“The Naval Component of the Chinese Defense Budget”
Remarks prepared for the U.S.-China Security Review Commission

December 7, 2001

Bernard D. Cole, Ph.D.
Professor of International History, National War College, Washington DC

The views expressed in this paper are those of the author and do not reflect the official policy or position of the National War College, the Department of Defense, or the U.S. Government.

Allow me to begin by thanking you, Mr. Chairman, and the members of this distinguished Commission for the opportunity to take part in the hearings you are holding today on the topic of the budget of the Chinese People’s Liberation Army (PLA). As requested, I will focus my comments on the PLA Navy’s (PLAN) role in determining and sharing the PLA’s budget.

Introduction

This topic has potentially important implications for U.S. interests and policy in East Asia, and thus warrants continued close attention by American observers of China. As a student of China’s military, especially its navy, and its foreign policy, I am very pleased to be able to share my views on this subject.

Any discussion of Chinese military spending would do well to begin with Mark Twain’s acerbic reminder that “there are three kinds of lies . . . . lies, damned lies, and statistics.”¹ For instance, estimates of the PLA’s 1994 budget range from the Chinese government’s $6.3 billion, to the $92 billion given by two American observers; those for 1995 include the Chinese government’s $7.5 billion figure, the U.S. Arms Control and Disarmament Agency’s $63.5 billion, and a later estimate of approximately $150 billion provided by a RAND Corporation analyst.² Hence, what figure are we to use when Beijing announces, as it did early this year, that it is increasing its military budget by 17.7 percent?

It is difficult to estimate accurately the amount of the Chinese navy’s budget, for several reasons. First is the innate sense of secrecy by the Chinese government and military. They simply do not agree with American (and other foreign) conceptions as transparency as a commendable means of reducing international tension and building bilateral confidence.

Second, Beijing has more than one way of describing the resources it puts into its military’s budget. “Defense budget” is not a commonly used term in China (or in many other countries, for that matter); Beijing prefers “defense expenditure” or “military expenditure,” and covers many categories of spending. Third, the Ministry of Finance categorizing allocations as either central or local complicates budget determination. Local government funding probably includes much of the budget of People’s Armed Police (PAP) and militia land forces. There are also sea borne militia units, and there is very little evidence about how these forces are organized, funded, and operated.

Fourth, budgeted defense spending is not clear with respect to the inclusiveness of allocations for many categories, including research and development, capital construction, and some personnel accounts, including some retirement and demobilization costs. For instance, money allocated under one account may well be obligated for other purposes. Fifth, the military draws on non-central government funding, including profits from commercial enterprises.³ These unofficial funding sources which complicate any evaluation of China’s defense budget result from what one distinguished observer notes as the “overriding financial fact in the development of the PLA: inadequate funding.”⁴

Sixth, the navy has achieved an increasingly important status during the past decade and probably has increased the percentage of China’s defense spending it receives. It is not apparent, however, that this has resulted in a meaningful shift of national security emphasis in China from continental to maritime security concerns.

Analyzing The PLAN Budget

The following remarks are based on four general assumptions. First, the Chinese military continues not to be accorded top priority by China’s leaders. Second, the land forces continue to dominate the Chinese military, as evidenced in the size and leadership role of that service. Third, the PLA has to deal with inter-service rivalries similar to those experienced in the United States and other militaries. Fourth, I further assume that within the PLAN, the different naval arms—including submarines, surface ships, and aviation—compete with each other for budget resources.

Despite these difficulties and uncertainties, we must attempt to understand the budget resources being allocated to the PLAN. Such knowledge will help us understand the purposes for which Beijing is engaged in modernizing the PLAN and increasing its capability to serve as an instrument of national security policy.

During the past ten years, China has been converting its very large but generally obsolete navy into a force more able to participate effectively in achieving national security goals. These goals do not, in my view, include deploying a PLAN able to operate globally, as a conventional force. By that, I mean that Beijing does not htmire to deploy aircraft carrier battle groups around the globe; it will continue to engage in a program of naval diplomacy, based on sending groups of two-three ships on long cruises. China is also likely to continue trying to deploy a small sea-based nuclear deterrent force, which of course has global implications.

Instead, Beijing is attempting to build a navy able to operate effectively in Asia, where China’s most vital maritime interests lie. These include first and foremost, defense of the homeland, a relatively simple task given the current lack of military threats. Second is the reunification of Taiwan with the mainland, while third is other sovereignty claims, including the land features and associated water areas of the South China Sea, the Diaoyu Tai (or Senkaku Islands) that lie northeast of Taiwan, between that island and Okinawa, and various maritime boundary disputes.

