Deciphering China’s latest defence budget figures

Mar2014: 

On 4 March the Chinese Government presented its 2014 budget to the National People’s Congress (NPC). The budget does not accurately represent the total amount spent by China on its military but its inclusion of an increased amount for defence echoes similar increases in recent years. Both the increase and the related modernization of China’s military capabilities reflect a complex series of external and internal factors.

The 2014 budget presented to the NPC totalled 15.3 trillion yuan ($2.5 trillion), including 808 billion yuan ($132 billion) for defence—an increase of 12.2 per cent on the 720 billion yuan spent on defence in 2013. The figure for the defence budget appears to refer only to expenditure by the central government, although there is also a small amount of spending (about 21 billion yuan) by local government.

The SIPRI estimate

The official government defence budget covers only a proportion of China’s total military spending. There is little transparency in the budget, which is disaggregated into just three major categories: personnel, training and maintenance, and equipment, usually in roughly equal proportions.

To give a more accurate representation of China’s spending, SIPRI’s estimate—which is based on open sources including the China Government Finance Yearbook—includes official figures or estimates for a number of other items in addition to the central and local defence budgets and the official budget of the People’s Liberation Army (PLA).

These other items include estimated additional research and development (R&D) spending; spending on the paramilitary People’s Armed Police; estimated additional military construction; spending on pensions and demobilization payments to soldiers by the Ministry of Civil Affairs; and estimated spending on arms exports.

Overall, SIPRI estimates that total Chinese military spending is about 55 per cent higher than the total central and local defence budget. For example, SIPRI’s estimate for China’s military spending in 2012 was 1049 billion yuan ($166 billion), compared to the official defence budget of 669 billion yuan. This estimate carries a considerable margin of error, especially in relation to the additional military R&D spending.

In contrast, the United States Department of Defense (DOD) stated in its annual report to the US Congress that Chinese military spending in 2012 was between $135 and 215 billion, based on 2012 prices and exchange rates. However, the DOD estimate does not provide a breakdown of China’s military budget, and includes very little explanation of the basis for its calculations.

Reasons for China’s increased emphasis on modernizing its military

China now has the world’s second largest economy and is recognized as a global power. China’s rapidly growing military spending—and the parallel military modernization—is thus just a reflection of its equally rapid economic growth. Indeed, China’s official policy is that its military modernization depends on and is subordinate to national economic development.

Chinese military spending has grown roughly at the rate of economic growth over the past decade or so—sometimes a bit faster, sometimes a bit slower. The share of gross domestic product (GDP) of military spending has thus remained fairly constant for some time. For 2014, China has set an inflation target of 3.5 per cent, which means that the 12.2 per cent nominal increase in the defence budget would translate to an 8.4 per cent real-terms increase. This is slightly higher than the targeted economic growth rate of 7.5 per cent, but the difference is not so large as to suggest a break in the general trend.

China’s defence budget for 2014 represents 5.3 per cent of the total central government budget. This is also a slight increase from 5.1 per cent in 2013, but again this is not a major change. At any rate, the relative priority given to the military is certainly not decreasing and may be slightly increasing despite the numerous major challenges China is seeking to tackle, such as economic inequality and environmental destruction.

China’s military spending in the global context

The increase will see China continue pulling away from other countries—including France, Russia and the United Kingdom—in terms of military spending, and gradually reducing the still very large gap with the United States. While China’s military technology is still well behind the most advanced Western systems in most areas, its rate of military technological development in recent years has been impressive, sometimes surprising analysts. The continued increase in spending by China is likely to mean that this rapid development will also continue. According to official statements in recent years, two of the major purposes of China’s large spending increases are improving the pay and living conditions of troops and the modernization and ‘informationization’ of the armed forces.

SIPRI’s estimates put China's military burden—the share of military expenditure in GDP—at 2–2.1 per cent of GDP. This is still lower than the global military burden of about 2.4 per cent, but higher than the majority of countries. In fact, among other major military spenders (the top 10 in 2012), China's military burden is lower than that of the USA, Russia, the UK, France, Saudi Arabia and India, but higher than that of Japan, Germany and Italy.

While there are many factors that shape the strategic balance in East Asia, the rapid rise of China’s military expenditure over the past 20 years has been the most significant factor influencing regional security. Many states have concerns regarding the lack of transparency in China’s military budget, and have adopted hedging or balancing strategies in response.

Greater transparency on China’s behalf would certainly help avoid a regional arms race, and would also be a positive step towards increased global peace and stability.

Sam Perlo-Freeman is Director of SIPRI’s Military Expenditure and Arms Production Programme. SIPRI’s estimate for China’s military expenditure in 2013, along with SIPRI’s data on military expenditure worldwide in the same year, will be published on 14 April.