China’s Hidden Military Spending

Off the coast of the Paracels, a disputed island chain in the South China Sea claimed by both Vietnam and China, Chinese vessels often enforce Beijing’s territorial claim by driving off fishermen with water cannons. “Defending” territory with armed force is typically considered a military operation. But these vessels are part of the Chinese coast guard, which comprises hundreds of ships, including refitted former Type 056 corvettes that had served in the People’s Liberation Army (PLA) Navy. Despite their new paint job, these ships are still formidably armed with a 76mm gun and a 30mm autocannon. Such vessels often antagonize Filipino and Malaysian boats as well, operating alongside the PLA Navy to bully China’s neighbors.

Despite the Pentagon’s having identified the growing “scale and sophistication” of this fleet and its use for acts of military aggression, Beijing does not include the coast guard’s budget — an estimated $2.1 billion — in its self-reported military expenses.

Exclusions of de facto military activity from the Chinese military budget are common. New research by the American Enterprise Institute indicates that China is pouring far more money into hard-power capabilities than it publicly reports, with a military budget that could have been as high as $711 billion in 2022. While it’s no surprise that China isn’t transparent, this figure is triple Beijing’s publicly stated military top line and nearly equal to American defense spending that year. It’s also consistent with an estimate from the American intelligence community that Chinese military spending might reach $700 billion annually. Beijing can get even more bang for its proverbial buck by worrying only about its neighborhood — allowing each defense dollar to pack far more punch than it could in America, whose military is nearly always playing an “away game” when deployed.

China’s real defense spending should provoke urgency in Washington to invest more in its own military, at greater scale, and faster. The American public is too often at ease in a belief that the U.S. military remains far ahead of its competitors, with statistics alleged to illustrate that U.S. defense spending is greater than that of the next ten most powerful countries combined. But the figures are misleading, since China’s self-reported military budget comes straight from the Chinese Communist Party as a single number released through state media each year, while the Pentagon’s budget is spelled out line by line in thousands of pages of public budget documentation. Given Beijing’s omitted military expenditures, as well as its domestic buying power, China is more a pacing threat to the U.S. than merely a challenge.

Before turning to the omitted spending, consider Beijing’s $236 billion top line in 2024, less than a third of the $825 billion recently appropriated to the Department of Defense this fiscal year. That $236 billion somehow supports the largest army in the world (with more than 4 million personnel), the largest navy on the planet by hull count, a growing air force of at least 3,000 aircraft, and leaps in advanced fields of military technology such as hypersonic missiles.

Many budgetary comparisons underestimate Chinese military spending by accepting the market exchange rate of the Chinese yuan, even though the failure to account for differences in labor costs and other prices between the U.S. and China leads to great understatement of Chinese buying power. To account for these differences and make meaningful comparisons, economies are often evaluated on rates of purchasing-power parity (PPP), based on which China is considered to have the world’s largest economy. There are limits to using PPP to compare military expenditures, as estimates are derived from the general economy instead of a country’s defense industry, but research has demonstrated that expenditures for military personnel and hardware can be accurately estimated in PPP terms.

AEI’s model used as a baseline the year 2022, for which we have the most recent and complete data from both the United States and China. In 2022, the United States’ appropriated military budget (without supplemental spending) was $742 billion, nominally more than thrice the Chinese top line, which was $229 billion. Further adjustments are needed, however, to more accurately represent Beijing’s buying power.

Beijing last provided a broad three-category breakdown of its military budget to the United Nations in 2020. It roughly reflects Chinese military priorities and allows for economic adjustments based on the function of each spending category. Extrapolating the same proportions to the PLA’s 2022 top line of $229 billion yields the following estimated expenditures: $68 billion for personnel, $76 billion for training and maintenance, and $85 billion for equipment. The training-and-maintenance and equipment categories should be adjusted to account for purchasing-power parity. As for personnel expenditures, an adjustment for labor costs is necessary. The PPP-adjusted Chinese equipment budget, per AEI’s analysis, is $135 billion, and the training and maintenance budget is $121 billion — nearly 60 percent greater than the nominal budget. When the personnel adjustment is applied to the PLA’s $68 billion personnel budget, the buying power more than quadruples, to $293 billion. The adjusted top line is, therefore, $549 billion, or 74 percent of the 2022 Department of Defense budget.

Now we can add the exclusions. It has been widely reported by think tanks and the Pentagon alike that Beijing omits from the top line, among other expenditures, funding for paramilitary organizations, military research and development, and current military operations. It does this by either not reporting the expenses or channeling them through civilian ministries.

China’s state-sanctioned practice of military–civil fusion, by which civilian research and commercial sectors are merged with the defense–industrial base, makes it difficult to discern where investments in dual-use civilian enterprises end and military spending begins. Nonetheless, some significant expenditures stand out. The People’s Armed Police (PAP), for example, which increasingly functions as an extension of the PLA, is tasked with internal state security, and its budget is one of the largest omissions from the military-spending top line. The PAP was recently reorganized under the Central Military Commission, the highest-level military organization in China. Besides being responsible for domestic security, the PAP is officially tasked with augmenting the PLA in wartime. In 2022, PAP spending stood at an estimated $45 billion.

