Getting China’s Defense Spending Right: A Conversation with M. Taylor Fravel, George J. Gilboy, and Eric Heginbotham
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I'm Bonnie Lin, Director of the China Power Project and Senior Fellow for Asian Security at the Center for Strategic and International Studies. In this episode of the China Power Podcast, we're discussing China's defense spending. Given China's lack of transparency, estimates on its actual levels of defense spending vary greatly, with many estimates indicating China's spending is approaching the level of the United States.

How should we accurately calculate what China spends on its defense? And how should its defense budget be compared to that of the United States? Joining us for this discussion are three experts, Dr. Taylor Fravel, Dr. George Gilboy, and Dr. Eric Higginbotham, who recently authored an excellent report titled, Estimating China's Defense Spending, How to Get It Wrong and Right.

Dr. M. Taylor Fravel is the Arthur and Ruth Sloan Professor of Political Science and Director of the Security Studies Program at MIT, specializing in international security with a focus on China and East Asia. He is the author of Strong Borders, Secure Nation, Active Defense, China's Military Strategy Since 1949, and he also has numerous publications in leading journals. He's a Rhodes Scholar and Andrew Carnegie Fellow, and he holds degrees from Middlebury, Stanford, LSE, and Oxford.

Dr. George J. Gilboy is a senior fellow at the Center for International Studies at MIT. George concurrently heads Woodside Energy's Tokyo office and was previously Woodside's chief economist and vice president for business environment. George lived and worked in China from 1994 to 2013, and rolls with Woodside Shell, Cambridge Energy Research, and Tsinghua University. He holds a BA from Boston College and

and a PhD in political economy from MIT. The views that George is sharing today are his own and do not represent that of Woodside. Dr. Eric Higginbotham is a principal research scientist at MIT's Center for International Studies and a specialist in Asian security issues.

Before joining MIT, he was a senior political scientist at the Rand Corporation and a senior fellow of Asian Studies at the Council on Foreign Relations. Dr. Higginbotham earned his PhD in political science from MIT. He is fluent in Chinese and Japanese and was a captain in the U.S. Army Reserve. Taylor, George, and Eric, thank you for joining me today. Great to be here. Great to be here. Hello. Thanks, Bonnie. Wonderful.

It's quite a treat to be joined by the three of you given the different time zones that we're in. And again, thank you for your excellent report. Taylor, let me start with you. Before we delve into the specifics of the report, could I ask you to provide an overview of the report in terms of its key findings and recommendations? And also, why did you write the report?

Thanks so much, Bonnie. The main motivation for this report was a series of analyses by other experts, as well as statements by individuals such as Senator Sullivan, which all seem to indicate that China's spending on defense

was around $700 million and thus very rapidly catching up with US spending on defense. And as we dug into these analyses and looked at Senator Sullivan's comments more carefully, we had lots of questions.

We thought that the existing kind of analyses that lead to these high-end figures were flawed. And we wanted to try to provide a different way of thinking about how to assess China's defense spending. By way of background, I should say, right, this is a real thorny problem because China reports what it spends on defense in its own currency, the renminbi. And thus, we need to find some way for basic comparative analysis, right, to convert this into dollars.

And when we looked at the existing analyses, we felt that they had two analytical shortcomings. The first is, and I know we'll get more into this in a few minutes, but the first shortcoming is that these analyses in general did not compare the same line items for China's spending with U.S. spending.

And this is important because simply if you want to make a comparison between any two budgets, whether it's defense budgets or other budgets or spending in a larger category, you want to make sure that you're counting all of the same items, right? You don't want to count more items for one country and not add those items to the ledger on the other side for another country. But what we found was generally, a few exceptions here and there, but generally, all

A lot of these analyses would add items to China's spending on defense, but not add those similar items to U.S. spending on defense. And the broader analytical problem here is that no two countries in their published defense budgets report spending on the exact same categories, right? So a defense budget in many ways is kind of analytically misleading if you're trying to identify underlying defense spendings.

So first, we wanted to come up with an analysis that would be very transparent about what line items we were counting for China and what line items we were counting for the United States.

The second analytical shortcoming was then how to convert this aggregate sum of what both sides are spending into U.S. dollars, right? Because we wanted to compare U.S. spending to Chinese spending. And here it gets into the dark arts of purchasing power parity that I know George will be discussing in more detail. But essentially, existing or previous reports, right, were adjusting China spending using a wide range of different

factors. A lot of these are related to purchasing power parity, but essentially we wanted to offer what we consider to be a high fidelity approach that would adjust spending on different categories of China's overall defense spending by the appropriate kind of purchasing power parity factor. So some analyses just use the PPP factor for the Chinese economy as a whole.

