China's Actual Defense Budget

The "actual" level of Chinese defense spending is hotly debated, probably not known with certainty to the Chinese authorities themselves, and ultimately is unknowable in any meaninful sense. The published budget has been growing at over 10% each year, generally in line with the estimated growth of China's economy. Thus it has grown from less that $20 billion at the turn of the century to nearly $100 billion by the year 2011. The American defense budget roughtly doubled over the same period, reaching about $750 billion. Analysts generally agree that the actual level of effort is seriously understated, and may represent as much as $125-150 billion at current exchange rates.

Understanding China's defense budget is further complicated by purchasing power parity [PPP] disparities, the difference between costs in China and the cost of an equivalent item in other countries with higher standards of living. Perhaps two-third's of China's expenditures are for items, ranging from salaries to weapons systems, that cost a fraction of their equivalent American value. The US Central Intellgience Agency estimates that China's PPP military expenditure is about $400 billion, about half that of the United States. But this overstates China's military potential, since it mainly reflects the fact that the People's Liberation Army has three times as many soldiers on active duty as does the United States Army. In almost every other regard, China's military power is only a small fraction of that of the United States, far less than might be expected based on the two-to-one budget ratio.

Some analysts estimate China's "real" spending on defense is at least three times as great as the publicly disclosed figure. For example, according to the Secretary of Defense's January 2001 report, Proliferation: Threat and Response, China's military funding levels were expected to average between $44 and $70 billion annually between 2000 and 2004. In another instance, US estimates of China's1994 budget ranged from the Chinese government’s official figure of $6.3 billion, to the $92 billion given by two American observers. The 1995 official Chinese budget was $7.5 billion, while the US Arms Control and Disarmament Agency estimated the actual number at $63.5 billion. The official figure was 14.6 percent higher in 1995 than in 1994, and 11.3 percent higher in 1996 than in 1995. As of 1997 China's official military budget was roughly $8 billion. Much of the increased spending has gone to improve the living standards troops and to keep pace with inflation.

The publicly disclosed figures do not include major spending for weapons research and for the purchase of foreign weapons like the destroyers China bought from Russia. Actual military spending, including the large but difficult-to-assess off-budget financing portion, could total $65 billion, making China the second largest defense spender in the world after the United States and the largest defense spender in Asia.

Overall, China's "official" budget does not entail the following: the purchase of foreign weapons systems; funding for paramilitaries (such as the People's Armed Police); government subsidies of the military-industrial complex; some aspects of research and development; revenue earned outside of the budget.

Although modernization is one reason for the budget increase, most defense modernization spending occurs outside the PLA budget. Imported weapon systems are financed by separate hard-currency allocations from the State Council and are not charged against the PLA budget. The PLA pays for domestically produced Chinese equipment, which makes up about half of the modernization effort, but it pays only the incremental cost of manufacturing one system and none of the substantial R&D or startup costs. Such costs appear in the budget of the state-owned industry that produces the equipment, including substantial hard-currency costs for foreign technology and assistance.

The PLA receives funding from numerous, extra-budgetary sources. These sources include special allocations for procurement, at least partially derived from arms sales profits; sales of military unit services (e.g., construction) and products (e.g., farm produce) and other traditional PLA self-sufficiency activities; earnings from PLA enterprises remaining after divestment, which still produce civilian services and products; and, defense-related allocations in other ministries (e.g., state science and technology budgets and agencies at the provincial and local levels). In addition, China's proliferation of weapons of mass destruction (WMD)-associated technology and conventional munitions may help subsidize certain force modernization programs. Tracking these sources complicates the process of identifying and assessing defense budgetary trends.

Beijing's publicly announced budget does not include military spending contained in off-budget funding and revenue. As with the Soviet military budget, the official Chinese defense budget apparently covers salaries, but does not cover the research, development and acquisition of new weapons and equipment, which is funded through the budgets of the responsible ministries. The official budget does not include the cost of the People's Armed Police, nor does it include soldiers' pensions. The official budget also excludes proceeds from international arms sales and from business operations owned by the military.

In the late 1990s estimates placed China's military spending from 4 to 10 times the official budget. In 1999 the Institute of Strategic Studies estimated actual Chinese military spending at $37.5 billion. As of 1999 China's actual defense expenditures were generally estimated at between $35 billion and $65 billion a year.

The official defense budget for FY2000 was $14.6 billion. However, by some estimates the PLA may have spent 200-300 percent beyond what was revealed in the official budget, which places actual outlays between $29.1 and $43.7 billion.

Another study by the International Institute for Strategic Studies, The Military Balance, 2000-2001 set Chinese military expenditures at $40 billion.

In a RAND corporation assessment, an estimate of between $120-180 billion was provided for actual spending in 2000 on an exchange rate and purchasing power parity basis [Charles Wolf, "Asian Economic Trends and Their Security Implications," RAND, MR-1143-OSD/A, 2000, p. 19].

The United States Arms Control and Disarmament Agency (ACDA) estimates on Chinese military expenditure were "rough estimates," and are some 7-8 times higher than the official Chinese defense budget figures. The ACDA estimates suggested that Chinese military spending had remained relatively constant over time, when factored for inflation and the devaluation of the yuan, while representing a declining share of the overall economy and government expenditures.

China's declared military budget in 2003 was $22.3 billion at official exchange rates. Accurately estimating Chinese military expenditures is a difficult process due to the lack of accounting transparency. Various government and independent calculations for the PLA's expenditures for 2003 - the most recent year for which a significant number of institutions published estimates - ranged from $30.6 billion to $141 billion based on official exchange rates or purchasing power parity (PPP) models.

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