China’s military capability set to grow faster than its defence budget

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When China announced its draft budget this week, its defence expenditure target revealed little about how much the country would really be spending on the People’s Liberation Army.

The official defence budget will increase by 7.2 per cent this year. Experts believe, however, that the figure masks a much bigger boost for military capabilities as leader Xi Jinping seeks to transform the PLA into a more potent force while lowering the cost of weapons acquisition as China’s economic slowdown bites.

“Xi has been talking about the need to accelerate defence modernisation and pushing for reforms that enable the economy to support a wartime footing. That requires more rather than less resources,” said Tai Ming Cheung, director of the Institute on Global Conflict and Co-operation at the University of California San Diego.

International analysts of the Chinese military agree that Beijing’s total military expenditure far outstrips its official defence budget, which does not include military research and development, some procurement, paramilitary forces and the coastguard.

“Our estimates suggest that total military spending is about 30-35 per cent higher than the official budget,” said Nan Tian, a researcher who tracks Chinese military spending at the Stockholm International Peace Research Institute.

Cheung, who has been researching China’s defence-industrial complex and military procurement for many years, said that after extensive R&D over the past three decades, production of a number of systems such as missiles, fighter jets and warships was now moving into higher gear.

This suggested a need for larger spending outside the official defence budget. “I would assume that it is at least a double-digit [year-on-year] rate of growth overall,” he said.

Over the past year, Xi’s plans to harness strategic resources to strengthen China in its competition with the US have gained prominence.

In a speech last year to military delegates of the National People’s Congress, China’s rubber-stamp parliament, Xi elaborated on plans to build an “integrated national strategic system and capabilities”. The phrase broadens Xi’s concept of “civil-military integration”, calling for not just pooling military and civilian technological and industrial resources, but also strategic capabilities across the entire economy.

Still, with China’s economy growing at its slowest rate in years, Xi’s desire to put the military on a much stronger footing has to be reconciled with an effort to bear down on procurement costs, squeezing more from the country’s defence industry.

“The economy is doing badly, and that necessarily means that the PLA doesn’t have a blank cheque,” said Lyle Morris, a senior fellow at the Asia Society Policy Institute’s Center for China Analysis and a former country director for China in the office of the US defence secretary.

In response, the leadership is trying to rejig China’s military-industrial complex. In a notice published in August 2021, the PLA said there was an “urgent need to accelerate the development of high-quality, high-efficiency, high-speed and low-cost military equipment”.

Since then, state-owned defence contractors have been highlighting the need to pursue low-cost systems, said Roderick Lee, research director of the China Aerospace Studies Institute at Air University, the US Air and Space Forces’ education institution in Alabama.

Chinese analysts explain the push by pointing to a widening gap between the armed forces’ procurement needs and the available budget.

In a report on the defence industry published a few months after the 2021 army notice, brokerage China Galaxy Securities highlighted that gap with reference to the Air Force and the Rocket Force, the PLA’s missile arm, which has been rocked by an anti-corruption crackdown that resulted in the ousting of its entire leadership and the defence minister.

Equipment procurement by those two services would grow by an average of 30 per cent annually in the five years to 2025, the brokerage estimated.

The report said there had been “sharp divergence” between growth in fiscal revenue and military spending, and the rapid increase in demand for equipment. “Reducing the purchase price for equipment is probably an important way of meeting the quantity requirements of equipment for war preparation under the current rigid military budget framework.”

According to Chinese and international military experts, that transformation is now in full swing and has been accelerated by what Beijing has observed during the war in Ukraine, in which Russia has run through huge supplies of materiel.

“That military operation is dragging on a lot longer than expected and has created the need . . . for much larger quantities of munitions and other gear than expected,” said a Chinese military expert who declined to be named because he was not authorised to speak to foreign media. “This is an experience we must draw lessons from.”

The PLA is telling suppliers to increase production to make up for the erosion of profits caused by lower prices, the expert added.

“We are now seeing a really extensive expansion of their defence industrial base,” said Lee of Air University. “Beyond the 14th Five Year plan we should expect really, really high volumes of low-cost missiles and low-cost other systems into the future.”