China has rapidly expanded its spending on defence over the past decade, at a pace that has closely mirrored its economic growth. However, a slowdown in growth over the past year has raised new questions over the implications for defence spending.

China has rapidly expanded its spending on defence over the past decade, at a pace that has closely mirrored its economic growth. Between 2001 and 2011, the average annual increase was 10.3% in real terms. Defence spending exceeded $100 billion for the first time in 2012, and the 2013 defence budget announced in March stands at $112.6bn, a 10.7% nominal increase over the previous year. However, a slowdown in economic growth over the past year has raised new questions over the implications for defence spending. Long-standing questions about Beijing’s lack of transparency on budgetary issues, meanwhile, remain unresolved.

Delayed modernisation

For 20 years after economic reforms were initiated by Deng Xiaoping in 1978, defence was not the top priority. The economy boomed as production was de-collectivised, price controls were lifted and some state industries privatised. Intensive investment in infrastructure led to large-scale migration of the rural population to the cities. According to Adam Liff and Andrew Erickson, ‘military modernization was treated as the least urgent of the famous “four modernizations” and, manifest in Deng’s request for the [People’s Liberation Army] [PLA] to “stay patient”, investment in the military was deemphasized throughout the 1980s.’

However, with export-led industrialisation firmly entrenched and membership of the World Trade Organization secured in 2001, the leadership began to prioritise military reform and modernisation. Between 2001 and 2011, real annual increases in the defence budget averaged 10.3% (or 15.6% in nominal terms) – the average growth rate of the economy was 10.4%. Defence expenditure in 2013 will be 3.1 times higher than 2001 levels after adjustment for inflation, and 5.1 times higher in nominal terms (see Figure 1). In dollar terms, defence spending has risen more than six times over the period, from around $17bn in 2001 to $112.6bn in 2013. China has become the world’s second-largest defence spender after the United States, spending more on defence than Japan, South Korea and Taiwan combined.

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Increased funding is not the only benefit for China’s defence economy that has resulted from economic growth. The country’s integration into global trade and production networks has increased the potential for a spill-over of civil technology to the military, particularly in dual-use technologies and production techniques. State monopolies, including those in the defence sector, have been restructured to fit a more corporate mould, encouraging greater levels of competition and allowing for improved integration with China’s growing civilian research and development sector, such as state-funded science and technology universities and research institutes. Meanwhile, the development of China’s domestic financial markets has allowed state-owned defence firms to tap alternative sources of funding.

Lack of data

Three closely related top-line budget figures are made public by Beijing each year: the first includes only central government outlays, the second includes some defence-related transfers to local governments, and the third includes a higher figure for local government disbursements on defence. The first and second figures are released for the year in which the spending is set to occur, while the third is released after an 18-month lag, in the following year’s annual statistical yearbook. The figures tend to differ only slightly, by around 3–5% at the most. The budget figures are highly aggregated, giving little indication as to the distribution of funding between the main service arms or categories such as personnel, operations and maintenance, research and development, and equipment procurement.

In a Transparency International study of defence budgeting worldwide, China ranked among the least transparent countries, alongside Algeria, Angola, Cambodia, the Democratic Republic of Congo, Saudi Arabia and Yemen. These states were characterised as providing little or no defence-related budget information to the public, and as having poor budget-oversight laws, undefined budgeting processes and significant off-budget military expenditure. Though Chinese budget figures may be regarded as useful benchmarks, they should be treated with a degree of caution.

The IISS Military Balance assumes that a set proportion of outlays on two accounts related to industrial-enterprise R&D (published in China’s statistical yearbook) are allocated to defence-related R&D, and adds these amounts to its spending estimate. Other areas believed to be excluded from the official figure include funds for weapons purchased from abroad and subsidies to state-owned industries, although it is believed that the latter have fallen substantially over the past decade. Finally, attempts to calculate China’s true military burden should take account of funds allocated to the People’s Armed Police, which is reported under a different budget heading.

When these additional items of military-related expenditure are added to official figures, the IISS estimate of Chinese defence spending typically rises by a factor of approximately 1.4 to 1.5 times relative to official figures, to US$136.7bn in 2011, using market exchange-rate conversions.

What has increased spending bought?

The PLA has made significant advances in many capabilities, including aircraft, missiles and ships, as well as electronic systems.

