China has it all to modernise its defence industry: US Secretary of Defense

China's actual military-related spending is higher than its official budget, estimated at more than $190 billion in 2017

China has the political will and fiscal strength to sustain a steady increase in defence spending, supporting the continued modernisation of the People’s Liberation of Army (PLA), the development of a military-civilian fused defence industry, and the exploration of new technologies with defence applications. China draws from diverse sources to support PLA modernisation, including: Domestic defence investments, indigenous defence industrial development, a growing R&D/S&T base, dual-use technologies conveyed in part through military-civil fusion, and acquisition of foreign technology and know-how. 

China’s long-term goal is to create a wholly indigenous defence-industrial sector, augmented by a strong commercial sector, to meet the needs of PLA modernisation, and to compete as a top-tier supplier in the global arms trade. However, the PLA still looks to foreign sources to fill some critical, near-term capability gaps and to accelerate the rate of advancement. 

Military expenditure trends: Key takeaways
 

• China’s announced 2017 military budget increase continues decades of spending increases, sustaining China’s position as the second-largest military spender in the world. 
• China’s published military budget omits several major categories of expenditure; actual military-related spending is higher than its official budget. 

In early 2017, China announced a 6.5 per cent inflation-adjusted increase in its annual military budget to $154.3 billion, approximately 1.3 per cent of gross domestic product (GDP). This budget continues more than two decades of annual defence spending increases and sustains China’s position as the second-largest military spender in the world after the US. China’s defence budget has doubled during the past decade; analysis of data from 2008 through 2017 indicates China’s official military budget grew at an annual average of 8 per cent. 

China’s estimated military expenditure 

China’s published military budget omits several major categories of expenditure, including R&D and foreign weapons procurement. Actual military-related spending is higher than its official budget, estimated at more than $190 billion in 2017.

China’s estimated defence budget growth

Jane’s Defence Budgets expects China’s official defence budget to increase by an annual average of 6 per cent, growing to $240 billion by 2021, and will have an increasing proportion available for training, operations, and modernisation following China’s 2015 announcement that the PLA will reduce its size by 300,000 personnel. China’s economic growth will slow during the next decade, projected to fall from 6.8-per cent growth in 2017 to 3 per cent in 2028. This could slow, but not halt, future defence spending growth. Assuming accurate economic projections and a steady defence burden, China’s official defence budget would be larger than $240 billion by 2028, remaining the largest spender in the Indo-Pacific region, besides the US. 

Defence sector reform 

China’s defence industrial complex continues to adapt and reorganise to improve weapon system research, development, and production by addressing bottlenecks and challenges to close the gap of an estimated one to two generations behind its main competitors in the global arms industry. Over the past three years, the CMC has taken organisational and policy measures to reenergise the PLA’s work on defence research and original innovation capacity through cooperation with the market sector. 

• In 2016, the CMC established the S&T Commission, a high-level defence research body, as an independent organisation under the high command. It also emphasised the importance of “military-civilian fusion,” a phrase used in part to refer to leveraging the same resource pool to develop dual-use technologies, policies, and organisations for military benefit.
• In early 2017, the PLA set up a Scientific Research Steering Committee that falls directly under the CMC, consisting of scientists and engineers experienced with cutting-edge technologies.
• In mid-July 2017, China reorganised the three top PLA academic institutes — the PLA Academy of Military Science, National Defence University, and National University of Defence Technology — as part of ongoing PLA reforms. With the new structure, the AMS will focus on scientific research related to military affairs, facilitating closer ties between military theory and S&T development. In 2016, China adopted the 13th Five Year Program (2016-2020) which, among other things, sets focus areas for research, development, and innovation. Several of these have defence implications, including aerospace engines (such as turbofan technology) and gas turbines; quantum communications and computing; innovative electronics and software; automation and robotics; special materials and applications; nanotechnology; neuroscience, neural research, and artificial intelligence; and deep space exploration and on-orbit servicing and maintenance systems.
• Other areas where China is concentrating significant R&D resources include nuclear fusion, hypersonic technology, and the deployment and “hardening” of an expanding constellation of multi-purpose satellites. China’s drive to expand military-civilian fusion and international economic activity supports these goals. A wide range of organisations work together to increase military-civilian fusion. The State Administration for Science Technology and Industry for National Defence and the PLA’s EDD work together to monitor and guide the state and military sides of China’s defence industrial apparatus, respectively. 

Edited excerpts from The Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China issued by the office of the US Secretary of Defense, August 16, in Washington