China Power

It’s the Economy, Stupid!

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China Power

It’s the Economy, Stupid!

Political or economic? The latter is a more likely reason for a defence spending slowdown.

As promised yesterday, I have our defence correspondent, Toshi Yoshihara’s, first thoughts on the Chinese defence numbers. He underscored the point I made about how even this apparently dramatic slowdown still makes for a hefty increase.

He told me:

‘A 7.5 percent rise is still pretty respectable in relative terms. Japan, for example, has been experiencing negative growth in real terms even as expenditures have held steady in nominal terms. The figures on defence expenditures have always been in dispute. Because the numbers don’t account for purchases of big-ticket defence items from abroad, they tend to understate how much the Chinese spend. Some defend the aggregate amount, claiming that most of it is devoted to operations and maintenance (O&M) just to keep the PLA running. But one could argue the same thing for all militaries.’

There have been a range of explanations given for the lower budget allocation this time. One snap analysis I read on the wires suggested it’s a political gesture aimed at consolidating improved ties with Taiwan. Setting aside the fact that Ma’s honeymoon with the mainland seems to be over, though, it seems unlikely a cut in declared spending is going to offer much reassurance with hundreds of missiles still pointing at the island.

One analyst instead suggested to me a more plausible reason:

‘I think the reason for this Chinese decline may be economic. Some observers are much less sanguine about China’s recovery from the financial crisis. The anecdotal figures that Gordon Chang and others use on indirect capital flight etc. from China are pretty sobering.’

And the same analyst went on to raise an interesting possibility:

‘The other reason is increasing social unrest arising from economic dislocation…The Hu and Wen team clearly needs to devote resources to deal with the socio-economic inequalities that might have been exacerbated by the financial crisis.’

The emphasis on the economic rather than political angle to the slowdown is also in keeping with the fact that the new budget, although a smaller increase than the previous year, is still 6.4 percent of total fiscal expenditure–exactly the same as last year.