Others use PPP factors linked to labor. And as we'll get into, both of these can produce inaccurate estimates. So our hope was that we would come up with a methodology that was totally transparent. Anyone can go to the appendices that are posted online and see exactly how we did it. They can check our numbers.

and then make this methodology widely, or at least publicly available so that other individuals who are interested in an accurate assessment of China's defense spending will have one place to start. Moreover, in principle, right, this methodology could be used for other countries where it's also quite difficult to come up with an accurate estimate of their defense spending

whether it's Russia, North Korea, or what have you. So those were the principal motivations that led us to write first the article for the Texas National Security Review, and then a shorter online essay for War on the Rocks. Thank you. Taylor, thank you. I do want to get to George about how exactly you conducted your analysis. But before that, and in terms of the big picture, what is your actual estimate of China's defense spending versus the official budget that China releases?

And how does your estimate differ from other estimates out there that people have made about China's defense spending? Oh, thank you for that. Our bottom line, right, is that we estimate in the War on the Rocks essay that China spends approximately $474 billion on defense for the year 2024, compared with $1.3 trillion for the United States.

So recall, right, that the $1.3 trillion figure here is higher than the published U.S. defense budget, which is around $800 or so million. But nevertheless, right, our analysis suggests that China spends 36% of what the U.S. spends.

spends. And this $474 billion figure is significantly lower than the $700 billion figure that featured in Senator Sullivan's remarks and has been sort of a figure that has been used in a number of other recent analyses. Taylor, maybe I'll just jump in and add to your remarks that another comparison point is that our conclusion of approximately $474 billion in 2024

compares to looking at just China's official defense budget at only the market exchange rate, which would be $232 billion. So our conclusion is that China does spend the equivalent of a significant amount more than its official budget. But as Taylor, you've emphasized substantially lower than some of these higher end estimates of about $700 billion.

Thanks for that. We should have been very clear that there are published budgets on both sides, and then we make

adjustments in terms of adding items to both sides to get a fuller sense of what all defense-related spending is. And then we try to convert the Chinese spending into U.S. dollars. This is why our figure of $474 billion for China and $1.3 trillion for the U.S. are both higher than published defense budgets for both countries, especially for China at market exchange rates. Great.

Great. Thank you. I think this is a good segue to transition to George. So George, which items did you include in your analysis? And could you clarify what is actually included in China's official defense budget and explain which additional items outside of China's official defense budget you and your team decided to incorporate into your assessment? Well, before I get to that, just a couple of more general points. I think that the

The first thing that we'd like to say on this is that there's more than one way to approach the problem. And that depends on the insights that you want to generate from the comparison. You can include or exclude different components for both sides. You can include paramilitaries, coast guards, and other things, defense-related R&D. But the most important point that we want to share is that

You should choose similar defense spending categories for both sides if you're going to do a comparison. And that, of course, includes the off-budget items. So how did we make our choice about what to include with those principles in mind? It really started on the China side. Of course, in recent years, China has rightly become a special focus of attention. China's growth in material capabilities and its relative opacity have led to efforts to define what we might call a

an assessment of its total level of effort on defense spending, trying to include all the relevant categories, primarily with respect to conventional forces. And this goes back to the early Pentagon China military power reports, a seminal RAND study in 2005, and a book that Eric Hagenbotham and I wrote in 2012. In this most recent paper, in terms of categories, we generally followed what Eric and I did in 2012. We include the official budget, which has three components, personnel, operations,

operations and training and equipment. And we added off-budget categories for China that are not included in the official budget, such as the People's Armed Police, which is a paramilitary force, the Chinese Coast Guard, which is actually now part of the People's Armed Police, defense construction, defense-related R&D that's not included in the official budget, and payments to demobilized and retired military service members. So one point we make in our paper is that while

Newer analyses that are coming out of American Enterprise Institute, Heritage Foundation, University of Western Australia are including these off-budget categories and in some cases additional ones such as for China for civil-military fusion, for example.

They're not making like-for-like comparisons and inclusions when they compare to U.S. spending. Generally speaking, they're only including the Department of Defense budget. In our paper, we chose to include similar categories for the United States. So we took the Defense Department budget, the Homeland Security budget, which includes the United States Coast Guard and has a role in domestic security, and the Department of Veterans Affairs, which corresponds to the category of payments often included for China, which is payments and benefits to demobilized service people.