The PLA Air Force has been able to retire many obsolete airframes, replacing these with modern fighter aircraft, while continuing research on stealth fighters. Having previously consisted largely of ageing aircraft of Soviet design, its inventory has been transformed by the manufacture of Chengdu J-10 and Shenyang J-11 aircraft. It is developing several new models including the Chengdu J-20, unveiled in January 2011, the first indigenous aircraft with stealth characteristics. Another aircraft with stealth characteristics, unofficially identified as the Shenyang J-21 or J-31, appeared in September 2012. While both were likely to be prototypes or technology demonstrators, they indicated the rapid progress being made towards developing an indigenous fifth-generation fighter. In January 2013, China conducted the first test flight of the domestically-produced Y-20 heavy military-transport aircraft.

China has also made significant progress in developing its naval capabilities – 28 of the 48 warships currently in China’s six destroyer flotillas were commissioned in the last decade. The PLA Navy’s first aircraft carrier, the Liaoning, was commissioned in September 2012 – the hull had been purchased from Ukraine in 1998 and had been undergoing refits at Dalian shipyard since 2002. In April 2011, the navy unveiled the Shenyang J-15 carrier-based strike fighter, which made its first landing on the Liaoning in November 2012. In August 2012, the first images emerged of a new class of warship, the Type-052D destroyer. Meanwhile, production of Type-039B SSK diesel-electric submarines and the Type-056 corvette continues, and several Type-071 class landing-platform docks have been built. China is also developing a carrier-borne airborne early warning aircraft and a maritime patrol aircraft.

Since the mid-1990s, China has brought its DF-21D anti-ship ballistic-missile programme from design to near initial operational capability. In January 2013, it was reported that the PLA had successfully targeted a full-sized model aircraft carrier in an over-ground test exercise, indicating that the DF-21D had now been at least partially tested, even if it had yet to undergo final trials in the more demanding maritime environment against a moving target. Other missile programmes in production or development are believed to include the DF-41 inter-continental ballistic missile, the DF-16 medium-range ballistic missile, the DH-10 land-attack cruise missile and the CJ-20 air-launched cruise missile. Missile systems require advanced electronics to detect, identify and track targets, as well as command, control and communications systems. Over the past decade, China has deployed both space satellites and non-space-based sensors and surveillance systems such as over-the-horizon radar, which have improved the supply of targeting data in the littoral.

However, gaps in capabilities remain. China has yet to fully indigenise domestic aero-engine development, and has had to rely predominantly on Russian technology. It is difficult to ascertain whether technological advances have been made in terms of sub-components within equipment platforms. China may also lack the ability to fully produce indigenously both advanced avionics, and composite and radar-absorbent stealth materials to reduce an aircraft’s radar cross-section. The modernisation of land equipment has been limited, partly because defence budgets since the mid-1980s have been disproportionately allocated to the missile, naval and military aviation domains. More generally, China has yet to fully develop the doctrines and level of training required to conduct high-intensity operations.

Slowing growth

The after-effects of the financial and debt crises that hit China’s main export markets in 2008 have cast a shadow over China’s export-oriented growth model. The 7.8% GDP growth seen in 2012 was the lowest in 13 years, and the official growth target for 2013 is lower still at 7.5%. Unless China is able to decouple itself from its export customers and rebalance towards a domestic demand-driven model, economic growth – and by extension defence spending – is likely to be constrained. Indeed, there are some signs that defence spending growth rates have already started to slow relative to the early and mid-2000s (see Figure 2). Whereas in the five years prior to the crisis (2003–07) real defence spending grew on average at 10.6%, in the five years since the crisis (2009–13) the average was 7.6%.

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However, the figures have been volatile, with real increases of more than 15% in 2002, 2006 and 2009, but much lower rises of 10% or less in the intervening years – in 2010 the budget grew by only 1.8% in real terms, partly as a result of higher inflation caused by a global commodities price boom and a property-market bubble.

The 10.7% increase in China’s defence budget announced in March this year is very much in the middle of the normal range of defence-spending increments seen since 2001, but this pace may not be sustainable. President Xi Jinping has acknowledged that the 30-year era of double-digit economic growth may be about to end.

As new questions arise over China’s ability to maintain the rates of defence spending seen over the past decade, existing questions over the composition of its official defence budget remain unanswered. Its lack of transparency arouses uncertainty and suspicion on the part of other countries – notably the United States – over its military intentions and aspirations. This opacity may ultimately prove to be counterproductive as other states take precautionary measures to hedge against worst-case scenarios.

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