China's Defense Spending Is Lower Than Previous Outside Estimates

A RAND Corporation report issued today estimates that China’s defense spending is between 2.3 and 2.8 percent of the nation’s Gross Domestic Product. This is 40 to 70 percent higher than official Chinese government figures—but substantially lower than many previous outside estimates of the share of GDP that China devotes to defense.

The study estimates that the purchasing power of current Chinese military spending runs between $69 billion and $78 billion in 2001 dollars, and could reach $185 billion in 2001 dollars in 2025. This amounts to more than 40 percent of current U.S. defense spending.

By comparison, U.S. defense spending was 3.9 percent of GDP in 2004, amounting to nearly $430 billion in 2001 dollars. “China’s defense spending has more than doubled over the past six years, almost catching up with Great Britain and Japan,” said Keith Crane, a RAND senior economist and the lead author of the study. “Although the rate of increase has slowed, by 2025 China will be spending more on defense than any of our allies.”

While China’s military budgets are expected to grow in the next two decades, the RAND report—titled, “Modernizing China’s Military: Opportunities and Constraints”—identifies several key factors that will determine future defense expenditures.

The study, prepared by Project AIR FORCE at RAND, says China’s growing economy is one of the primary factors affecting defense spending. Already the second largest economy in the world by some measures, China has the economic resources available to fund a robust military modernization program.

Although researchers project that growth in China’s economy will slow from recent rates of more than 9 percent to as little as 3 percent by 2025, they still forecast China’s economy will more than triple in size by 2025.

China has made important strides toward addressing longstanding weaknesses in its defense industries. The government adopted a number of major reforms in military procurement processes and the operations of defense enterprises. Government-run defense firms are now given incentives for improving quality and efficiency, and the government is fostering competition among them. Defense enterprises are also increasingly partnering with civilian enterprises.

In addition, China’s defense enterprises have benefited from a decade of access to foreign military systems and related equipment, materials and technologies. These advanced foreign weapons platforms and technologies have helped Chinese enterprises to improve their domestic products.

Researchers point out that these strategies have been successful in improving the sophistication and quality of the military equipment produced domestically in sectors such as information technology, shipbuilding and defense electronics.

Recent improvements in China’s defense industries began in the late 1990s, as the Chinese government devoted more resources to improving the defense industry’s research, development and manufacturing capabilities. As a result, the study says that Chinese defense industries are beginning to narrow the technology gap with Western defense industries in some key capabilities.

While many factors could bolster China’s military, researchers identified a number of challenges that may slow China’s growth over the next two decades: the stagnation and subsequent decline in the size of the labor force; a fall in the domestic savings rate as the population ages and older people spend down their savings; a slowdown in the growth of exports and industrial output due to market saturation; weaknesses in the financial sector; and problems in agriculture and rural areas.

As China’s population becomes older, wealthier and more urbanized, the public is placing greater pressure on the government to increase spending on pensions, health care, education, the environment, and investment in infrastructure.

Despite the projected growth of China’s economy, the rising demand for social services, combined with rising government debt, will constrain the government’s ability to continue increasing military spending, the report says.

The ability of the Chinese government to increase taxes is limited, the study warns. Taxes and government expenditures as a share of GDP in China are already above average for medium-developed countries. Any further increase in taxes could threaten to incite political unrest, the report says.

While many factors will affect China’s future military capabilities, the RAND report also identifies several indicators that may help policymakers determine which trends identified in the study will persist in the coming years. These include:

• Closure of poorly performing defense plants, and expanded production by better-performing plants.
• Significant contract awards to nontraditional defense suppliers, including non-state enterprises.
• Divestures and acquisitions of defense enterprises driven by decisions taken by enterprise management, rather than governmental ministries.

A printed copy of “Modernizing China’s Military: Opportunities and Constraints” (ISBN: 0-8330-3698-X) can be ordered from RAND’s Distribution Services (order@rand.org or call toll-free in the United States 1-877-584-8642).

Project AIR FORCE is a federally funded research and development center that conducts objective analyses on issues of enduring concern to Air Force leaders, including air and space power, modernization, workforce issues, acquisition and infrastructure.