Monday, March 05, 2007

This Should Come as No Surprise

China has announced that its military budget will increase by almost 18% this year, continuing a string of double-digit increases that began more than a decade ago.

Officially, Beijing's military spending will spend $44.94 billion on defense this year, a hike of almost $7 billion over the 2006 defense budget. A spokesman for the PRC legislature defended the increase as "quite modest," compared to the military outlays of the United States, Britain, France and Japan. And, obligingly, the Associated Press notes that the current U.S. defense budget is $523 billion, more than 12 times what Beijing spends.

But, as we've noted before, the figures released by the PRC government never tell the full story. Much of Beijing's defense spending remains hidden, concealed inside various "enterprises" run by the People's Liberation Army, or simply omitted from the "official" budget. A 2006 Heritage Foundation assessment estimates China's "real" defense spending is between $65-90 billion a year, giving the PRC the world's third largest defense budget (after the U.S. and Russia). More importantly, neither Washington nor Moscow has ever sustained the type of budgetary increases generated by Beijing over the past decade.

In a 2002 analysis of the PRC defense budget, the U.S.-China Commission (USSC) estimated that Beijing's actual defense outlays may be two or three times higher than the official claims, thanks (in part) to those creative budgeting and accounting pratices:

"...there is no consensus as to where its ‘hidden resources’ of military financing lie and how large its actual defense spending really is."12 The missing money is either hidden in other budgets or simply not calculated.13 The official budget does not cover several areas, including: indigenously made weapons and equipment production; some Research Development Test and Evaluation (RDT&E) costs; funding the People’s Armed Police (PAP) and reserves; funds for large foreign weapon systems procurement; funds directly allocated to military factories under control of the General Armaments Department (GAD); and foreign military aid."

"...Additional resources are provided to the PLA by state and local jurisdictions through cost-sharing arrangements, by profits generated through PLA-run enterprises not yet divested, from the production and sale of products and services, through funding allocations from other ministries, and from receipts generated by foreign military sales and transfers. As a result, the official budget is vastly understated; the range of annual estimated defense funding runs from $20 billion to $140 billion. The most recent Department of Defense estimate puts the real defense budget at about $65 billion, which is roughly three times the official claims, or just under 5 percent of the GDP." [And remember: this was the estimate for 2002]

And, unlike the U.S. (where roughly half our defense budget goes for personnel compensation and benefits), China can put much of its expenditures into hardware and training:

A different way to assess the size and trends of the military budget is to look at expenditure per soldier. Based upon the $65 billion DOD estimate of China’s military spending and the assumption that PLA downsizing from 2,470,000 to 1,970,000 personnel has been completed, the expenditure per soldier in 2002 would be closer to $33,000. The comparable U.S. and Japan's published expenditures are $213,208 for United States and $192,649 for Japan.20 Based upon the $65 billion defense spending estimate, the optimistic projections of sustained average GDP growth of 8 percent and average annual defense budget increases of 20 percent, spending per soldier in the downsized PLA in 2010 would be a respectable $170,220. It should be noted that these static expenditure comparisons ignore what the money is being spent on, for example, how much is for modernization and buildup and how much it buys in the local economy.

Clearly, how much China spends on defense is open to debate. But one thing is apparent: Beijing is making good on its plans to become a regional and global power, spending the money required to substantially improve its conventional and nuclear forces. And, funded in part by a huge trade surplus with the U.S., China's military build-up will only continue.

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