[NSP Research Report] The Status and Implications of China's Defense Spending Increase

Abstract

In analyses of the US-China military competition, China's defense spending trends are a matter of utmost concern. Despite the concerns of neighboring countries and rival nations, and the points raised by experts, China insists that its defense spending is not excessive relative to its population, territory, and economic power. Available data and information support this assertion to a considerable extent. However, the issue lies in the transparency and reliability of such data and information. It is extremely difficult to grasp the effects of defense spending based solely on the total amount and general categories, given the persistent lack of reliable data observable and verifiable from the outside regarding specific expenditure details and fluctuations, and changes in the spending ratios among different branches of the military, which can directly impact China's military capabilities. Most concerning is the suspicion that costs for weapons research and development and the acquisition of advanced foreign weaponry are omitted from the publicly available defense spending data. Considering the three variables of threat factors (rival nations), policy will (domestic politics and leadership), and capacity (economic power), the likelihood of China drastically increasing or altering its defense spending in the immediate future is low. However, the opacity and low reliability of these expenditure details can exacerbate security dilemmas, potentially leading to a vicious cycle where China becomes even more reluctant to disclose expenditure details for actual weapon acquisition and military buildup.

Main Text

"While the absolute amount of China's defense spending is clearly increasing, its growth rate shows a declining trend over the long term. From 1990 to 2013, the average annual defense budget growth rate was 15.1% over 24 years. Dividing this by government periods, the average annual growth rate during the Jiang Zemin era (1990-2002) was 15.95%, and during the Hu Jintao era (2003-2012), it reached 14.66%. Following the ascent of Xi Jinping (2013-2017), it was 9.52%. China's defense spending growth rate has shown a pattern of decrease during its rise, and notably, it has shown the lowest growth rate under the Xi Jinping administration, which is at the center of controversy regarding defense spending increases."

"In reality, while China's defense spending has been increasing quite rapidly recently, it is still being managed within the scope permitted by its economic capacity. First, the average annual defense budget growth rate from 1990 to 2013 was 15.1% over 24 years. However, the average annual inflation rate during the same period was 5.5%. Considering inflation, the real defense budget growth rate was 9.6%. This indicates that the defense budget growth rate has not kept pace with the average annual real economic growth rate of 9.9% during the same period. In 2014, defense spending increased by 12.2%, but considering the inflation rate of 3.5% that year, the real defense spending growth rate was 8.4%. This slightly exceeded the Gross Domestic Product (GDP) growth rate of 7.5% at the time. China's defense budget is indeed shown to be linked to its economic growth."

"However, although the transparency of defense spending data has improved compared to the past, the Chinese government still does not disclose specific details of how defense funds are used. Not only are the categories of the defense budget unclear, but the omission of generally included items also raises concerns about transparency. China first began to roughly categorize its defense spending into troop deployment, training, and equipment in its 1998 defense white paper. Until the 2008 white paper, the Chinese government included a separate section on defense spending, briefly introducing expenditure details and including comparisons with other countries like Japan and Russia, aiming to show that China's defense spending was not relatively high. However, since 2010, as China's defense spending surpassed that of these countries, such comparative data has no longer been provided. The breakdown of defense spending is limited to a very general description: personnel costs (34%), operating and maintenance costs (34%), and weapons and equipment costs (32%). Furthermore, since 2013, with the shift in defense white papers to a thematic format, the section related to defense spending has disappeared."

"However, these defensive explanations from the Chinese government paradoxically raise suspicions that China may be intentionally downplaying or concealing expenditures related to military buildup within its defense budget. A particular issue is that research and development (R&D) costs, which are crucial for military modernization, are not included in the defense budget. In this context, the emphasis on 'military-civil fusion development' (军民融合发展) during the Xi Jinping administration is noteworthy (State Council Information Office of the People's Republic of China 2015). Officially, this is understood as actively seeking to integrate advancements in civilian technology to promote development in cutting-edge defense science and technology. The emphasis on military-civil fusion development suggests the possibility that investment in defense-related R&D is increasing, even if it is not captured in the defense budget. Indeed, external research institutions such as the Stockholm International Peace Research Institute (SIPRI) consider R&D costs to be excluded from China's defense budget and estimate and publish R&D expenditures in addition to the officially announced defense budget."

"Another point of contention regarding defense spending details is how the military budget is allocated among different branches, given the Xi Jinping administration's focus on strengthening naval and air force capabilities. This, too, is not officially disclosed by the Chinese government, so it can only be indirectly inferred from recent trends in the enhancement of China's military combat capabilities. It appears clear that the Xi Jinping administration is aiming to become a maritime power and is focusing on strengthening naval and air force capabilities during the military structural reforms."

"First, in terms of policy will, the policy choice of how much weight the Xi Jinping administration will place on the 'dream of a strong military' (强军梦) for the realization of 'the dream of a strong nation' (强国梦) through economic development needs to be examined. Compared to other major powers, China's defense spending as a percentage of its Gross National Product (GNP) is still relatively low. Paradoxically, this leaves considerable room for policy decisions to be reflected."

"However, it is questionable whether China can continue to expand defense spending in the future, even if its economic growth rate continues to decline. Firstly, China has not increased its defense spending solely for economic growth. Rather, there are numerous realistic socio-economic factors that could constrain future defense spending increases. These include a slowdown in economic growth, negative consequences of economic restructuring, an aging population, and increasing demand for welfare spending, which could lead to a reduction in defense spending and a decline in the defense industry (Shin Sung-ho 2012, pp. 8-10). China has already entered an era of medium-speed growth, termed 'new normal' (新常态), and is currently undergoing restructuring to secure new growth engines, which are crucial for its national destiny. Under these circumstances, maintaining double-digit defense spending growth rates, as seen during the period of high-speed growth, may be difficult. In fact, China has maintained defense spending growth rates in the 7% range for two consecutive years, following 2016."

"Considering the domestic challenges and circumstances it currently faces, China is unlikely to engage in an excessive military arms race with the United States to compensate for its naval and air force inferiority. In summary, while China clearly recognizes the necessity of 'building a strong military' to realize the Chinese Dream, it appears to hold the pragmatic view that the 'dream of a strong military' should be pursued gradually within the context of a strategy prioritizing economic development. Therefore, although conflict with the United States is inevitable to some extent, China is also making efforts to manage the situation to avoid unnecessary escalation. In other words, China's policy will to become a strong nation is clear, but a strategic approach is required to achieve the goal of its rise. Judgments on regional dynamics and strategic approaches can act as deterrents to China's aggressive defense spending increases."

Author

Director of the EAI China Research Center and Professor at Dongduk Women's University. She holds a Ph.D. in Political Science from Peking University's School of International Studies and has served as a policy advisor to the Ministry of Unification and an executive member of the Joint Research Committee of Korean and Chinese Experts. Her main research areas include China's foreign relations, China's ethnic minorities, and Chinese nationalism. Her recent publications include "Changes and Continuities in the Foreign Policy of the Xi Jinping Regime," "China's policy and influence on the North Korea nuclear issue: denuclearization and/or stabilization of the Korean peninsula?", "Talking About China's Future" (editor), and "China's Territorial Disputes" (co-author).