China’s Defense Budget Is Much Bigger Than It Looks

U.S. Sen. Dan Sullivan recently revealed that U.S. government estimates put the Chinese annual defense budget at around $700 billion. That is far higher than previous estimates and almost on par with the United States’ 2023 defense budget of just over $800 billion.

Sullivan’s number stands in stark contrast to other estimates of Chinese defense spending. One of the most respected independent sources of defense data, the Stockholm International Peace Research Institute, pegs China’s military budget for 2022 at only about $290 billion. The new, much higher number also completely contradicts the widespread assertion that U.S. defense spending is so lavish that it amounts to more than that of the next 10 countries put together.

Sullivan is not the only prominent figure in Washington to suggest that China spends much more than anyone thought. U.S. Army Gen. Mark Milley, chairman of the Joint Chiefs of Staff, has repeatedly testified before the U.S. Senate that the widely circulating figures are misleading, not least because they don’t take into account China’s far lower domestic costs for wages, weapons, facilities, and other budget items. Because of these lower costs, China literally gets more bang for the buck.

So how much does China actually spend on its military? And why is there so much confusion?

First, Milley is right to point to cost differences. Put simply, China’s 1.9 trillion yuan budget buys a lot more in China than the equivalent amount of dollars in the United States. This is because wages and other costs are far lower in China: An American truck driver, for example, earns a starting salary of $40,000 per year, more than five times as much as his Chinese counterpart, who earns only about 54,000 yuan ($7,400 at the market rate). Although the gap varies for different occupations, average wage incomes across the whole Chinese economy are about one-fifth of those in the United States. Based on China’s official personnel budget and a leading international think tank’s estimated numbers of military personnel, the gap in military wages is slightly less—with Chinese military personnel earning about one-quarter of their U.S. counterparts’ salaries. In other words, China’s military personnel budget goes four times further.

A price gap also applies to other domestic inputs, from many weapons and supplies to services and facilities. Comparing each country’s defense inputs suggests that the purchasing power of China’s overall defense budget is 60 percent higher than the dollar equivalent suggests. Even when using the old, low estimate of $290 billion, that would give the Chinese military nearly $469 billion in actual spending power—about 59 percent of the 2021 U.S. defense budget.

But there is even more Chinese military spending that the adjusted figure fails to account for. China’s official defense budget excludes its paramilitary forces that can be deployed in a conflict, China’s militarized coast guard, and foreign weapons purchases—and probably also excludes extensive military-civilian fusion. The most glaring difference is in research, development, testing, and evaluation (RDT&E), for which the U.S. military budgeted roughly $100 billion in 2021. China claims its RDT&E costs are included in its equipment budget, but this is unlikely given the massive investment needed for Chinese advances in aircraft, warships, and other capabilities over the last several decades. In China, most of these items come out of other budgets.

The SIPRI figure of $290 billion attempts to adjust for most of these off-budget items, but there is little transparency, and China’s rapid advances and buildup suggest that the off-budget items are much higher. If additional off-budget defense items amounted to, say, another 50 percent of SIPRI’s conservative estimates of China’s defense spending, that would indeed imply a purchasing power of around $700 billion—the figure quoted by Sullivan. So, even allowing for purchasing power differences, Sullivan’s figure suggests that there a massive amount of hidden spending, most of which is likely to be associated with military-civilian fusion.

For the time being, the U.S. military has the edge both in terms of capacity and capability, while the Chinese People’s Liberation Army is more labor-intensive. But this edge quickly fades to a U.S. deficit when one considers the strategic landscape and China’s path of modernization.

China’s equipment procurement has been catching up to that of the United States at an average annual rate of 8.6 percent (adjusted for inflation) since 2010. China has been steadily decreasing the share of its military budget spent on personnel, while increasing the amount spent on equipment, such as missiles, aircraft, and warships. Beijing’s shift from a military that overspends on personnel to a military focused on modern weapons systems will require a sea change in Washington’s strategic thinking.

U.S. policymakers and military strategists should also take note of the vast difference in planning for a Chinese military with about one-third of the United States’ resources compared to planning for one funded at almost the same level. What’s more, China’s military spending is almost entirely concentrated in a single theater of operations, whereas the U.S. military has a global footprint.

The first and most important thing U.S. policymakers can do is to make Sullivan’s leaked estimate public. It is difficult to make the case for more defense spending or a strategic shift to the Indo-Pacific if the public data says that China is only spending a fraction of what the U.S. does.

The Senate version of the fiscal year 2024 National Defense Authorization Act contains a helpful provision that would direct both the U.S. Defense Intelligence Agency and the U.S. Defense Department to conduct studies on the Chinese defense budget and release them to the public. The provision even outlines the spending buckets and economic differences that ought to be taken into account when building these reports.

On the international stage, the United States should work with other nations concerned about the Chinese military buildup to push for greater transparency in military expenditures. If there’s nothing to hide, why not open the books?