Thank you, Mr. Chairman, Dr. Dreyer, and members of the U.S.-China Commission for the invitation to take part in the hearings today on the topic of “Chinese Budget Issues and the PLA’s Role in the Economy/Party/National Priorities.” It is a privilege to appear here today, and I hope my presentation helps address your questions regarding the Chinese defense budget and military expenditures.

You have assembled today and heard from the leading U.S. experts on the Chinese People’s Liberation Army (PLA), its budget process and its role in the Chinese economy. These specialists have devoted years of dedicated research in the effort to better understand the Chinese military system. The testimony they presented today reflects the findings of that research.

By agreement with the U.S.-China Commission staff, I will not repeat the testimony they have presented. Rather, I will summarize the state of our understanding of the budget issue, review the motivations for Chinese military modernization, and provide several proposals for future study and investigation.

My contribution to the hearings today is from the perspective of a practitioner. I have spent the better part of my 29 year career as a U.S. Army Foreign Area Officer specializing in China. I have been either studying the PLA or working directly with the PLA as a defense attaché, an intelligence analyst, and policy action officer responsible for military-to-military relations with China.

The Commission invited participants in this panel to address any or all of nine questions relating to the Chinese defense budget. The scholars on this panel have done a commendable job.

Dr. David Shambaugh provided the Commission with a comprehensive introduction to the Chinese defense budget process, content, and players. Drawing from the research that will be published in his forthcoming book Modernizing China’s Military: Progress, Problems, and Prospects, he highlights the challenges of understanding the defense budget, then walks us through the transparency issues, the research methodology, the details of the budget, the budget process, the PLA financial reforms underway, and provides his assessment that the real defense budget is two to three times the official budget. He, as do the other members of this panel, points out what we know of the budget and what we do not know, in terms of both sources of funds and how they are expended. Issues of commercial involvement, arms sales, technology transfers, and proliferation are also well covered. His written testimony merits careful study.

Dr. Shambaugh’s work represents the product of extensive research, using Chinese as well as Western sources, coupled with a rigorous peer review process involving leading specialists on the Chinese military. Given the continuing Chinese penchant for secrecy, his work is as close as we are going to get to a definitive analysis of the PLA’s budget process and contents.

Dr. John Frankenstein has summarized several decades of research with his review of the evolution and state of the Chinese Defense Industrial Complex (CDIC). He accurately points out that the ills of the CDIC reflect the larger problems faced by China’s state-owned enterprise (SOE) sector. Twenty years of reform efforts aimed at creating SOE's capable of providing technological support to China’s military modernization have met with only limited success, notably in the sector of missile technology. On the whole the situation is one of “strategic failure”. Nonetheless, China continues its attempts to reform this sector and we should not be complacent in tracking progress in the CDIC.

Dr. James Mulvenon explores the implications of the PLA’s withdrawal from commercial operations, a process known as “divestiture”. His testimony summarizes the findings contained in his excellent book Soldier’s of Fortune: The Rise and Fall of the Chinese Military-Business Complex, 1978-1998. This book is required reading if one is intent upon separating the myth from the reality of the PLA’s involvement in commercial activities – in China as well as abroad. The PLA did, in fact, gain some benefits via its commercial activities. But in the long run, the costs seemed to outweigh the gains, leading to the ten-year process of trying to reign in, then ultimately disengaging from business. Getting out of business will be as difficult for the PLA as was getting in and trying to effectively manage its businesses.

Dr. Andrew Marble further explores the commercialization of the PLA looking at the impact on the PLA and on the defense industrial complex. In particular, he points out the role of PLA commercialization as a vehicle for the acquisition of dual-use technologies and raises concerns about proliferation.

From Dr. Marble’s testimony, we are reminded that while the PLA may be going out of business and not operating in the U.S., the CDIC is alive and well here. We need to pay much more attention to the presence and scope of CDIC activities in the U.S., particularly with an eye on the CDIC as a vehicle for the acquisition and transfer of sensitive technologies. Closely linked to this process, the U.S. must do a better job of identifying the critical technologies the government needs to protect. And in doing so, we should distinguish those critical technologies from core competencies that U.S. business needs to protect to maintain its competitive edge. The government cannot and should not try to protect everything; it must prioritize what needs to be protected and then do the job well.

Absent from the hearings today, however, is another well-respected student of the subject of Chinese defense spending, Dr. Bates Gill. His chapter on “Chinese Defense Procurement Spending: Determining Intentions and Capabilities” in a 1999 book edited by Ambassador James Lilley and Dr. David Shambaugh complements well the testimony given here today. Woven throughout his analysis of the Chinese defense budget system is the reminder that the value as well as the objective of such study is to gain “greater insight into Chinese military capabilities and intentions.”

