China's Hidden Defense Budget: Unveiling the True Scale of Military Spending

The Deceptive Nature of China's Official Defense Budget

On March 5th, 2024, China announced its defense budget for the year, claiming total spending of approximately $230 billion. While this represents a 7% increase from the previous year, it still only appears to account for 25% of the United States defense spending, which stands at $840 billion. However, this official figure is highly misleading.

Analysts have long argued that China's actual defense expenditure is much higher than the officially reported number. Through a combination of four different factors, the Chinese Communist Party (CCP) is able to hide a vast portion of their defense spending:

1. Concealing spending
2. Lack of transparency in reporting
3. Categorizing military spending under other budget items
4. Purchasing power parity adjustments

This article will examine each of these factors in detail and provide an estimate of China's true defense budget. The findings raise important questions about how we should assess the extent of China's military power and whether their spending is actually catching up to the United States.

Factor 1: Purchasing Power Parity (PPP) Adjustments

One of the most significant factors in understanding China's true military spending is adjusting for the purchasing power of China's currency using a purchasing power parity (PPP) adjustment.

Understanding PPP

To illustrate the concept of PPP, consider this example:

Imagine you have $1 to spend in both China and the United States. In the US, that dollar might buy you a single energy drink. However, in China, that same dollar could potentially buy you an energy drink and a snack. This means that the real value of your dollar goes further in China than it does in the United States.

PPP adjustments aim to account for these differences in purchasing power between countries. For defense budgets like China's, we need to consider what the amount actually buys in each country to get a more accurate comparison.

The Impact of PPP on China's Defense Budget

According to the Pentagon's China Military Power Report, China is vastly underreporting its military budget. Supporting this assertion is research done by the American Enterprise Institute (AEI). Their model converted China's military expenditures in the equipment, training, and maintenance categories to US dollars using the PPP conversion rate instead of the market exchange rate.

When accounting for PPP:

• The PLA's equipment budget rises from $85 billion to an adjusted $135 billion
• The training and maintenance budget increases from $76 billion to $121 billion

This represents a nearly 60% increase in these categories alone.

When the PPP adjustment is applied to the People's Liberation Army's $68 billion personnel budget, the actual buying power more than quadruples to $293 billion.

This comprehensive adjustment significantly enhances our understanding of the true scale of China's military spending, illustrating how PPP conversions can reveal a much larger defense budget in real terms.

Limitations of PPP Analysis

While PPP analysis is a valuable tool, it does have some potential limitations when applied to defense spending:

• These adjustments often assume that the products being compared are of similar quality and capability, which might not always be true.
• For example, the sophistication of China's fighter jets might be lower than their US counterparts, which could skew a PPP adjustment comparison.

Therefore, while PPP is an important factor, it cannot fully capture all variables when assessing military expenditure. This is why we need to consider multiple factors in our analysis.

Factor 2: Hidden Military Spending

Beyond PPP adjustments, there are vast sections of China's military-related spending that are excluded from their official budget. The Pentagon's annual report on Chinese military developments confirms that Beijing's published military budget omits several major categories of expenditure.

The People's Armed Police (PAP)

One of the most significant omissions from China's official defense budget is the People's Armed Police (PAP), a paramilitary force tasked with maintaining internal security and supporting the military in times of war.

Key points about the PAP:

• It falls under the command of the Central Military Commission (CMC), China's highest military authority headed by Xi Jinping.
• The PAP comprises 1.2 million active personnel.
• It maintains a division-sized mechanized infantry unit and a rapid deployment light motorized infantry unit.
• PAP officers are equipped with rocket-propelled grenades and even attack helicopters.
• Following military reforms in 2016, the PAP came under direct command of the CMC.

The existence of such a large, military-structured force outside the official defense budget raises significant questions about the transparency and comprehensiveness of China's reported defense spending.

Dual-Use Infrastructure Projects

Another area of hidden military spending involves infrastructure projects with dual civilian and military purposes. Much of China's $1 trillion Belt and Road Initiative has potential military value, adding ports and train networks that could be used to facilitate troop movements around the world.

