After the regime establishment, from 1954 China adopted the former Soviet Union’s defence budget style of arrangement. From the first five-year plan, the government drafted every budget item before the five-year plan began. The items contain central budget special subjects, regular provisions and supplies, equipment maintenance etc., and roughly regulated annual growth margins according to expected GDP growth rate and important missions assigned by the central government. However, since the establishment of the regime, China experienced the cultural revolution, national military strategy adjustment, the four modernizations, reform and opening up, and a new military revolution, which were important factors influencing the defence budget arrangement. Furthermore, China’s special dual-leadership structure, corruption and overlapping constructions were also negative factors for the defence budget. Nevertheless, China finished nine complete five-year plans and is now approaching the end of its tenth five-year plan. China has increased defence expenditures on a large scale during recent years, and PLA combat capabilities have increased significantly.
II. China’s Defence Budget Arrangement
1. China’s defence budget style of arrangement
The amount of China’s defence budget is decided by the party centre before each five-year plan begins. Based on this decision, the Central Military Commission transmits the items and amount for the year. According to the nation’s general strategic objective and general defence construction mission, each basic unit submits its budget demand to the four headquarters, military regions and each arm of the services in accordance with mission and objective. In other words, there are two processes of direction and examination from upper level to lower level, and one demand and collection from lower level to upper level. The budget arrangement is based on the amount of the previous year and is usually increased.
2. Annual published defence expenditures
According to China’s defence white paper of 2000, there were three parts to defence expenditures, namely personnel expenses, maintenance of activities and equipment. The ratio was about 3:3:3. The three parts were divided into thirteen categories and sixty-one subjects. However, the published amount and contents did not include central budget special subjects but just regular provisions and supplies.
3. Items not revealed in the official budget
China’s defence spending includes defence research and experimentation, militia construction, militia enterprises, militia equipment purchases, special projects and other expenses. These items belong to the central government’s special budget subjects, which is a part of the whole defence expenditure. China’s defence budget structure is different from that of other countries. Defence investment, procurement and export, science and technology research and development, off-budget capitals are excluded from annually published spending. In addition, the official budget does not include weaponry production, armed police, militia and reserve requirements.
III. Implication of China’s Defence Budget Arrangement
China’s defence budget arrangement has multiplied in the last ten years. For example, the budget of 1992 was double that of 1984, 1996 was double that of 1992, 2001 was double of 1996’s and 2004 was double of 1999’s. In 1999, the defence budget was for the first time over 100 billion Yuan. In 2004 it was 200 billion. Dramatic increases in the defence budget have different significances both domestically and externally.
1. China Threat Theory is rising
China’s consecutive increase of its defence spending and push to further improve military modernization construction by developing high-tech has not only caused suspicion from its neighbouring countries but Japan has continuously requested transparency of China’s defence budget. In order to prevent the influence of the China Threat Theory, Beijing published its defence white paper in response.
For a long time, Japan has assisted China’s economic construction by granting loans. However, the Japanese government suspected that China used the capital on military construction. Therefore, in 2003 Japan reduced its loan by 20 per cent. This is Japan’s third year of reduction. It is also the first time in fourteen years that the total amount of the loan has been reduced to less than 100 billion Yen. China consecutively increased defence spending each year, speeded up advanced weapons and equipment replacement, challenged US global hegemony and reiterated that it would not denounce the use of force against Taiwan if the latter declares independence. The trend caused China's neighbours to express growing unease, and US dominance of the region has been threatening. The commander of the US Pacific Command once stated that China’s military strength is offensive and China is threatening Taiwan.
2. Enhance control, auditing and supervision of defence spending
From the final quarter of 1955, China formally followed the former Soviet Union’s defence budget style of arrangement. Until 2000, there were six reforms on budget arrangement. The reforms concentrated on solving the PLA’s dual-leadership (military and political) problems. All previous reforms had caused struggles in auditing and supervision rights between upper and lower levels.
