China’s Defense Budget: A Mixed Bag

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China’s Defense Budget: A Mixed Bag

For the U.S. and its allies, China’s new defense budget contains both bad news and good news.

As my colleagues have already reported, China announced a military budget of 808.23 billion Yuan ($131.57 billion) for 2014, a roughly 12.2 percent yearly increase. Naturally, this has raised concern among many of China’s neighbors that are locked in territorial disputes with Beijing, as well as in the United States.

For the countries concerned about China’s growing defense spending, there is both bad news and good news (or at least less bad news) contained in this announcement.

Let’s begin with the bad. First, as is well known, China’s military spending in 2014 is almost certain to far exceed $132 billion, as Beijing is notorious for keeping much of its defense spending off the books. Many estimates of China’s 2013 defense spending put it closer to $200 billion, although any credible sources contain a caveat that the margin of error is high. Nevertheless, assuming it was around $200 billion in 2013, a 12 percent increase this year would put China’s defense spending at about $224 billion. The Pentagon’s base budget is about $527 billion for FY 2014, meaning that Beijing’s military budget is about 42 percent of the United States’. However, this gap is narrowing quickly given the stagnant or even declining U.S. defense budget and the large yearly increases in China’s military budget. As discussed more below, wide disparities in personnel costs further narrow the differences between U.S. and China defense spending.

Another negative development for the U.S. and its Asian allies is that China’s military budget is growing at a faster rate. The 12.2 percent increase in 2014 is the largest increase since 2011, despite the growing economic issues the Chinese leadership must contend with. Since this was Xi Jinping’s first defense budget, this trend could continue for the next nine years, although that is hardly certain.

Relatedly, and perhaps the most troubling development, China’s military spending now appears to be totally divorced from its GDP growth. Defenders of the double-digit growth in China’s defense budgets over the last decade or so have often sought to downplay concerns by pointing out that the increases were simply keeping pace with growth in the overall economy. This felt reassuring since it meant that China wasn’t spending any more on defense when measured as a percentage of GDP (indeed, this number would be declining since China’s GDP is larger than its defense budget). Thus, the implication was that the military was not a top priority for China’s leadership.

The new 2014 budget should put this fallacy to rest. As China’s economic growth has slowed in recent years its defense budgets have continued to grow. The new budget is now the third year in a row in which the defense budget grew faster than the overall economy. And it’s no longer even close. The projected 12.2 percent increase in defense spending comes at a time when Chinese leaders, perhaps somewhat optimistically, are hoping that the economy will grow at a rate of 7.5 percent. Clearly, Chinese leaders view the appropriate size of military spending as something that is entirely different from economic growth.

Furthermore, the growth this year will be intensified by relatively low levels of inflation. As Andrew Erickson and Adam Liff note in a recent article, historically China’s defense budget increases have been eroded by high inflation rates. But China’s inflation rates have trended gradually downward in recent years and are projected to be especially low in 2014. Indeed, even in January, during the run-up to the Chinese New Year, consumer inflation rates remained stable at 2.5 percent, and the long-standing deflation in producer prices accelerated slightly. Although China has set a target inflation rate of 3.5 percent for 2014, January inflation rates are usually higher than yearly averages due to the Chinese New Year. Thus, some analysts expect China’s yearly consumer price index inflation to be just 2 percent, while others see the overall rate falling somewhere around 3.1 percent.

Still, there is some good (or less bad) news for the U.S. and its allies. First, as noted, there is generally perceived to be a large gap between China’s official defense budgets and its actual defense spending. However, some suggest that this gap has been quickly shrinking in recent years. For example, the International Institute for Strategic Studies’ 2006 Military Balance estimated that the gap between reported and actual spending for China in FY 2005 was 72 percent. In 2012, IISS’s Military Balance estimated that the gap for FY 2010 had shrunk to 41 percent. Thus, some of the reported 12.2 percent increase could be for expenditures that were previously made off the books, rather than actual increases.

Another batch of sort of good news comes from Quartz’s Lily Kuo. Kuo notes that many—including PLA officers themselves—believe there is an excessive amount of corruption within the PLA, which siphons off some of the money in the defense budget. She notes that in 2012 a raid on one PLA officer’s house yielded a Mao statue made of pure gold.

Still, I’m not sure how much relief the U.S. and its allies should take from the fact that there is corruption within the PLA. To begin with, as recent U.S. military scandals have shown, there is corruption in all militaries. Then there’s the fact that defense budgets contain a lot of money, and individual officers lining their pockets are unlikely to affect it substantially.

A more important consideration, in my opinion, is the potential for high-levels of corruption and general inefficiencies with regards to the awarding and implementation of weapons contract. Kuo also quotes Project 2049’s Ian Easton as saying that soldiers in the PLA spend 40 percent of their time in “political training.” Assuming that this figure is accurate, and there’s good reason to think it is, this is an enormous waste of resources from the point of combat effectiveness. That being said, Xi has made it extremely clear that he wants to shift emphasis towards combat training, presumably to the detriment of activities like political training.

Arguably the biggest reason for optimism regarding China’s new military budget is that the Chinese leadership has signaled that much more money will go to various personnel costs. Dennis Blasko, for example, tells the New York Times: “A significant portion [of the defense budget increase] likely will be used for more pay raises. You may recall hearing some talk about how PLA officers should be paid more than civil servants.”

This is excellent news from the standpoint of the U.S. and its Asian allies, as lower military personnel costs are a significant advantage China has over most other militaries. For example, IISS estimated that last year personnel costs accounted for just 30 percent of the People’s Liberation Army’s entire budget. By contrast, IISS estimates that personnel costs eat up 43 percent of Pakistan’s budget, 44 percent of Japan’s, and 45 percent of India’s military budget.

The U.S. military’s personnel costs are especially remarkable. Defense Secretary Hagel has said they make up roughly 50 percent of the current defense budget. Meanwhile, the House’s Budget Committee has noted that, “Since 2001, the cost per service member in the active-duty force has increased by 41 percent, excluding war funding and adjusting for inflation. If personnel costs continue growing at that rate and the overall defense budget grows with inflation, military personnel costs will consume the entire defense budget by 2039.”

Thus, while containing its own costs, Washington desperately needs the PLA to also increase the percentage of its military spending that must go to personnel costs. The good news is that these personnel costs are likely to continue growing in China as it transitions to a consumption-based economy, and the overall standards and costs of living increase in the country. The bad news is that increases in per-soldier costs in the PLA will be partially offset by reductions in the overall size of the PLA.