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Future Chinese Defense Spending

10% annual growth
$US billions, current
pub= published budget

The growing Chinese defense budget has raised concerns regarding US-Chinese military balance in Asia. China's growing economy has empowered the government to better pursue the modernization of its military. The miracle of compound interest may enable China to surpass the United States as the world's leader in military expenditure. Over the two decades since the end of the Cold War, Chinese military spending grew at an annual rate of about 10% each year. If this growth rate continues, China's published military budget would surpass the current level of American military spending [about $750 billion] around the year 2033.

It is generally agreed that the published budget understates actual spending. The Purchasing Power Parity adjusted estimate of nearly $400 billion would surpass the American defense budget by the year 2018, and would be double that of the United States by the year 2025. The year 2033 is a long time from now, but the year 2018 is not. For ease of calculation, these guesstimates ignore adjustments for inflation.

According to a 2005 RAND corporation analysis entitled Modernizing China's Military, previous analysis of China's potential to become a considerable threat to strategic interests in Asia are primarily based on the increased resources from China's expanding economy. China's defense budget was predicted by RAND to amount to $185 billion in 2025. The new analysis points to four factors that will determine the successful modernization of the PLA: continued economic growth, the ability to collect economic revenue, competing budget interests (pensions, health care, education, etc.), and the ability to produce advanced weapons comparable to the United States.

China has had one of the fastest growing economies in the world. Growth has been predicted to subside however due to the Chinese government's desire to slow down the rate of inflation. The RAND assessment predicted 7 percent annual growth till 2010, which would taper off to 3 percent by 2025. [In fact, growth appears be to holding steady at about 10% ] Despite the subsiding growth, it is believed the China's economic output will be three times bigger by 2025. Declining growth will be most likely be attributed to declining work force, reduced savings because of an older population, declining exports and imports due to a saturated market, weak financial institutions, and agricultural and rural issues.

The Chinese government may encounter problems in allocating the funds needed for military modernization. Tax revenues amounted to 10.7 percent of China's GDP in 1995 and dramatically rose to 18.5 percent in 2002. Comparatively, China's tax rates are higher than other medium income developing countries. Current tax rates have already sparked revolts in rural China and may cause future political. China's debt problems and weak banking system will also hurt China's ability to fund military modernization.

Although China has significantly increased its military budget in the past decade, the continued modernization of its military is dependent on continued economic growth. One aspect that could slow modernization is the competition for funding. China's population demographically is becoming older, thus necessitating a pension system that could reduce defense spending. Other programs, such as healthcare and education, could potentially reduce defense spending.

If continued economic growth is maintained, China will be more able to earn more economic revenue to fund its military modernization. As mentioned before, much of China's modernization has been derived from the purchase and of foreign weapons system. China has purchased a significant amount of weaponry and technology from Russia and Israel. Structurally, China's defense industry has prevented it from developing advanced weaponry. China's defense industry has been characteristically inefficient and lacking in quality-control. However, reforms have been enacted to improve production. One instance is the introduction of contract bidding amongst its domestic defense companies, which they hope will provide incentives for its producers to be more innovative and improve quality. Foreign purchases have also functioned as productive technology transfers and have improved the defense industry's productive capabilities.

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