Chinese Coast Guard

The Chinese Coast Guard is another significant instance of hidden military spending. Key points include:

• It was placed under control of the PAP in 2018, excluding its budget from official defense figures.
• The Chinese Coast Guard is significantly larger than its US counterpart, operating over 500 vessels (120 with a displacement over 1,000 tons) compared to the US Coast Guard's 243 cutters.
• It has 40,000 active personnel and operates a fleet that resembles a secondary navy.
• The Navy has transferred many repurposed frigates and corvettes to the Coast Guard, further masking the true scale of defense spending.

Factor 3: Research and Development Spending

One of the most significant omissions from China's official defense budget is military research and development (R&D) spending. The Pentagon has publicly reported that, despite Beijing's claims to the contrary, the Chinese budget does not include any totals for military R&D.

This omission is particularly significant given:

• China's massive investments in emerging technologies
• The rapid progress of the PLA's modernization efforts

For context, America's investment in the research, development, test, and evaluation category in the Pentagon's budget was $118 billion in 2022, nearly 20% of the total defense budget.

China's military R&D expenditures are often referred to as a "black box" due to the lack of published information. However, previous research found that 45.3% of Chinese central government R&D spending went to non-disclosed agencies, indicating these funds are likely defense-related expenditures.

The American Enterprise Institute (AEI) believes that even an estimate of $45.8 billion for China's military R&D expenditures is conservative. The true scale of China's investment in military R&D is likely much higher, considering:

• Hidden contributions from military-civil fusion initiatives
• Cyber espionage activities that enhance China's technological capabilities at potentially lower direct costs

Factor 4: Efficient Spending and Strategic Reallocation

Since the 1990s, China has implemented strategic changes in its military spending that have allowed for more efficient use of resources:

• Reduction in military personnel numbers
• Reallocation of resources away from personnel spending and toward equipment procurement

This shift has enabled significant investment in new military equipment, resulting in:

• A massive naval buildup
• Procurement of hypersonic weapons
• Large stockpiles of munitions

Key statistics:

• Overall real military spending has increased three-fold since 2000
• Real military equipment spending has risen nearly eight-fold over the same period
• Real military equipment expenditure has grown at an annual rate of over 10%, much faster than China's real GDP growth

In contrast, American military spending has followed a different trajectory, with less prioritization of naval or air procurement. Consequently, China's military equipment budget has grown six percentage points per year faster than the US defense procurement budget.

Estimating China's True Defense Budget

Considering all these factors, what is the final estimate of China's true defense spending? Based on analysis from the American Enterprise Institute, the actual dollar amount is estimated to be over $549 billion. This is more than twice the size of Beijing's claimed $229 billion defense budget.

This adjusted figure of $549 billion amounts to roughly 75% of the American Department of Defense budget topline, rather than the 25% suggested by official figures. This more accurate estimate better explains how China has been able to sustain its unprecedented military buildup.

However, it's important to approach these estimates with a degree of caution and skepticism:

• M. Taylor Fravel, the director of the Security Studies Program at MIT, estimated that China spent $471 billion on defense in 2021.
• The Stockholm International Peace Research Institute (SIPRI) estimated $292 billion for the same period.

Both of these figures are significantly lower than the AEI report estimate. Some analysts argue that the AEI report may have exaggerated China's military spending to influence US defense policy and spending toward China.

Conclusion

While the exact figure of China's true defense spending remains a subject of debate, what is clear is that China's military expenditure far exceeds its officially reported numbers and outstrips that of its neighbors. It was greater than the combined military spending of India, Russia, Japan, South Korea, and Taiwan.

Understanding the true scale of China's defense spending is crucial for several reasons:

1. It provides a more accurate assessment of China's military capabilities and intentions.
2. It informs strategic decision-making for other nations, particularly in the Asia-Pacific region.
3. It challenges the narrative that US military spending dwarfs that of all other nations combined.

As China continues to assert itself on the global stage, transparency in military spending becomes increasingly important. The international community must remain vigilant and continue to scrutinize China's defense expenditures to maintain an accurate understanding of the global military balance.

Ultimately, the discrepancy between China's official defense budget and its estimated true spending highlights the need for greater transparency in international military expenditures. As geopolitical tensions continue to evolve, accurate information about military capabilities and intentions will be crucial for maintaining global stability and preventing misunderstandings that could lead to conflict.

Article created from: https://youtu.be/N8JrW6fatpU?feature=shared