A Chinese soldier eyes a target during a shooting drill to enhance the anti-drug smuggling capacity of border police in Longjing city, in the southeast of Jilin province in a file photo. Photo: Xinhua

It’s that time of year when the People’s Republic of China (PRC) announces its defense budget. This year, defense spending is set to increase nearly 6.8% after last year’s 6.6% rise. Beijing perhaps only issues these figures as a favor to the Pentagon and US think tanks. 

How’s that?

In the US a defense budget works as follows: Congress authorizes a certain amount of money to be spent on “defense.” Say, US$700 billion. The Department of Defense and the military services then have to live within that amount. If they over-spend, they’re Out of Schlitz, to borrow an old beer commercial jingle. And they’ll have to wait until next year, or else beg for something extra.

It’s not so different from our personal budgets and how we manage our income and expenses.

So it sounds familiar to us when China announces that it is spending a certain amount on defense. Analysts will argue over the “true” figure and whether there are “defense-related” expenditures that don’t go into the official figure. And they’ll try to adjust for the fact that things don’t cost the same in China as in the US.

But it’s basically the same idea: The PLA gets a certain amount of money and has to live within its means. Just like the US military.

Or so one might think.  But it’s in fact different with China. Here’s how: 

In America, the secretary of defense goes to the Senate Armed Services Committee and asks: “How big is our budget this year?” The answer: “$700 billion.”

The US Pentagon. Photo: AFP

In China, the top dog in the People’s Liberation Army (PLA) goes to the Central Military Commission (atop which sits President Xi Jinping) and asks: “How big is our budget this year?” The answer: “As big as you want it to be.”

In other words, the Chinese government will spend whatever amount it takes, over as many years as needed, to build a military that can defeat the US. And Beijing has been clear about its desire to vanquish the Americans for many years, even if too many experts have refused to believe them.

One Western observer with several decades of experience in China describes how to consider PRC defense spending:

“Think of the Chinese Communist Party as the national central account holder for all of its departments: agriculture, power, coal, education, PLA. The party funds what needs to be funded – on an ongoing basis allocating funds to where party policy priorities are during any given period. It is a continuous process, not an annual budget that you spend until next year’s budget kicks in.”

“Remember, all expenditures in China are in non-convertible yuan. There are 12 regional printing centers that provide whatever funding is needed this week, this month, this year.”

“Funding the PLA’s domestic expenditures is easy – print yuan when and in the amount needed:

  • Salaries – print yuan;
  • Equipment from Chinese equipment suppliers – print yuan;
  • Bombs, guns, bullets from Chinese suppliers – print yuan;
  • Uniforms, boots, helmets, belts, caps, underwear (South China Sea island forces were just issued a new-fabric tropical underwear) made in China – print yuan;
  • Pensions and payments to retirees – print yuan;
  • Whatever the PLA needs that is supplied domestically – print yuan.”

Defense is the top priority for the CCP – and there are no Chinese Bernie Sanders or Green New Dealer types who will complain about the defense budget, for long. And once the PLA can outmatch the US military, every other nation will fall into line. That is worth almost any price.

Clerk counting yuan and US dollar notes at a bank. Photo: AFP

There is a limit to defense spending, however. Anything that is needed from overseas – say, iron ore to build steel, technology, “dual use” equipment and technology, landing and stevedoring fees for PLA aircraft and ships stopping off at overseas ports and airfields – all must be paid for in currency that’s convertible, which the yuan is not.

To sum up, while the CCP can print up whatever cash it needs for domestic military expenditures, it needs to obtain convertible currency to pay for overseas expenses.

There are effectively two different defense accounts – one domestic and more or less unlimited and one overseas and dependent on available foreign exchange.

The latter should be a problem for Beijing. The CCP doesn’t have anywhere near the foreign exchange it needs to meet its total expenses – or at least it shouldn’t.

But with US and foreign financial firms pouring billions of convertible currency (somebody else’s) into the PRC every year, and foreign business investing in the PRC and chasing their own China dream, the CCP has enough to pay for defense.

Thus, US’ defense spending versus China’s is something like: “You’ll spend what you’re allocated” versus “We will spend what we need” to defeat the Americans.

And there’s more to worry about. Retired US Navy Captain James Fanell, former head of intelligence at US Pacific Fleet, says that regardless of the amount China actually spends it’s essential to consider what China is actually producing with its defense spending.

“In 2020 the PRC experienced its lowest overall increase to GDP since the 1980s, 2.3%. Yet the CCP was so determined to increase spending on the PLA that they increased spending by 6.6%.” With this year’s targeted increase even higher, “they keep talking about everything but the one metric that matters: what is produced.”

Fanell adds: “And on that account, the PRC is getting four times as many warships and submarines as the US – who spends three times as much money.

A Chinese warship is seen docked at Garden Island naval base in Sydney on June 3, 2019. China has recently launched three new amphibious assault ships, and it is currently building a third aircraft carrier. Photo: AFP / Peter Parks

“What is the Biden administration’s strategy to deal with this reality?  Build fewer, but more capable warships? More ‘distributed maritime operations‘ (DMO) concept papers and PowerPoint slides? More promises of a 6th generation fighter in 20 years? Where are the damn supersonic and long-range ASCMs [anti-ship cruise missiles] that the US Pacific Fleet has been asking for for two decades? Where are they? Or, instead, will team Biden just ignore this reality and commission a million dollar study to tell them that all is fine?”

Meanwhile, the PRC keeps spending whatever it takes to defeat America. And they won’t run out of yuan. And Wall Street and industry appear willing to make sure they have the US dollars they need to round things out.

Now that’s a defense budget with Chinese characteristics.