Again, there's different ways to approach this problem. You could choose to include or exclude certain categories. Our point here is simply that similar categories should be included for both sides in any comparison. Maybe a little bit later, we'll get to, after you choose the categories, how do you measure them?

You mentioned you did not include civil-military fusion into your calculation of China's defense budget. In addition to that, what other items did you decide to not include? Civil-military fusion is a phrase that's meant to capture generally the melding of

spending on research development and other technology development programs that have maybe their inception in civilian sectors, but have significant military applications. The one that people would probably talk about the most right now is AI, artificial intelligence. I think, again, the point that we would say is that

The United States has civil-military fusion too. Your GPS system, the integrated circuit, these things came from civil-military fusion in the United States, which sometimes has its inception on the military side, then gets further developed in the civilian side, and then comes back to the military side.

So if you were going to include that category for China, then you should do it for both. In our case, we didn't attempt to do that. What we did do, however, is we made an attempt to estimate from China's national R&D spending, including both

government and corporate level programs or company level programs, R&D that is not included in the official Chinese military budget, but that has defense applications. So we did put that in there. Other things that we didn't include, we didn't include intelligence programs. I think the logic there is it's non-transparent on both sides, not just on the China side. I mean, for example, the

The National Security Agency appears to have a very significant budget, but it's hard to get a clear understanding of how much. So intelligence is very difficult to make a reliable estimate for either side. Space programs, again, both sides have military and non-military space programs. We decided not to try to disentangle these.

nuclear weapons. On that one, to be clear, we excluded the fissile material or nuclear warhead programs only. The delivery systems like missiles and so on are generally included in the equipment budgets. The US side is very transparent on all this kind of spending and the nuclear side, China is not. I think in terms of what we didn't include, our feeling is that our choices are generally fairly conservative. All of these are areas where it's likely that the US spends more than China, not less.

And so I think we would say that it would be good to develop more data and comparisons in these areas. We still think that our main points about how to make and how not to make comparisons about defense spending apply whether these particular categories are included or not. Let me pause here to invite Taylor or Eric to jump in, in case either of you want to highlight what additional items you included or did not include in your defense assessment.

So on the nuclear question and on the Intel question, for that matter, I think, as George said, one of the primary motivations of not including them has to do with the difficulty of assessing them. You know, on the U.S. side, intelligence budget is black. We know the NSA is a massive organization, both in terms of personnel and budgets, but there really are not credible estimates of exactly how big it is.

So that's one issue. I guess another point on this is that in both cases, particularly on the nuclear side, the US has overwhelming sort of advantages in terms of size and scale and presumably budgets. So this is excluding them is inherently conservative in terms of the budgetary analysis here.

So, China, for example, currently deploys about 500 warheads and its nuclear forces. That number is growing very rapidly. So, it's expanding the size of its nuclear arsenal. But if you're comparing that to the size of the US arsenal, that is, in terms of available warheads, about 3,800. So, several times that number. So, I think we've got fewer than 2,000 actually deployed, but we've got another 2,000 in reserve.

And then 2000 retired waiting for dismantlement.

If you compare the size and scale of those inventories, the asymmetry, the U.S. advantage is larger than the advantages it enjoys in other categories. So again, inherently conservative to exclude that category. Great. Thank you. Maybe, George, back to you in terms of the critical question that Taylor had flagged, and that is, how did you measure these categories? A related question was,

How long did it take? And was this a relatively difficult process or was this a relatively straightforward exercise? And could your method be used to compare China's defense budget with budgets of other countries too? Let me take that last question first. And I wouldn't call it easy, but I do think any professional defense analyst that's willing to

to put in the time and effort could adopt the methods that we use. Not all of the analysts will be able to use Chinese language source material that we used, but there are many ways to deal with that. I do think that, you know, I fully agree with what Taylor said. We've put out some transparent assumptions and calculations, and we do think and hope that people will adopt them and or help us to improve them through a constructive critique.

Not easy, but certainly doable. In terms of how do we measure it, a critical piece is not just what you include, but how do you convert for a common currency so that you can make comparisons. Now, the pathway to 700 billion defense spending for China depends on including many things, but it also depends on an adjustment to Chinese spending, which is carried out in yuan to a common international dollar for comparison. And that adjustment is called purchasing power parity or PPP.

And the PPP exchange rate is applied in place of a market exchange rate. Now, there's a logic to this. In a less developed economy like China, overall price levels are lower than in a more advanced economy like the United States.