Fourth is the maritime economic interests vital to China. These include, first, the sea lines of communication (SLOCs) located in Asia’s coastal waters, a term I define as those ocean areas within 200 nautical miles (nm) of the coast.⁵ Beijing is also vitally concerned about much more far-ranging SLOCs, of course, especially those that pass through the South China Sea and the Indian Ocean to the Middle East, and across which is imported approximately 30 percent of the daily oil requirements of China’s growing economy.⁶ Second are offshore mineral and biological resources; these include approximately 10 percent of China’s known petroleum (oil and natural gas) reserves, and the fisheries industry, an important source of protein to the Chinese diet. Third is the heavy concentration of modern economic enterprises in China’s coastal region.

Beijing’s goal is to deploy naval and air forces sufficient to deter and if necessary defeat any threats to the security of these maritime interests. This in turn requires an estimate of the operational situation, based on likely threats. There is little doubt that China views the United States as the primary maritime threat to its perceived vital national interests in East Asia.

The strength of the PLAN increased significantly between 1990 and 2000, a decade of growth between the end of the Soviet Union and the continued intensification of the Taiwan issue. The trend during that decade, a trend that continues today, is a modest addition of approximately 1.5 new surface combatant ships and one submarine per year. The total number of combatants has remained about the same, as older ships are decommissioned, but today’s PLAN includes more modern—if rarely state of the art—warships and submarines, and is significantly more capable than its 1990 fleet.

The most significant new ships and submarines have been acquired from Russia. China’s navy was begun in 1950 with large-scale Soviet assistance in all areas, from training schools to ships, and Beijing continues to rely on Moscow for naval support.

Four Kilo-class conventionally powered submarines were ordered from Russia in 1993. Although a 1970s design, these are still very capable conventionally powered attack submarines. In 1998, Beijing purchased two Sovremmeny-class guided-missile destroyers (DDGs) for approximately $900 million; both of these ships are now homeported with China’s East Sea Fleet. Armed with the formidable SS-N-22 Moskit missile, these ships were designed by the Soviets in the 1970s to attack aircraft carriers and cruisers.

These foreign purchases were likely funded not from the annual PLAN budget, but by special allocation from the Chinese government through the Central Military Commission (CMC). The annual budget would have been still stressed by these new purchases, however, since they required specialized personnel training, maintenance packages, and spare parts supplies. In fact, it is probable that the PLAN tried to save money with the first two Kilo-class submarines by attempting to have both commissioning crews share one crew’s training package; the results were, predictably, poor performance by these first two boats.

China has also been modernizing its navy with indigenously-built surface combatants, submarines, and aircraft. This latter category is significant, given the central importance of airpower to modern naval forces; apparently none of the Su-27 and Su-30 aircraft acquired from Russia have been assigned to the PLAN.

In the category of warships, however, the PLAN now deploys two Luhu-class and one Luhai-class DDGs. These are powered by gas-turbine engines acquired from the United States during the 1980s in the case of the Luhus, and from Ukraine in the case of the Luhai.⁷ Despite these modern power-plants (more efficient than the Sovremmenys’ trouble-prone steam plants), the three Chinese-built DDGs possess limited weapons and sensor suites, especially in the areas of anti-air and anti-submarine warfare. It is presently unclear whether the PLAN will receive funding sufficient to both buy additional Sovremmenys, although there has been much open-source press reporting to that effect, and to build more Luhais. I do not think the navy will receive that funding, and has opted to acquire additional Luhais, although it may well improve the ship’s capabilities by arming it with the Moskit anti-surface ship cruise missile, and with a phased-array type of anti-air warfare (AAW) radar. This will still require the Chinese to purchase the ships’ gas-turbine engines from a foreign source, probably Ukraine.⁸

China is building the successful Ming and potentially more capable Song-classes of conventionally-powered submarines, turning out one per year of the former and one of the latter about every two years. This construction probably means Beijing will not purchase additional Kilo-class boats from Moscow. Rather, China may be holding back on foreign purchases until a successful submarine-design incorporating air-independent propulsion (AIP) is available, perhaps the Russian Amur-class, long under development.

Hence, the PLAN budget must be assumed to have to accommodate a continued indigenous submarine-construction program, without the supplementary funding that would presumably be allocated if additional Russian submarines were purchased. The most significant addition to the future Chinese submarine force, however, will likely be the nuclear-powered ship (SSN) designated “Type 093,” now under construction, almost certainly with extensive Russian assistance.

The PLAN already deploys five Han-class SSNs, but these have never been completely reliable, and it is doubtful that more than three of them are currently operational. The Han is modeled on the old Soviet November-class, designed in the 1950s, which had a troublesome nuclear engineering plant; the Type–093 is presumably modeled on the more modern and far more capable Victor III-class of Soviet boat (designed in the 1970s). The design and construction dollars for this new PLAN SSN probably come from the navy’s “regular” budget, but it is likely that the central government has provided additional, extra-budgetary funds to pay for the Russian assistance in building the boat.

