China Isn't Just Spending More, It's Spending Smarter

China’s inflation-adjusted military spending is at least three times larger than it was in the year 2000 and by some counts is hundreds of billions of dollars larger than the official numbers suggest. Yet even these dramatic top-line estimates do not tell the whole story of China’s military rise, because it has also increased efficiencies within its defense budget – meaning that, unlike the United States, China isn’t just spending more, it’s spending smarter.

With over four million active personnel in the late 1990s, China’s PLA has always had a large military. But these numbers of personnel have been of declining strategic relevance. A great power conflict in the Indo-Pacific will be primarily fought at sea and in the air, leaving large standing armies with much less of a role to play.

China then began to adapt and modernize the PLA with the aim of developing a modern force potentially capable of projecting force well beyond its borders. To achieve this goal, China reduced the number of military personnel, thus allowing a smart re-allocation away from personnel spending and into equipment procurement spending – most notably, investment in new military equipment. This has included a massive naval build up, the procurement of hypersonic weapons, and large stores of munitions.

Consequently, whereas overall real military spending has increased threefold since 2000, China’s real military equipment spending increased nearly eight-fold over the same period. This means that real (inflation-adjusted) military equipment has grown at over 10 percent per annum – much faster than China’s real GDP growth.

Real Military Spending Growth in China and the USA (2000=1)

Chinese spending in constant (2015) Yuan. U.S. spending in $U.S. 2015. Both indexed to 1 in 2000. Source: Robertson (2023)

Over this same period, American military spending has been trending in quite a different way. Simply put, the U.S. has not been prioritizing naval or air procurement to the extent necessary to deter a rising China. Thus, China’s military equipment budget has grown six percent points per annum faster than the U.S. defense procurement budget.

American defense spending, by contrast, is inefficient, and characterized by bloated operations and maintenance budgets as the services struggle to maintain older systems and fail to replace them. The average age of a U.S. Air Force fighter jet is 32 years. In comparison, the average age of a jet at Delta Airlines is only 15.1 years – and Delta has nonetheless been criticized for its “aging planes.”

Unsurprisingly, the increasing Chinese investment has been closing the military equipment gap. The nominal spending data combined with data on machinery and equipment prices from the World Bank suggest that China’s military procurement budget has increased from 10 percent of the U.S. budget in 2000, to 37 percent of America’s annual defense budget today.

To put that in context, China’s military equipment budget was little smaller than France’s procurement budget in 2000. Today, however, China’s military equipment budget has the purchasing power of France, Germany, Italy, Russia, Turkey, and the U.K. combined.

Comparative Real Military Equipment Spending $U.S.

Note: Data show estimated equipment spending converted to current $U.S. using the relative price of machinery and equipment from the World Bank’s International Comparisons Project. Source

If anything, these comparisons may understate the true relative size of China’s current rate of investment in military equipment because, perhaps ironically, China can import certain types of equipment more cheaply than it costs it to build internally. Converting Chinese spending on military equipment to U.S. dollars using market exchange rates – which indicates how much it could buy through importing equipment from friendly countries, such as Russia – suggests that China’s military equipment budget could actually purchase the equivalent of 57 percent of the U.S. military equipment budget.

Strategic Realities

Increased defense spending makes sense from the Chinese point of view. As the Chinese economy has grown into the second largest in the world, the Chinese government has identified a whole new set of economic interests beyond its borders, with which it must now contend. China’s economy needs more far more energy than China can produce itself, and it therefore imports oil and gas from the Middle East, Central Asia, and Russia. The Chinese government recognizes that it needs the ability to protect as well as, and to project power beyond its borders to secure the energy imports its economy needs. Pro-CCP media thus argue that China’s military rise has only been and that China’s share of military spending in GDP has been relatively constant, and in line with a peaceful rise.

But China’s overall military spending and the relatively constant share of military spending in GDP, suggest this is actually a dramatic transformation and remarkable strategic pivot, with a rapid increase in equipment per person that helps China manage a range of increasing strategic ambitions.

Beyond securing energy and economic needs, modernization has been an undeniable geo-political success in terms of the Chinese ambition to force reunification with Taiwan and other international strategic ends, such as challenging the freedom of navigation in the South China Sea. For example, in 1995-96 China’s huge military personnel advantage (the PLA then had around four million active military personnel) didn’t prevent the USS Nimitz traversing the Taiwan Strait during the 1995-96 crisis to force China into a humiliating backdown. Since then, however, the situation has changed dramatically, and a U.S. carrier in the Taiwan Straits would now have to contend with China’s massive anti-area, access denial capabilities with a less decisive impact.

While China’s increased military equipment spending is undeniable, so too the strategic implications of this spending shift are unmistakable. The headline defense budget and constant share of military spending in GDP mask the real growth story of China’s military rise - the two decades of smart investments in naval and air procurement that have given the China a modern 21^st-century military capable far superior to the personnel-heavy military it once had. China is not just spending more, it’s spending smarter.

Peter Robertson is Dean and Head of School, University of Western Australia Business School.

Wilson Beaver is a Senior Policy Analyst for defense budgeting at The Heritage Foundation.