Prices for goods that are based on low wage labor in particular are going to be lower in a less developed economy than they are in a more advanced economy. This could include things like food, clothing, housing. We're looking for equivalent similar goods in particular when we make EPP adjustments.

Now, although this adjustment could make sense, in practice, some analyses apply it incorrectly, or they apply it inconsistently, or they apply it in ways that just don't make much sense in terms of comparing modern military power.

And I'll just mention a few problems specifically. First, if you do a PPP adjustment to some spending categories, we think that you have to apply PPP consistently. You should use the appropriate currency conversion factor that's relevant to that spending category. So for example, a wages exchange rate for personnel, but a machinery and equipment exchange rate for equipment.

Now, when it comes to personnel, we're going to see that using PPP, China will get a large upward adjustment for the equivalent spending power due to its relatively lower wages. But that leads us to this second problem or second question here.

The most lethal military capabilities are captured in spending categories such as technology and equipment. The PPP data, which is collected by the World Bank International Comparison Program, shows that China has a purchasing power disadvantage in technology and equipment, not an advantage.

In other words, in the most important or most lethal spending categories in equipment and machinery, it costs China relatively more to get a similar product or result than the market exchange rate implies, not less, which is what we're commonly used to with a PPP and which is the approach that many of these other sources take. Last couple of points here.

PPPs are meant to compare the same or similar goods. And that works for a bowl of rice or a t-shirt, but it's less obvious that it works for something like a fighter plane, a submarine, or even a non-commissioned officer. These things may not be the same even when

or even similar really when capabilities and personnel training operational context and supporting systems are considered. In summary on this PPP stuff, the critique that we're putting out there is that some sources that are getting these inflated estimates up to about 700 billion for China,

Not only are they failing to include similar categories of spending for the comparison, but they're highlighting a more salient threat or an alleged more salient threat from China by using PPP to inflate the least lethal capabilities the most. George, when you discussed the PPP conversions based on World Bank data, you said that it cost China more to purchase advanced equipment. That seemed a little counterintuitive to me. Could you unpack that a bit? Yeah.

Yeah. Okay. So it's something I think that everyone should, especially people that are using or interpreting these PPP-based analyses should pay more attention to. I am going to hit you with a few numbers, however. Okay. Now the latest World Bank data comes from a field survey that was carried out in China in 2021. In 2021, the World Bank says the market exchange rate was 6.45 yuan per US dollar. If we look at the World Bank field survey data on equipment,

all going back to every survey that's been conducted in China, all the way back to 2005. The equipment PPP data that they collect indicates that China has a lower spending capability for technology and equipment than is implied by the market exchange rate. So in the most recent survey, it implies 9.9 yuan per dollar, which is higher than the market exchange rate of 6.5 yuan

yuan per dollar, which means that China only gets about 0.7 times

the purchasing power that's compared to the market exchange rate. You might say, "Wow, gee, China has a challenge in spending on the most lethal capabilities, which are technology and equipment, and actually its spending is a little bit less in equivalent terms than what we might think of." We normally think about China as a manufacturing superpower. How is it possible that technology could be more expensive in China?

A lot of China's manufacturing prowess is based on imported equipment and technologies. Many of the manufactured exports, these are based on imported components. They're made with imported robots. They're made with imported machine tools.

In some technology and equipment subsectors, China has to overcome learning curves or has to build up supply chains, become more familiar with these technologies. All of these things have costs. In some cases, the technology is actually more costly for China to acquire and apply than it is even for the United States. And of course, that's made more complicated by technology.

import dependency, which can raise the other kinds of costs. There are tariff and non-tariff barriers. And so these kinds of barriers plus the learning curves are the reason why it's possible that even though China is a manufacturing superpower, some categories of technology, equipment, and machinery could actually be relatively more costly for China to acquire than they might be for the United States to acquire.

Thank you, George. That makes a lot of sense. And I really appreciate both your numbers, but also the macro explanation. Eric, let me turn to you. And I want to ask for your thoughts of looking across different defense spending categories. So based on your report and your findings, what areas are you seeing China spend the most on? And what are the most significant investment areas? And what does it suggest in terms of China's military priorities?

So thanks, Bonnie. As you might have interpreted or understood from George's comments, the paper was really focused on conceptual issues with regard to how to compare defense budgets. So how to do consistent comparison and think about exchange rates.

It is actually difficult to assess China's military priorities based solely on the budget figures alone, specifically or primarily because China doesn't provide numbers other than a few simple categories that it provides to the United Nations when it submits basic budgetary documents. So the way it divides those figures for the United Nations is spending on procurement, spending on manpower, and spending on operations and maintenance.