Dr. Gill, thus, points out that one of the primary motivations for our interest in the Chinese defense budget is to better understand China’s military modernization in the context of its capabilities and intentions. China, in its official writings, staunchly proclaims that its military is defensive in nature and, as such, military modernization is both a national responsibility and a natural process. The October 2000 National Defense White Paper described the tasks of the Chinese military as being to “consolidate national defense, resist aggression, defend the motherland, safeguard the people’s peaceful labor, participate in national construction and serve the people wholeheartedly”.

Be that as it may, we must not lose track of the motivations for Chinese military modernization and how those motivations affect our national interests. The primary reason for Chinese military modernization is to prepare for a contingency involving Taiwan. Closely linked is China’s recognition that the most viable strategic threat to China comes from the U.S. China’s modernization considerations include calculations pertaining to U.S. support for Taiwan, U.S. regional presence, and the long-term concern that the U.S. is the only country with the comprehensive capability to threaten the Chinese regime. These are realistic assessments the Chinese make, and they should not surprise us.

Beyond Taiwan and the U.S., China is modernizing to meet the general defense requirement to protect its borders, territory and adjacent waters. Ever present, the military remains the backbone of the Chinese Communist Party rule and is the force of last resort to maintain internal security. And, even if an actual military contingency does not occur, China seeks to modernize to reinforce its claim to major power status.

So, in addition to our interest in the Chinese defense budget, there are other factors contributing to China’s military modernization that we should not lose sight of, such as:

• The overall economic development,
• The impact of the rising education level,
• The increased spread of professionalism in the military,
• Scientific and technological progress, and
• The acquisition of foreign technology.

So where do we go from here in our examination of the Chinese defense budget? In my view, there are several steps the Commission could influence to further our knowledge and understanding of this issue.

We must take advantage of the increasing number of Chinese language open source publications available to scholars and analysts. Unlike years ago, books, newspapers, journals, and Internet web sites are available. As the scholars on this panel have demonstrated through their research, we probably are only scratching the surface of Chinese language publications and military writings available which address the military budget issue. While secrecy does surround the budget process, the opaqueness we attribute to the Chinese budget system may be due, in part, to lack of a systematic way for scholars to get access to Chinese language materials and translations. Development of a centralized system for acquisition, assessment, storage, and translations of Chinese military publications could help improve our understanding of the defense budget process as well as other areas of interest in the Chinese military system.

Second, we should work to establish greater access to elements of the Chinese government, as well as the military, and better convey the idea that budget transparency would contribute to overall confidence and stability in the region. As a corollary, we should convey the view that a defense budget that has many hidden components does not contribute to Chinese security. Foreign assessments of the Chinese threat assume the worse and likely portray more capability than exists. The increased threat, in turn, provides justification for military expenditures to compensate for the Chinese capability. So rather that hiding either weakness or strength to deceive potential enemies, China provides justification for other countries to assume the worst. This contributes to a waste of resources by all concerned, and an increase in the potential for instability and conflict.

Third, there is some credibility to the view that the Chinese do not really know the extent of their defense expenditures. Such a situation breeds fraud, waste, abuse and corruption. As Dr. Shambaugh points out, the Zero-Based Budgeting reforms introduced by the State Council under Premier Zhu Rongji’s orders are being applied to the PLA. This is an area where Western experience could be shared with the PLA – as well as the rest of the Chinese government as a confidence building measure. There are several U.S. non-government organizations with expertise to offer that should be encouraged to do so.

Fourth, one of the best ways to learn about how the PLA operates and conducts business is to ask them. Much of what we know now is derived from direct contact with members of the PLA who have had a role in the budget process. While the subject of military-to-military relations is not on the agenda for these hearings, U.S.-PRC cooperation in defense budget management is an area worth exploring. There are several questions we should ask. For example, would U.S. national security benefit more from a better, hands-on understanding of the Chinese defense budget process? Given the high degree of transparency in the U.S. defense budget, would there be risk to U.S. national security by cooperating with the PLA in this area? And then, of course, we must ask if it is really in our interest for the PLA to effectively manage its budget and improve its capabilities? Would this contribute to PLA modernization in a way that creates a greater risk than is caused by our not knowing the extent of the PLA defense spending? These are some of the questions that need to be addressed before moving ahead with military-to-military cooperation in this area.

The analysis and understanding of the Chinese defense budget system, the sources of support for the Chinese military, the allocation of resources to military modernization, the changing involvement in commercial activities, the evolution of the research, development, and production capabilities, and a myriad of related subjects, are all critically important areas that we need to better understand. We need to do so, so that we can more accurately judge China’s military capabilities and, ultimately, its intentions. In turn, this will affect our threat assessments, our military planning, and our allocation of limited, critical resources.

Again, I thank the Commission for inviting me and providing me the opportunity to discuss my views on this important subject.