On 22 March 2001, the Chairman of the Central Military Commission, Jiang Zemin approved a ‘plan of military budget arrangement reform’ drawn up by the General Logistics Department and passed on to all PLA units and armed police. The reform included classified budgeting, zero based budgeting and synthetic budgeting. The main essence was to make the administration authority arrange annual budgets from zero, not dependent on the budget amount of the previous year. The authority was to submit a proper budget arrangement for the following year by re-examining business activities and priorities, as well as basing it on cost-benefit analysis. The main purpose of the reform was to enhance central government control, auditing and supervision on military budgets, to improve unauthorized items, items against regulations, overlapping investments, illegal treasury and weak supervision and control mechanism in the past.
3. Strive for budget by taking advantage of the authority’s intentions
Before reform and opening up, PLA soldiers were just like ordinary Chinese people. If the troops could be mobilized and fed, the PLA was easily satisfied. However, after reform and opening up, the divergence of income between military and civilians in the coastal areas, the shortage of government financial capability and internal shortcomings in the military contributed to the PLA’s suspicions of central government. Furthermore, military exercises against Taiwan in 1995 and 1996 concluded hastily due to the US dispatch of two aircraft carrier battle groups. The PLA clearly recognized that the strengthening of military modernization was of great urgency, and patriotism within the PLA was developing. All the factors contributed to the demand for more budget.
During the fifth Plenary Session of the Fifteenth Party Congress, representatives from the PLA requested many times in small group discussions that the defence budget be increased. Jiang Zemin and Hu Jintao promised to renovate military equipment while ensuring economic development, to ensure a win over an anti-Taiwanese independence war which would involve intervention by foreign powers. In his speech at the PLA Equipment Work Conference in 2000, Zhang Wannien, vice chairman of the Central Military Commission, stated that China ‘must accelerate military modernization' and that the war across the Taiwan Strait is unavoidable during the tenth five-year Plan. The above-mentioned situation was interpreted by foreign observers as the PLA striving for an increase in budget. In addition, for the sake of consolidating Jiang’s leadership, increasing its budget was a means for wining PLA loyalty.
4. An overall new military revolution improvement
The PLA’s new military revolution is different from the US armed forces revolution of military affairs (RMA). The major difference is that the US military is based on strong science and technology capabilities and it uses new science and technology methods to change the war process. The US consideration is not limited by the branches of the armed forces and evaluates the whole influence on armed forces. The US RMA grasps the challenges caused by the end of the Cold War and historical changes in the world. In comparison, China’s science and technology development is falling behind the US. It is quite difficult to copy the US model of the revolution of military affairs. In addition to the changes of ideology, tactics and strategy, the most important point of military revolution is to research, procure and replace advanced weapons. China is limited by relying on imports of military technology and weapons from Russia. While facing potential and substantial problems, China has had to rely on the experiences of several high-tech wars and begins the so-called military revolution with Chinese characteristics.
Strictly speaking, a military revolution with Chinese characteristics is in response to the shortage of China’s science and technological capabilities. However, China also has to keep driving military revolution in the short-term future in order to avoid embarrassment. During the past ten years, China has invested lots of capital in military science and technology research and development, in procurement of advanced weapons, import of high-tech and worked towards lifting the EU arms embargo. In addition, China’s defence spending arrangement has focused on improving servicemen’s salaries, installing high-tech weapons and equipment, and simplifying troops. These measures have achieved primary results in several aspects. For example, the PLA emphasized landing warfare against Taiwan in past exercises, but in recent exercises emphasized attack on aircraft carriers. Military exercises in 2004 have improved to fight for air supremacy over the Taiwan Strait. Moreover, dispatched Su fighter planes purchased from Russia also dealt with possible conflicts in the West Pacific. China has frequently been conducting ocean surveys in the West Pacific region, focusing on the western waters of Guam and the neighbouring waters of Japan. Obviously, the survey is aimed at using submarines to contain aircraft carriers in future conflicts.