We do know what's sort of included or excluded from the budget, but we don't see the magnitude of the numbers for the different categories that are included within the defense budget. So if we look at the very limited data that is available in terms of those categories, procurement, manpower, and operations maintenance, there are some trends. So we can look at the numbers that have been submitted to the United Nations from 2010 into the 2020s.

The percentages in those different categories don't really change radically, but the proportion spent on equipment has gone up somewhat from 33% to 37%.

And the percentage spent on personnel has gone down somewhat from 34% to 30%. So we don't really know what's happened since 2020. That could have reversed to some extent. But there are a couple of points that can be made here. First is that if you combine sort of the breakdown in those categories with the fact that China's defense spending has roughly quadrupled in real terms since about 2010, in other words, after accounting for inflation, then

You can understand that even though the percentage spent on soldiers has gone down, the spending per soldier, even if you're just talking about direct costs in terms of wages and benefits, has gone up.

And then if you think about sort of the equipage of the soldiers, how much the equipment budget is per soldier, so per capita in the military, that increase is very, very dramatic. So the bottom line here is the Chinese military is becoming more capital intensive and less manpower intensive. So it's replacing manpower with capital.

It's reduced the size of the military over this period by about 10%. And that's all consistent with Xi Jinping's goal to modernize the PLA by 2035 and make it a world-class military by mid-century. In other words, make it qualitatively an equal of the United States by mid-century or about 2050. So if we think in those terms, and then we come back to some of these points that Taylor and George made earlier,

about how purchasing power has been applied and the benefits that China might reap from lower manpower costs, we can see that it's not really exploiting the advantages of cheap labor. It, in fact, is trying to harness high technology, which is very costly for it,

and trying to recruit a better class or well-educated soldiers from the upper tiers of the Chinese economy. It's all consistent with what we know about modern warfare. Modern warfare is all about technological advantage

And the scenarios that we're talking about, if you're talking about U.S.-China conflict, are those that really emphasize high-tech warfare. You know, an invasion of Taiwan, both sides would need very good intelligence, high-end ISR, intelligence surveillance and reconnaissance.

Strike systems deployed on sophisticated platforms, aircraft would be very important, naval systems would be very important. So this is not a war where sort of cheap labor at the bottom end of China's economy is going to give it enormous advantages. So I think that that's probably the main point that we can reach from China.

the numbers that are available. And Eric, you mentioned that China's putting a lot more investment on equipment per soldier, and also that the Chinese military is becoming a lot more capital intensive. But to what extent is China really catching up to the United States? And how does China's modernization compare to that of the United States?

China's modernization effort is being conducted on a very broad front. So people talk about asymmetric capabilities. And, you know, of course, if you have particular geographic advantages, you can invest in certain types of technology that provide high return on relatively low cost basis. But overall, they're really trying to modernize the armed forces across the board.

They're very much following, in many ways, US models for many parts of the military, not across the board, but many parts of the military. So if we were to make some back of the envelope guesses or estimates about how much they might be spending on the services, you could sort of start to do that.

The ground forces, there's still a core or the backbone of the Chinese military, but they have suffered the greatest reduction in terms of size and scale. So they've gone from

1.6 million about 20 years ago to about a million today. The size of the Navy, Air Force, and rocket forces has increased steadily over those years. So China today deploys twice as many major surface combatants as it did 20 years ago. 20 years ago, it had fewer than 200 modern aircraft. Today, it deploys more than 1,000. And the rocket forces are growing fast.

So it's modernizing on a broad front. It still has a number of disadvantages if you compare it primarily in terms of quality, but I have to say also in terms of quantity. And this does bring us back to budgets. And there's a question here, which is sort of where's the beef? If China's military budget is in fact approaching that of the United States, why is it still so far behind in so many areas? So even if you're looking strictly at quantity, the United States has twice the naval tonnage that China does.

It has twice the number of combat aircraft that China does. It has 50 plus nuclear attack submarines. China has the same number of submarines, but only six of those are nuclear powered. The rest are conventional. And if you sort of compare across the board cost of conventional to nuclear, they're much, much cheaper. They're coming at a quarter or an eighth the cost.

The US has 11 aircraft carriers. China is conducting sea trials on its third. So across the board, the US still enjoys quantitative advantages and many qualitative advantages. All that said, China doesn't have to catch up to pose a lot of challenges. It is in the region. So if there's a scenario that takes place in East Asia, that's on China's home territory. So the point of the paper is not to suggest that we don't face

real challenges on the military front or that China can't give us a run for our money in many of these scenarios, but that China is not in fact nearly catching up with the United States in terms of how much it's spending or even what it's producing.

