On 22nd of may, 2020, the Chinese government
disclosed information on their latest annual
defense spending, for the current year.
The sum of 1 point 268 trillion yuan was disclosed,
which is equivalent to 178 billion US dollars,
in nominal dollar value.
Comparing the sum with last years, an increase
of 6 point 6 percent is evident.
But figures without context are meaningless.
Thing is, there is NO international standard
for reporting defense budgets.
Any country can report what it wants.
So direct comparisons are unwise, unless some
deeper analysis is attempted.
Unlike the US defense spending, which is reported
by the US government with a fair amount of
detail, (but does tend to vary in the news,
depending on which additions are reported)
the chinese spending is devoid of details.
There’s just one figure.
There is however, some other official data.
Chinese defense white papers have, over the
years, given the figures of the split of those
one line defense spending sums.
And added spending on PErsonnel, maintenance
and operations and equipment.
Those percentages have shifted in recent years.
From roughly one third of the budget going
to each to some 40 percent going to equipment,
and the other two getting roughly 30 percent
each.
Of course, even those figures are still lacking.
Does any of that include construction, for
example?
Or research and development?
Or pensions?
Or various incentives to arms producers, to
modernize their assets?
Nuclear research and spaceflight research
could also be missing - as those are dual
use technology areas.
Indeed, even the US budget is widely thought
to enjoy benefits of the atomic energy defense
activities - which add 24 billion more annually
to the US defense spending, if one decides
to include it.
In all likelihood - the reported chinese budgets
over the years do not include most of those
items.
US DoD reports on Chinese military regularly
state Research and development and foreign
weapons purchases aren’t included in the
chinese figure.
Back in 2012 the US DoD estimated the actual
chinese defense spending to be between 15
and 70% higher than what was reported.
Since then, US DoD reports on China stopped
giving the upper estimate and generally just
said “more than 25%” bigger than officially
reported.
But comparing what we know about the US budget
could help us make an estimate ourselves.
The US defense budget shows that the US military
personnel costs make up little under 22% of
overall costs.
Operations and maintenance make up the biggest
part, at 40%.
Procurement of equipment is valued at 21 percent.
Now, procurement of equipment is not necessarily
the same as what china lists under its equipment
label.
If it IS the same, then that means chinese
are equipping themselves at twice the RELATIVE
rate to themselves, as US forces are equipment
relative to themselves.
The US also spends little under 14% on paying
for research.
Which is not mentioned in the chinese case,
but research is almost always tied with actual
equipment in the end.
Certainly, if one looks at the pace of new
ships, planes, missiles et cetera being inducted
in chinese service, as well as a myriad of
parallel research programs - which don’t
really lag numbers wise, behind us programs,
then it does seem plausible the research money
is indeed not part of the official figure,
as US DoD suggests.
But how big is the research item?
At a minimum, it’s probably the same as
US one, 14%.
But it could be somewhat bigger.
Though, exactly quantifying the research value
of chinese programs is of course impossible.
Suffice to say - they’re placing a lot of
new systems in use - so a lot of research
money is needed as well.
Here’s a list of some of the systems they’ve
been working on or are researching just in
the last ten years.
So, while it’s unlikely there’s something
like 30 percent of total spending going to
research, it’s possible China IS spending
more on research, percentage wise, than the
US.
Especially when spaceflight, satellite and
nuclear research is included.
So 15 to 20% of total Chinese spending may
go to research, added to the known figure.
As well as 2% going to construction and housing
spending, which is modeled as slightly higher
than US construction spending at a percent
and a half, due to quicker relative expansion
of chinese military.
Finally, as US DoD suggests, foreign weapons
purchases are funded outside the official
chinese budgets.
That may indeed have been a reason why a decade
ago US DoD claimed the chinese defense spending
is MUCH higher.
Today, China makes pretty much all of its
military hardware itself.
It buys some russian engines but the overall
volume of business has dropped to perhaps
a few billion dollars per year.
Meaning perhaps 1 percent of the entire defense
spending goes to that.
There’s also stuff like pensions and health
insurance, which is unclear to which degree
it’s part of the official chinese budget.
The US budget for example does include some
of those items.
But some western sources do claim those are
not included in the chinese budget and offer
their estimate of roughly 9 percent to be
added for that purpose over the official defense
budget.
That figure does mesh reasonably well with
the 8 percent that the US official budget
is spending on pensions and health funds.
Then again, the US does spend 22% on its personnel,
while China spends some 30%.
True, the US pays its soldiers more, as all
are professional soldiers - while a fair share
of Chinese soldiers are volunteer conscripts
which just get some pocket money.
