Uninterrupted cash influx into Chinese military despite falling GDP

The Foreign Policy journal has taken a closer look at economic statistics provided by the Chinese government, which seem to point to Beijing camouflaging military expenses in the budget. Caliber.Az reprints this article.

"China’s current economic slowdown has many observers concerned about spillover, including the possibility that the Chinese Communist Party (CCP) will try to substitute nationalism for prosperity as a basis of legitimacy. Some even worry that the party will strike out abroad to divert blame and shore up support at home. These concerns are well-founded, as new data suggests that the CCP years ago made the decision to use force—or the threat of it—to stay in power. From Beijing’s point of view, nationalism and military strength are the handmaidens of future prosperity, and if this comes as a surprise, that is by design.

China’s economic growth has been slowing for over a decade, so the CCP has had plenty of time to responsibly manage the deceleration and—as urged by many Western policymakers and economists—transition to more sustainable consumption-led growth. But the party has failed to implement this advice, perhaps because it would require structural changes that might weaken its grip on power. Instead, the CCP responded to slowing economic growth by pouring resources into its military, the People’s Liberation Army (PLA).

Beijing attempted to cover up the scale of this investment. While trumpeting the party’s commitment to a 'peaceful rise', Chinese officials released annual defense budget figures over the last decade indicating that they were keeping spending on the PLA roughly pegged to China’s gross domestic product (GDP)—i.e., that the PLA’s budget increases were proportional to broader economic gains.

Even though China’s GDP is widely thought to be lower than reported and the PLA budget higher, the global community largely accepted Beijing’s line that the two were coupled, enabling the party to explain away the biggest peacetime military buildup since the 1930s.

For instance, the Center for Strategic and International Studies characterizes Beijing’s 'rising defense spending' as 'closely linked to its burgeoning gross domestic product' such that 'since 2000, China’s defense expenditure as a share of its GDP has hovered at or below 2 percent'. This soothing summary is consistent with Chinese public data, but not with common sense. Unfortunately, until now, every public estimate of Chinese defense spending—whether from the Stockholm International Peace Research Institute or the International Institute for Strategic Studies—is based on statistics released from Beijing, with minor tweaks consisting of additions of non-defense spending line items from the official budget.

If you watched as China serially produced more new ships, airplanes, and missiles than you could count for most of the last decade and then wondered how the PLA budget could only be growing by single digits in real terms as claimed, you were right to be suspicious. Our group’s independent, bottom-up estimate of Chinese defense spending shows that investment in the PLA has significantly outpaced broader economic growth since at least 2015.

This comes from a unique, open-source effort to recreate Chinese spending for every year back to 2000 using observable outputs from major categories including procurement, personnel, and operations and maintenance. For instance, we estimate the cost of each system or weapon the PLA has fielded in dollars, based on its capabilities compared to an analogue from a market economy, and then convert to renminbi using a tailored purchasing power parity exchange rate to account for differences in the price of goods and services in China relative to other countries. While our absolute number for any given year is likely to be an underestimate, as we cannot price what we do not see (i.e., secret programs or underground facilities), this approach conveys a longitudinal sense of the major cost centers and of trends in the PLA’s budget, independent of Beijing’s official statements. We estimate that from 2015 through 2019, China’s military spending grew nearly twice as fast as China’s official GDP in real terms.

PLA investment stalled during the height of COVID on the mainland in 2020 as Chinese shipyards switched from building PLA Navy vessels, a traditional cost center, to building commercial ships—potentially because constructing warships requires tighter working conditions than constructing bulk carriers, and health concerns were paramount.

But the spending increases appear to have resumed by last year and to be outstripping GDP growth once more. Chinese drydocks are again buzzing with about 20 major warships under construction; the PLA Rocket Force has embarked on a radical nuclear expansion; the PLA Air Force is pouring ever more resources into the procurement of advanced aircraft; and China is orbiting record numbers of military satellites, even surpassing the United States. All of this is happening in the face of the economic crisis brought on by Chinese President Xi Jinping’s zero-COVID policy and its aftermath, which exacerbated China’s broader economic downturn.

Amid this crisis, Beijing’s decision to double down on defense spending—combined with the party’s shift from a 'peaceful rise' to its increasingly bellicose 'wolf warrior' diplomacy—is a deliberate strategy. Backstopped by credible threats, Beijing is in the process of wresting from the rest of the world the resources, market access, technology, and capital that it needs. In other words, the CCP is positioning to coerce—or, if necessary, fight—its way to riches.

Consider the South China Sea. Back in 2010, on the sidelines of a meeting in Hanoi, then-Foreign Minister Yang Jiechi reacted angrily to the persistence of smaller regional countries defending their right to contested islands and the waters surrounding them. 'China is a big country, and other countries are small countries, and that’s just a fact', he explained.

Since then, China has tried to claim essentially the entire sea by building and militarizing new islands. South China Sea outposts are not only of symbolic and defense value but also convey influence over sea lanes that serve as an economic lifeline for East Asian countries dependent on both energy shipments from the Middle East and access to other foreign markets. The South China Sea takeover has additionally enabled Beijing to press its claim to local fish stocks and undersea gas and oil deposits.

As Xi intensifies this extractive campaign, he explains his logic—which he calls the 'dialectic of war and peace'—to domestic audiences as follows: 'Only those who are capable of fighting can deter war, and those who are ready to fight may not need to fight'. Building up the PLA, then, is designed to enable the party to assert its interests abroad without fear of resistance".