5. Subsidy of losses from detaching army-run business enterprises
In 1985, the three headquarters of the PLA issued temporary regulation on army-run business to legalize the PLA’s sprawling business activities. Since the scale and scope of army-run business was increasing speedily and vied with civilian business enterprises for markets and resources as well as spoiling the normal economic order, Jiang Zemin requested in 1989 that the armed forces get rid of their sprawling business empire. In 1995, Jiang Zemin addressed a strategic guideline in the new era and requested that the armed forces under army level should stop doing business activity. In 1999, Jiang ordered that combat units under army level would not be allowed to engage in commercial activity and carried out socialized logistic measures thereafter. All canteens, farms and service agencies were transferred to central or local government. This was a serious blow to financial resources, off-budget incomes and the decision-making power of the armed forces, and complaints could be heard throughout the military hierarchy. The PLA authority answered that subsidy would be considered when arranging the defence budget. China had never mentioned an increase in the defence budget before 1998, yet since 1999 the regime has published factors for increasing. In 1999 and 2000, the government stated that it would not give army-run business enterprises substantial subsidies.
6. Increased salary and attracting talent
Due to the speedy economic development in Mainland China, for many years the PLA servicemen’s salary could not keep up. The military can no longer attract urban youths and youths with high educational backgrounds. The PLA cannot recruit youths by nationalism and patriotism. China has been making every effort to cultivate talents in the army in order to avoid loss of outstanding servicemen, to recruit talents and improve troop combat capability. In recent years, the PLA has not only increased wages but also enhanced officers and non-commissioned officers’ advanced education. According to a source, a detachment of the PLA Navy has trained hundreds of soldiers with PhD or master degrees and overseas students.
The PLA military training work issued in 2003 emphasized that in order to improve all servicemen comprehensive quality and combat capability, military institutes have been making efforts to seek a breakthrough on talent cultivation. During the CCPCC and NPC conferences in 2003, Ding Jigao, director of financial affairs in the PLA’s General Logistic Department, stated that due to the rise of living standards both in urban and rural areas, servicemen’s living standards also needed to improve. Ding added that the country needed to increase the military budget to improve troop living conditions and to raise the material culture and living standards of servicemen.
The concept of China’s defence budget arrangement is different from other countries. For many years, mismanagement and supervision of the budget caused unnecessary waste and overlapping constructions. Servicemen’s social status was not high due to low wages. Nevertheless, during the past ten years China has copied western countries’ measures to attract talents and retain talents in the army by raising the salary and improving the service environment. Moreover, a large amount of military spending has input talent cultivation in co-operation with civilian institutes, as well as the dispatch of military personnel to study abroad. The increase in the defence budget has caused neighbouring countries misgivings and the PLA has become an army of leap forward development. The PLA has begun threatening US security strategy in East Asia and US global military dominance is going to be affected by China.
Director and Research Associate, Research Section, Cross-Strait Interflow Prospect Foundation, Taipei, Taiwan
 Preview of China’s 11th five-year Plan-Plan Arrangement Divided into Three Parts, China News Agency, 27 September 2003.
 Arthur S. Ding, ‘China’s Defense Finance: Content and Management’, Mainland China Studies Monthly, Taipei (September 1995), pp.27-28.
 People’s Daily, Beijing, 22 March 2002, p.1.
 China’s Defense White Paper, Edition 2002.
 Yu-yi Dai, ‘A Discussion of China’s Disguised Defense Budget’, Armed Forces University Journal, Taipei, 1997, pp.14-18.
 Ibid., Table 1. Quoted from Expenditure Subjects of China’s Defense Budget.
 ‘National Statistics Standard: Finance No 10’, National Bureau of Statistics of China, http://www.stats.gov.cn.
 Ruei-lin Wu, ‘Increase of China’s Defense Budget Recovered by Two Digits’, Study of Chinese Communist Monthly, Taipei (May 2004), pp.63-64.