Thank you, Eric. Taylor, I want to bring you into the conversation with two questions. So first, how much is China's defense spending focused on dealing with threats to the PRC homeland and also contingencies around its periphery versus operations abroad? So largely speaking, how much is China focused on the Indo-Pacific? And second, if most of China's efforts are still at home or in the Indo-Pacific, how can we compare China's defense spending with that of the United States and

given that we, the United States, have so many commitments globally and significant operations beyond just the Indo-Pacific? Thanks, Bonnie. Those are two great questions. So a preface before I answer both of them would simply be to say that we were focusing on how to estimate the top line

of China's spending relative to U.S. spending, which meant that we weren't able to unpack it necessarily to the degree that we might want to, especially with respect to your second question. But first, in terms of drivers, I think there are a few, but they're longstanding. As Eric mentioned, right, ever since the 19th Party Congress in 2017,

Right. There have been new benchmarks for the modernization of the People's Liberation Army, most notably to be, quote, basically modernized by 2035.

and world-class by mid-century, which we understand to be 2050. The 2050 sort of benchmark of being world-class is not necessarily meant to be identical to the United States, both in force structure and global power projection. It's not really a strategic concept about how China will think about using force, but it is one that says, or calls on China, right, to be

as good as any other country right in the first league with respect to how it can sort of employ military power. So those are the very broad drivers. The more specific drivers, I think, are very much focused on

being able to prevail in conflicts that will occur in China's periphery. So in this sense, I think it's still very much driven by a potential for a high intensity conflict over Taiwan, but also at the same time, because China worries about sort of chain reaction events and fighting on essentially two fronts, right, to be able to prevail at the same time against India, or perhaps if there's an event on the Korean Peninsula and so forth.

But it is, I think, quite intensely focused on the region for now. And then the third driver, I think, would be a larger one. And in some ways, this is linked to the world class one as well. But I think as competition or as rivalry intensifies with the United States and military power is a very important element in that rivalry. That's, I think, an additional driver that may have been less salient 10 years ago when it was perhaps really just driven by the regional contingency.

factors. So it's overdetermined, as we say in political science, what I think is driving China. Now, in terms of regional versus global, I think I've sort of answered your second question already, but I think it's overwhelmingly, for now, right, dominated by the need to prepare for regional contingencies, though I think the scope of operations is

to prevail in those regional contingencies continues to grow at greater distances from China, though probably still within the broader East Asian region for now, but also growing perhaps into the Indian Ocean area if China considers how it might want to respond to an attempt to blockade

China, right, or to control its sea lines of communication during a conflict and so forth. But I think if we look at the expansion of China's global footprint, it's been on a steady but slow increase, especially if we think about sort of the creation of new overseas bases. I think the pace at which China has been doing this is probably slower than a lot of people were predicting 10 years ago. Djibouti remains the largest of these overseas bases.

Something's going on in Cambodia, of course, but it does not seem to be nearly on the scale as what is happening in Djibouti and is probably in terms of its utility more focused on sort of the Asia region than on sort of a global power projection. And so.

This is not to say that China might not move to have a more global force in the future, but I think it does have a couple of constraints. First, it has to be able to fight and win on its own terms in Asia, where it faces, I think, its greatest challenges.

military challenges. And from its standpoint, of course, Taiwan is central here. And so in that sense, China doesn't have sort of the luxury of being quite secure in its home territory from its perspective and thus being able to devote a far larger percentage of its military resources overseas.

And the second point, China has to overcome the fact that it does not have a very large network of military alliances that the United States enjoys that makes it much easier to forward deploy forces in other regions. And so this, I think, is going to be a real uphill challenge for China.

It will find other ways perhaps to sustain forces overseas, but I think it's going to not enjoy what has enabled the U.S. to be a truly global military power.

Taylor, this may be beyond the scope of your paper, but one argument that could be made in an effort to compare apples to apples is that China's defense spending is primarily focused on its immediate periphery, whereas U.S. defense spending is global. Given this, do you think it would be more appropriate to focus on a portion of U.S. defense spending that specifically targets the Indo-Pacific?

I'd be interested in hearing your thoughts on this line of reasoning. No, I mean, I think clearly, right, China is primarily playing a home game and the U.S. is playing a global game, although one, even according to statements of senior U.S. defense policy officials, right, does treat China as the pacing challenge. Nevertheless, I think if one wanted to get a better assessment of the relative balance between the U.S. and China,

In Asia, first Eric is going to have to rewrite his RAND report from 2015.