Another notable exclusion is that of military research and development. The Chinese government denies it, but independent research confirms that Beijing does not include military R&D in its reported figure. This spending goes into a black box, as no relevant budgetary documents are made public. Past researchers have estimated that roughly half of Chinese central-government R&D spending was going to “nondisclosed agencies,” a term thought to indicate military-related entities. If this level is proportionally applied to more-recent (though notably incomplete) data, Beijing spent at least $45.8 billion on military R&D in 2022.

Additionally, Chinese figures do not include outlays on China’s space forces, military satellites, or counter-space and anti-satellite capabilities. In a prime example of military–civil fusion, the PLA oversees both military and civilian space activities, blended through opaque accounting. Their total self-reported budget in 2022 was approximately $21 billion. Expenses related to military demobilization, retirement payments, military construction projects in the South China Sea, and arms imports — also excluded from China’s top line — add up to another $48 billion.

When the estimated total uncounted expenditures of $162 billion are added to the adjusted $549 billion top line, Beijing’s true level of military spending is $711 billion. This is 96 percent of the Pentagon’s 2022 budget and slightly larger than the intelligence community’s assessment of Beijing’s true budget.

But even this appraisal is incomplete. There is no public information available for many other expenses excluded from the military budget, such as outlays for the People’s Armed Forces Maritime Militia, the militarization of commercial shipping, and China’s state-sponsored hacker army. And that’s not to mention the blurred lines between Beijing’s investments in groundbreaking dual-use tech such as artificial intelligence, 5G, and aerospace technology. If fully evaluated, Beijing’s military spending could prove much larger than the estimated $711 billion.

While U.S. defense spending of $842 billion in fiscal year 2024 is, nominally, the highest in history, as a portion of GDP it is among the Pentagon’s slimmest budgets since before World War II. American defense spending has not grown in proportion to the nation’s wealth or other federal spending; in fact, it continues to shrink as a percentage of GDP. President Joe Biden’s defense-budget request for fiscal year 2025 is $850 billion — a 1 percent increase over 2024 — which would bring U.S. defense spending down to 3 percent of GDP for the first time since the dissolution of the Soviet Union.

Even Beijing’s self-reported top line is increasing at nearly double the rate of the United States’. Over the past ten years, China’s official defense spending has increased by more than 75 percent, from $132 billion in 2014 to $234 billion in 2024. Over the same decade, China has seen average defense-budget growth of about 8 percent per year, well above the rate of inflation. During the same period, the Pentagon’s base budget grew at an annual average of roughly 4 percent. While funding for overseas operations during the height of the wars in Afghanistan and the Middle East, along with emergency spending, provided additional growth over the past decade, defense appropriations have largely failed to offset the rampant inflation of recent years, which continues to cut into the Pentagon’s buying power and further reduces the portion of the budget left to fund new equipment and technology. In addition, sporadic increases and cuts have complicated the Pentagon’s -- and the defense industry’s — ability to plan ahead. This budgetary neglect has led to cracks and strains evident across the U.S. military, forcing it to do more with less.

For the U.S. to balance its priorities in the Indo-Pacific with those elsewhere and meet the needs outlined in the National Defense Strategy — such as deterring Iran, countering Russian aggression, and shoring up allied commitments — significant and costly power-projection capabilities will be required. While the U.S. may still nominally spend more than any adversary and field the most powerful military in the world, those numerous priorities spread American capabilities thinly across the globe. On the whole, the U.S. military outmatches the Chinese, but the military balance in the Indo-Pacific is far less clear-cut. Beijing does not have to worry about balancing power globally and actively managing peace across three separate theaters. It can instead throw its weight about the Indo-Pacific and deny the attainment of U.S. objectives there. This effectively means that Beijing’s defense investments go much further than the United States’. Nearly equal defense spending between the U.S. and China does not, therefore, produce similar strategic outcomes for the two countries.

The American public has little insight into the real scope of Chinese military spending. Despite the Pentagon’s admission that China’s “actual military-related spending is significantly higher than what it states in its official budget,” in its most recent report on Chinese military power, the Pentagon provided no budget estimate.

Thankfully, Congress has started to act. The 2024 National Defense Authorization Act mandates that the Pentagon conduct a comparative study of Chinese military spending and publish the results. Additionally, policy-makers should encourage intelligence agencies to release a breakdown of their public estimates in order to better inform debate about the true scope of China’s military spending.

Though better public estimates are a good first step, the best way to adequately counter China’s growing combat power is to increase our forces’ lethality, size, readiness, and presence in Asia and beyond. To credibly deter adversaries, the U.S. military requires the capacity to get to the fight as well as the ability to sustain, rapidly repair, and resupply forces. It needs to be able to withstand early losses and sustain its efforts in a prolonged war. China’s catching up to the U.S. in defense spending must not mean that it can outmatch — or, worse, outlast — America should our military be called upon to fight in Asia.