Chinese probably use a better part of their
half a million conscript pool.
Shared with their people’s armed police
paramilitary service, to go into their army.
So something between 10 to 20 percent of the
PLA’s 2 million strong force may not require
much in terms of salaries.
The US on the other hand pays full salary
for their little under 1.4 billion active
personnel.
The US national guard does cost more than
ordinary reserve, which both sides have.
As it trains more and even deploys in wars
sometimes.
So overall, personnel wise, the size of two
armed forces is actually fairly close to one
another.
Given that, it’s still possible the discrepancy
between personnel costs does mean China includes
various pensions and health costs.
Which leads us to the following breakdown
of chinese defense spending.
And it becomes apparent the actual defense
budget which would be more or less comparable
with the US one is roughly 20 to fifty percent
bigger than the announced budget.
Neither the US nor Chinese figures represents
total defense spending, either.
Nuclear and spaceflight research, veterans
pay or various paramilitary, intelligence
agencies and domestic security funds are not
included here.
But they’re not included for either side,
so the comparison is still somewhat relevant.
So now we have a better equivalent to the
US budget.
Is then the new chinese defense spending a
sign that China will overtake the US, defense
spending wise, anytime soon?
At between 216 and 261 billion dollars it
doesn’t look like it.
That’s an attempt at na apples to apples
comparison, with various items standardized
across the board for both countries.
Evidently, using the nominal dollar value
exchange rate, the US still spends more.
But one dollar will not buy the same amount
of equipment, same research nor same piece
of salary in China as it will in the US.
Due to smaller costs of living, prices in
China are lower, salaries are lower and overall
- the chinese budget needs a multiplier figure
to be really and truly comparable to the US
budget.
Most of the costs in China are domestic.
Even when buying stuff abroad, the purchases
are often from Russia, which also has lower
costs.
One COULD use a simple purchasing power parity
modifier that the world bank or IMF use, and
in that case the Chinese budget could go up
by 51 percent.
But actual salaries, prices et cetera in China
are even lower.
Compared to China, one would need roughly
100 percent more money to live the same life
in the US.
There are still some research costs and even
production costs that do require foreign talent
and salaries which could match the western
salaries.
And the costs of housing are probably not
really applicable.
Fuel is more expensive in China, et cetera.
So even that modifier is probably unwise to
use.
But something in between the two IS, however
likely.
Which brings us to the final estimate.
Given the previous range, now the range gets
even wider.
But it’s the best one can hope for in terms
of accuracy.
The final estimate is thus between 325 billion
and 522 billion dollars, when aiming for a
truly apples to apples comparison.
That’s between 52 and 83% of the US budget.
When us overseas deployments and war operation
costs are excluded.
As China barely does any of those.
That may seem as if the US has not much to
worry over yet but there’s another piece
of the puzzle not mentioned yet, which possibly
does worry the US government.
Chinese defense spending is a fairly small
part of its economy.
Nominally, China claims it’s around 1.3%
of its GDP.
But with all the additions explained in this
video, it’s likely between to 1.4 and 1.7
percent.
The US spends 3.1 percent of its GDP on defense.
That's roughly two times more than China.
So China has more room to grow.
And the ratio becomes even slightly worse
when US veterans benefits are added.
Those are different than pensions, and are
benefits because people deployed in actual
wars over the decades.
China, again, doesn’t have anything similar
when it comes to costs.
VEterans affairs do command a sizable chunk
of sort-of-defense related spending.
But they are an issue for US spending as they’ve
ballooned in recent years.
Their budget was just $45 billion in 2001.
And it grew by five times in 19 years, as
both the veterans themselves and their families
receive the benefits.
There’s a bunch more of various spending
that this video won’t go into, like intelligence
agencies and what not, but it’s likely us
defense related spending, as percentage of
GDP is already not two times but closer to
three times bigger.
There’s just not the same amount of economy
left to go around, pumped into the military,
compared to China.
The coronavirus will impact both economies
but it’s not looking likely the US will
come out of that crisis in a better shape.
The trade war between the 
US and China may hurt China a bit more, but
again, overall - the course into the future
does seem to favor Chinese military spending
more.
When 
a world war approached, Countries hiked up
their spending within a year or two to massive
levels.
If China and the US go 
to war, that might happen again.
And 
the US might 
actually find itself outspent.
Of course, spending is one thing.
And actual capability is another.
Capability needs technology, training and
a few decades of comparable effort to really
set in.
But you can learn more about that difference
between the US and China from our other videos.
