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Tai Ming Cheung: China's 2010 Defense Budget -- What Does It Mean?

March 7, 2010

The Wall Street Journal (WSJ)
March 5, 2010

Tai Ming Cheung is an associate research
scientist at the University of California
Institute on Global Conflict and Cooperation in
San Diego. His new book, Fortifying China,
examines the transformation and workings of the Chinese defense economy.

When China announces its defense budget each
spring, it is primarily an act of political
signaling because so little information is
disclosed. Only the overall size of the budget
and its change from the previous year is
revealed. Moreover, the official defense budget
excludes numerous items that should be counted
according to international standards. This means
that the only meaningful number to consider is the annual rate of change.

For the past two decades, the People’s Liberation
Army (PLA) has enjoyed double digit annual
increases. The message that this conveyed was
that the Communist Party was indebted to the
political loyalty of the military, especially
following the 1989 Tiananmen Square crackdown in
which the army saved the regime. When tensions
escalated in the Taiwan Strait from the early
1990s, the soaring defense budget increases
signaled the seriousness that the PLA was taking
in its efforts to modernize and get ready to use
force if Taiwan were to declare independence.

So what is Beijing trying to signal with this
year’s sharply reduced 7.5% defense budget
increase? Domestically, the Chinese authorities
want to show that the PLA is sharing in the
belt-tightening that the rest of the central
government is facing in a tougher economic
climate. It is noteworthy that this year’s
defense budget as a proportion of the national
budget is the same as last year, at 6.4%.

Whether the PLA is actually sharing the economic
pain is disputable though. The military is in the
midst of a major rearmament drive and is
purchasing sizeable quantities of new,
sophisticated arms to replace aging gear. This
was demonstrated in last October’s national day
military parade and also in recently announced
robust profits by the local defense industry that
supplies the PLA with much of its equipment. The
defense industry has been a major beneficiary
from the central government’s stimulus
initiatives over the past two years with a number
of the country’s big defense conglomerates
receiving generous bank loans and government support.

China’s defense budget message for the outside
world, and notably Taiwan and its neighbors, is
that its fast-paced defense modernization is
shifting down a gear, at least for this year. But
Beijing’s effectiveness in promoting such a
posture is deeply compromised by the lack of
transparency in its defense budget, which has
created extensive foreign distrust and
uncertainty over its military and strategic intentions.

Another important question to ask is whether this
reduced budget increase represents the beginning
of a structural shift in the high pace of Chinese
defense spending growth to a lower rate of
increase or is simply a temporary adjustment made
for near-term political and economic factors and
will likely return to its double-digit tempo within the next 1-2 years.

An intriguing comment by a knowledgeable PLA
academic, Maj-Gen. Luo Yuan of the Academy of
Military Sciences, the PLA’s premier strategic
think-tank, suggests that this year’s
single-digit increase may be a harbinger of the
future. Luo said that “this year’s 7.5 percent
increase signaled that China’s defense
development has entered a more mature, healthy and stable stage.”

Luo’s argument will carry more weight if next
year’s rate of defense budget increase remains
subdued. This is because next year marks the
beginning of the 12th Five Year Program. Past
precedents suggest that the level of defense
budget increases in the first year of a 5 year
program provides a rule of thumb of the level of
increases for the following 4 years, subject to annual economic conditions.

However, there are some reasons to suggest that
this year’s budget rate dip may be short-lived.
One important factor is the current low rate of
inflation. Chinese officials have often explained
in the past that the high rates of defense budget
growth were due to strong inflationary pressures.
But the past year’s inflation rate has been near
zero. If inflation picks up again this year, this
would make a return to a double-digit defense
budget increase much more likely next year.

Another factor is that military authorities may
be relaxing their efforts to raise salaries and
living standards among military personnel after
several years of spending heavily to successfully
catch up with civilian counterparts. PLA officers
now earn as much if not more than civil servants
after lagging well behind during much of the post-1978 reform period.

An even more compelling argument to suggest that
defense budget hikes will soon return to the
double-digit norm of the previous two decades is
the impending leadership transition that will
take place within the next two years. With Xi
Jinping expected to take over from Hu Jintao by
2012 as the country’s leader, one of his key new
sources of power will be commander-in-chief of
the armed forces. And one of the main tools that
civilian leaders have to win the loyalty of their
military chiefs is through the defense budget.
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