So, Eric, get on that. We're going to need updated analysis focused on the region. But also, I don't think we're going to be able to answer this purely by looking at defense spending. Nevertheless, right, it is true that most of what China is spending, it is spending to be focused on the region, whereas the U.S. is spending more broadly, even though going back to the pivot and to more recent policy moves, right, the U.S. really is

quite intensively focused on the region, whether it's reinvigorating the alliances, generating new forms of security cooperation, such as AUKUS, having, I think, a higher tempo of exercises in the region, deploying more cutting-edge military forces to the region, such as a hypersonic missile system now in the Philippines, and so forth. So I think it's quite dynamic in that sense, Bonnie, but...

Nevertheless, if one is thinking about the overall scope of the challenge that China poses based upon what it spends on defense, I think one would need to do both what we've done in our paper and then perhaps complement that by looking at a more regionally focused military campaign analysis.

Bonnie, there's maybe something, a comment that I'd like to add, and that is, does any of this matter in terms of the assessment of China's budget in comparison to U.S. defense spending?

And, you know, I think we would argue that it does matter. One could say, well, look, we've got to mobilize the team to sort of face the threat from China. So a little bit of exaggeration has no harm. But this is an important national security related estimate. And there's no excuse to get it wrong when you have better data and methods available. From a U.S. perspective, I think we want to strengthen deterrence and if necessary, fight and win.

So accuracy and self-correction of errors, it's one source of advantage for us and not really exaggeration. I think a second factor overall is just that defense spending

estimates do play a role in assessing the overall degree and the nature of the challenges that the US faces from China. On balance, a bigger budget means a more salient threat. So it matters because underestimating China's defense spending could leave us less prepared than we want to be. But overestimating it could also fuel spirals of security competition. And I think a final reason that it matters is if you focus a lot of the debate on, is China

That's $700 billion, or is it something else? These aggregate spending levels. I think the people that are focusing on this are distracting attention from the more important debate, some of which Eric and Taylor were just covering. But that more important debate is what kind of capabilities the United States and its allies should be purchasing in response to China's ongoing military modernization. And I may be

A couple of those choices are in air power, whether or not to replace or retain aging fleets, whether we should be investing or the balance of investment, let's say, the relative balance of investment between uncrewed vehicle platforms and very large crude platforms, and the balance of investment in things like strike versus hardening and resilience. On balance, I think it's not just a number. There are some significant implications for these debates around what China is spending and how does it compare.

I think they're all important points, but George mentioned rejuvenating the air fleet. So I'll put a little bit of meat on those bones. The US is operating a very old inventory of combat aircraft at this point, maybe unprecedented in terms of the age of the airframes. They're very expensive to maintain. They're very difficult to maintain. It means that the readiness rates are quite low and we're burning money to keep old capabilities in play.

There have been attempts to accelerate the retirement of those aircraft and increase the rate of procurement of new aircraft.

That has been opposed on the grounds that conflict with China might be imminent, that the China threat, if you will, is sort of reaching peak proportion. So while the defense budget discussion can't really answer those questions, it does speak to them. Are we reaching peak threat? Is China's military budget approaching that of the United States? I think the evidence on that latter question is clearly no. China's military capabilities are...

are not all that close to those in the United States. They are continuing to increase and they will in the aggregate continue even if China's defense budget growth went to zero, which it's not going to do. But 10 years ago, it was spending very little. Today, it's spending a lot. So even if defense growth went to zero,

The inventories that it maintains, the actual capabilities that it has within the PLA are going to grow for some years. So I think the evidence would suggest that we should be investing in the future. We really need to be rejuvenating the air fleet, which is an argument that the chief of staff of the Air Force

has made, and this should be done. So the budget does speak to some of these very specific issues about what the United States needs to be doing now to meet the challenge. Great. Thank you. I do want to wrap up this podcast with one final question. How do you assess the future trajectory of Chinese defense spending?

