08 March 2014

China’s Defense Budget: A Mixed Bag

Zachary Keck, “China’s Defense Budget: A Mixed Bag,” The Diplomat, 8 March 2014.

For the U.S. and its allies, China’s new defense budget contains both bad news and good news. …

Let’s begin with the bad. First, as is well known, China’s military spending in 2014 is almost certain to far exceed $132 billion, as Beijing is notorious for keeping much of its defense spending off the books. Many estimates of China’s 2013 defense spending put it closer to $200 billion, although any credible sources contain a caveat that the margin of error is high. Nevertheless, assuming it was around $200 billion in 2013, a 12 percent increase this year would put China’s defense spending at about $224 billion. The Pentagon’s base budget is about $527 billion for FY 2014, meaning that Beijing’s military budget is about 42 percent of the United States’. However, this gap is narrowing quickly given the stagnant or even declining U.S. defense budget and the large yearly increases in China’s military budget. As discussed more below, wide disparities in personnel costs further narrow the differences between U.S. and China defense spending. …

… the growth this year will be intensified by relatively low levels of inflation. As Andrew Erickson and Adam Liff note in a recent article, historically China’s defense budget increases have been eroded by high inflation rates. But China’s inflation rates have trended gradually downward in recent years and are projected to be especially low in 2014. Indeed, even in January, during the run-up to the Chinese New Year, consumer inflation rates remained stable at 2.5 percent, and the long-standing deflation in producer prices accelerated slightly. Although China has set a target inflation rate of 3.5 percent for 2014, January inflation rates are usually higher than yearly averages due to the Chinese New Year. Thus, some analysts expect China’s yearly consumer price index inflation to be just 2 percent, while others see the overall rate falling somewhere around 3.1 percent. …

… while containing its own costs, Washington desperately needs the PLA to also increase the percentage of its military spending that must go to personnel costs. The good news is that these personnel costs are likely to continue growing in China as it transitions to a consumption-based economy, and the overall standards and costs of living increase in the country. The bad news is that increases in per-soldier costs in the PLA will be partially offset by reductions in the overall size of the PLA.

For further information, see:

Edward Wong, “China Announces 12.2% Increase in Military Budget,” New York Times, 5 March 2014.

Andrew S. Erickson and Adam P. Liff, “Full Steam Ahead: China’s Ever-Increasing Military Budget,” China Real Time Report (中国实时报), Wall Street Journal, 5 March 2014.

Andrew S. Erickson, “Testimony before the U.S.-China Economic and Security Review Commission,” Panel II: “Inputs to China’s Military Modernization,” “China’s Military Modernization and its Implications for the United States” hearing, Washington, DC, 30 January 2014.

Andrew S. Erickson, “China’s Near-Seas Challenges,” The National Interest 129 (January-February 2014): 60-66.

Andrew S. Erickson, “China’s Naval Modernization: Implications and Recommendations,” Testimony before the House Armed Services CommitteeSeapower and Projection Forces Subcommittee, “U.S. Asia-Pacific Strategic Considerations Related to PLA Naval Forces” hearing, Washington, DC, 11 December 2013. Click here for oral statement.

Adam P. Liff and Andrew S. Erickson, “Demystifying China’s Defence Spending: Less Mysterious in the Aggregate,”The China Quarterly 216 (December 2013): 805-30.

Nathaniel Austin, “Lifting the Shroud on China’s Defense Spending: Trends, Drivers, and Implications—An Interview with Andrew S. Erickson and Adam P. Liff,” Policy Q&A, National Bureau of Asian Research, 16 May 2013.

Andrew S. Erickson, “China’s Defense Budget: A Richer Nation Builds a Stronger Army,” Inaugural Presentation in “China Reality Check” Speaker Series, Center for Strategic and International Studies (CSIS), Washington, DC, 8 April 2012.

Andrew S. Erickson and Adam P. Liff, “China’s Military Development, Beyond the Numbers,” The Diplomat, 12 March 2013.

Andrew S. Erickson and Adam P. Liff, “A Player, but No Superpower,” Foreign Policy, 7 March 2013.
Andrew S. Erickson, “China’s Military Budget Bump: What it Means,” China Real Time Report (中国实时报), Wall Street Journal, 5 March 2013.