist Murray Scot Tanner finds that dramatic increases in mass unrest over the past decade have turned social protest into a “daily phenomenon” in China [9]. Ministry of Public Security data indicate that the number of “mass incidents” rose from about 8,700 in 1993 to more than 58,000 in 2003 [10]. The increase in such incidents apparently reflects growing dissatisfaction with problems associated with economic reforms and the behavior of local officials, including excessive tax burdens, layoffs, failure to pay wages and pensions, property rights disputes arising from land seizures, corruption, environmental degradation and rising income inequality. Chinese Premier Wen Jiabao in a late 2005 speech highlighted illegal land seizures as a particularly severe threat to social stability, especially in rural areas. “Some places are unlawfully occupying farmers’ land and not offering reasonable economic compensation and arrangements for livelihoods, and this is sparking mass incidents in the countryside,” Wen said (BBC, January 21, 2006).Tanner argues that the growing number of protests probably does not pose a direct threat to the CCP’s survival, so long as the incidents remain relatively small, poorly organized and isolated from each other, but he also points to evidence that suggests the protests are becoming more difficult to control. In particular, the growing size of protests, improvements in organization and tactics and employment of communications technology are factors that pose serious challenges for Chinese police. Even sustained high rates of economic growth will not slow rising unrest unless Beijing reforms China’s political and legal institutions, creates effective channels for citizens to seek redress for their grievances, improves governance and accountability and reduces widespread corruption [11].

These social, political and economic challenges have the potential to impose constraints on further increases in military spending. Under the leadership of President Hu Jintao and Premier Wen Jiabao, China is shifting from an economic strategy that emphasized rapid GDP growth above all else to an approach that devotes more attention to reducing income inequality and ensuring sustainable development. Hu and Wen are likely to have their hands full, since local officials historically have been evaluated and promoted on the basis of metrics associated with the rapid growth strategy and may resist the new balanced and sustainable development approach. Nonetheless, as part of this new approach, Chinese leaders emphasize that the country’s economic policies must promote the development of a “harmonious society” [12]. Accordingly, China’s 11th Five-Year Program is intended to promote balanced growth and sustainable economic development.

These ambitious plans and the pressing requirements could eventually reduce the resources available for defense spending. China’s Minister of National Defense Cao Gangchuan highlighted these constraints during an October 2005 press conference with U.S. Defense Secretary Donald Rumsfeld. According to Cao: “the top priority of the Chinese government today is to develop the country’s economy and improve the livelihood of its people…given the duties and obligations of the government, it is simply impossible for us to massively increase the investment into defense capabilities building” [13]. Although Cao’s comments were likely intended to defuse U.S. concerns about the growth of the Chinese defense budget and the potential implications of Chinese military modernization for regional security, they probably also reflected a fairly realistic appraisal of Beijing’s policy priorities and the limitations domestic challenges may begin to impose on further dramatic increases in military spending in the future. Especially if growth slows or Beijing is forced to confront some of the unintended consequences of its longstanding policy of promoting rapid economic development no matter what the social and environmental costs.


Rapid economic growth has allowed Beijing to dramatically increase defense spending since the late 1990s without compelling Chinese leaders to choose between military modernization and China’s other policy priorities. In the not too distant future, however, the Chinese government is likely to face growing pressure to devote a larger share of government spending to coping with serious domestic problems such as income inequality, the collapse of the healthcare system and environmental degradation, all of which contribute to rising social unrest. As these domestic problems become more pressing, Beijing may have to begin to face some of the budgetary tradeoffs it has previously managed to avoid, even if economic growth continues at a fairly impressive rate. Moreover, in the event of an economic downturn, the challenges of balancing these competing budgetary priorities would become much more acute for China’s leaders. At the same time, however, it is important to keep in mind that Beijing clearly attaches a great deal of importance to military modernization and that even if the need to deal with mounting domestic problems prevents defense spending from continuing to grow at a double digit pace indefinitely, China will remain dedicated to increasing the PLA’s professionalism and enhancing its operational capabilities.


1. See, for example, Dwight Perkins, China’s Economic Growth: Implications for the Defense Budget, in Ashley J. Tellis and Michael Wills, ed., Strategic Asia 2005-06: Military Modernization in an Era of Uncertainty, Seattle, Washington: National Bureau of Asian Research, 2006, pp. 363-386.

2. Office of the Secretary of Defense, Annual Report to Congress, Military Power of the People’s Republic of China 2005, pp. 21-22.

3. Keith Crane, Roger Cliff, Evan Medeiros, James Mulvenon, and William Overholt, Modernizing China’s Military: Opportunities and Constraints, Santa Monica, CA: RAND, 2005.

4. Wang Shaoguang and Hu Angang, The Political Economy of Uneven Development: The Case of China, Armonk, NY: M.E. Sharpe, 1999.

5. For more on this issue, see Elizabeth Economy, The River Runs Black: The Environmental Challenge to China’s Future, Ithaca: NY, Cornell, 2004.

6. Rural Development, Natural Resources and Environment Management Unit, East Asia and Pacific Region, The World Bank and PRC State Environmental Protection Administration, Cost of Pollution in China: Economic Estimates of Physical Damages, Washington, DC: The World Bank, February 2007,

7. Melinda Liu, China 2.0: Beijing Shifts to New Economic Model, Newsweek International, January 30, 2006,

8. State Environmental Protection Administration, People’s Republic of China, Environmental Protection in China, 1996-2005, Beijing, China: State Council Information Office, June 2006,

9. Murray Scot Tanner, Chinese Government Responses to Rising Social Unrest, Testimony presented to the US-China Economic and Security Review Commission on April 14, 2005,

10. Ibid.

11. Ibid.

12. For a detailed explanation of this approach, see Communiqué of the Sixth Plenum of the 16th CPC Central Committee, People’s Daily, October 12, 2006,

13. U.S. Department of Defense, News Transcript: Joint Media Availability with Secretary Donald Rumsfeld and General Cao Gangchuan, October 19, 2005,