So do you expect spending to slow, to continue to increase at its current pace, or to increase at a significantly higher pace? Maybe we can go in reverse order of how we started. So Eric, George, and then Taylor. I think one of the strengths of China's modernization effort has been, first of all, a

an acknowledgement of weaknesses, at least to assess where the Chinese military stands relative to others. Now, I say a willingness to do that. That is really top-down. Chinese leaders

and especially, I would say, Xi Jinping more than any leader since Deng Xiaoping, has been critical of the military, has pushed reform against the wishes of the military, and has forced the military to confront weaknesses. As a result of this

sort of consistent top-down pressure over time. It has varied, but it's been consistent. China has taken an incremental approach to assessing and plugging weaknesses. So I would expect that to continue

into the future to result in continued significant investments in the military that are likely to match GDP growth. Now, of course, we all know that GDP growth is declining. They're going to have trouble hitting 5% this year. But I would expect Chinese military spending to continue to keep pace with economic growth and for them to continue to address continuing weaknesses. And we could sort of tick off where those

Weaknesses lie. Some prominent weaknesses include submarine warfare, anti-submarine warfare, certain technology areas like aircraft engines that have inhibited the ability of China to deploy fifth generation aircraft as they had originally been designed.

So I think we can expect them to continue to plug some of these weaknesses. They may put more investment into amphibious capabilities where they don't have sufficient capacity to launch an invasion of Taiwan at present. So I would say those would be

Some of the drivers, I would expect continued institutional reform. There's a number of weaknesses in that area to include continuing difficulties with jointness, despite efforts to set up more joint structures under these new theater commands. But I think there'll probably be an emphasis on more jointness, greater range, higher percentage of nuclear-powered submarines, et cetera. So China has its work cut out for it. Okay.

I'll come in with a couple of comments on that, just if we're looking forward. As the economist in the group, I'll say it's the economy, stupid. And I think if we look forward, the ability to generate military power depends on the state of the economy and the ability to generate techno-economic power. China's now confronting some challenges there. And those also are going to force the CCP to make some choices about balancing various concerns that ultimately come back to stability and its monopoly on

power within China. And of course, that concern for stability in its own monopoly on power is really at the heart of some of the recent choices that China's made about generating military power and having more assertive policies. So I think that this doesn't mean that China's going to stop military modernization, but certainly from the economy perspective, government budgets are going to have quite a few competing stakeholders as China tries to address difficulties in the economy.

If we look at another angle, I think China's also now confronting some of the consequences of its recent more assertive policies in the region, and that is strengthened regional alliances and alignments in Asia where multiple countries are concerned about potential security competition with China. Japan in particular is one of those countries. I think with a new prime minister, Ishiba Sugeru,

I think that generally speaking, China would be expecting to see some continuity in Japan's commitment to strengthening its alliance with the United States, strengthening its own defense capabilities. I think that potentially one wrinkle that Prime Minister Ishiba may bring to the table is that some of his commitments

newer ideas on defense are about making the alliance with the United States more equal. And that could be potentially a source of strain within the alliance, or it could produce an alliance that's even stronger. And Ishiba has also mentioned things like an Asian NATO, which China would likely see as quite threatening.

But the interesting thing on the Japan side, of course, is that Japan faces some of the same concerns. Can the Japanese economy actually support continued defense modernization and increased defense budgets in the same way? So both China and Japan kind of confronting those trade-offs. Jordan Taylor, final word to you? Sure. It's hard to add anything to what my esteemed colleagues have said. But let me, in addition to foot stomping the point of the economy,

make one other observation, which is China's assessment of its broader security environment and its assessment of the intensity of its rivalry with the United States, which already has a very strong military dimension and could become even more acute in this regard. And so it is possible that despite the economic headwinds

and other important reasons that George and Eric cited for why we might not see more defense spending. I think if there is a new political judgment, then we may see China want to invest even more in its armed forces. I don't think this is

a high probability event, but I also don't think we can discount it given the new era of US China relations, right? Which is basically, in my view, at least dominated by trying to balance each other's power and

and how that may play out. I think the expansion of China's nuclear force is a small reflection, perhaps, of this dynamic, but limited to some of, I think, the benefits China hopes it might derive from a larger nuclear force, but we could see this more broadly, right? And so that is also a factor that might push in the other direction and to sort of reverse the trend that we've seen in terms of the rate of increases

then China's defense spending at least declined or flattened out and become somewhat level with overall increase in the sort of central government budget, as it were. Awesome. Thank you. It seems that you are all saying that China would ideally like to continue to increase its defense spending, given its threat assessment, as well as desire to invest in key capabilities.

but economic and other constraints may limit how much China could spend. I very much appreciate the three of you joining me today to share your assessment of China's defense budget. And just to recap for our listeners, you find that China's official defense budgets are misleading and low, and that you estimate China's defense spending to be about $474 billion, which is about a third of total U.S. defense spending. Thank you again to all three of you for joining me today.

And it was my pleasure to speak with you, Taylor, George, and Eric. Thank you, Bonnie. Thanks, Bonnie. Thank you very much, Bonnie. Thank you.