The Budget Process

The PLAN’s budget process involves a number of steps. First, the navy leadership formulates its request within a paradigm of several categories. These may be listed under the following headings:

1. Personnel. Pay and fringe benefits to naval personnel, to include some food, uniforms, pensions, and possibly allowances provided personnel who are demobilized; this category also includes the pay and fringe benefits provided civilian employees.
   
   
2. Education and training. This category would include each of the three geographic fleet’s shore-based training establishments; recruit and new officer training; naval academies; thirteen naval colleges ranging from entry-level academies for officer-candidates to training for commanding officers in over 200 technical, tactical, and operational subjects; and possibly the PLAN contributes to the cost of operating various inter-service schools. Not included in this category may be specialized training packages for newly-purchased foreign systems, such as the Kilo-class submarines obtained from Russia.
   
   
3. Operations and Maintenance. This includes ships, submarines, and aircraft, as well as the Marine Corps and other units under PLAN command; everything from fuel to spare parts for most equipment. Other budget lines include meteorological-oceanographical support and shore-based communications systems. An important sub-category here for the PLAN is “hotel services”: these include housing and shore-support for ships and other operating units and their crews.
   
   
4. Research and Development (R&D). The bulk of PLA R&D likely is conducted and funded on a centralized basis, but the PLAN probably has its own R&D establishment for addressing such navy-specific areas as anti-submarine warfare (ASW). This category should include the complete range of research (categorized into four levels in the U.S. Navy), from basic laboratory experiments to afloat-testing of operational systems.
   
   
5. Procurement. While headline-grabbing items purchased from foreign concerns--primarily Russian, French, and Israeli during the past decade—are almost certainly funded directly by the central government, the PLAN must allocate resources for indigenously produced items, ranging from Luhai-class DDGs and Song-class submarines to small arms and personal equipment for its personnel.
   
   
6. Construction. This budget category focuses primarily on naval base and other facility construction, ranging from piers to warehouses to personnel housing and recreational facilities. Another important line item here concerns the navy’s fuels systems, including storage, pipelines, and pumping facilities.
   
   
7. Civil Sector. This is a particularly uncertain category, and would include funding the PLAN may be obligated to provide naval militia units ashore and afloat. It also refers to budgetary interactions between the navy and local governments, ranging from provincial support to inland PLAN facilities to support of navy personnel draft and recruiting teams; these involve some naval expenditures, but also accrue monetary and other support to the PLAN.⁹

The budgetary process within the navy remains opaque. Extrapolating from the annual cycle the PLAN uses for requesting special operational assignments, and basing my discussion on the cyclical nature of governmental budgeting procedures in other navies, I offer the following description. The PLAN includes five operational forces:

1. surface vessel units,
2. submarine units,
3. aviation units,
4. coastal defense units, and
5. Marine Corps.¹⁰

Each of these has a stake and an input in the PLAN’s budget process, as would, presumably, the PLAN Headquarters departments and the operating fleets: North Sea, East Sea, and South Sea. The process itself no doubt follows a formal schedule of analysis, estimate, submission, review, and resubmission, but also no doubt is relatively continuous throughout the year. This continuous process results from competition for scarce budgetary resources both within the PLAN, and from that service’s competition with the air and ground forces.

Conclusion

Our lack of precise knowledge of the procedures followed by the Chinese navy is obtaining and spending its share of the nation’s defense budget is not surprising, given the commitment to secrecy by the PLA. However, a review of the PLAN’s changes in force structure and operational capabilities during the past decade can serve as an indicator of the efficacy of the navy’s budget gamesmanship.

Future Spending

As for the next decade, we are forced to estimate PLAN expenditures based on the international situation, especially that in East Asia, policy statements by China’s government; and observed acquisitions and doctrinal developments within the PLAN. Another factor is the future of the Chinese economy, which is likely going to be subject to major perturbations resulting from membership in the World Trade Organization.

There is little doubt, despite the post- September 11th developments in west China, that Taiwan will remain the preeminent concern of the Chinese navy. That concern translates into a primary PLAN focus on the U.S. Navy. Hence, PLAN budget priorities will continue to concentrate on those systems and capabilities that may facilitate a successful campaign in the East China Sea against possible U.S. intervention, should China’s determination to reunify Taiwan with the mainland result in Beijing using the military instrument of statecraft.

The development of an aircraft carrier, interestingly, would not very significantly affect this operational situation: during any contest in the vicinity of Taiwan, the PLAN would be able to rely on airpower based on the mainland. The presence of one or two carriers would present the PLAN with more of a burden—the carriers would embody so much political capital for Beijing that they would have to be protected at all costs—than a advantage.

Four factors serve as more significant harbingers of Chinese intent to increase its navy’s role in a Taiwan scenario. First would be an increased rate of acquisition of SS-N-22 anti-ship cruise missiles and the ships, probably of the Luhai-class, aboard which to deploy them. The decision to build additional Luhais would be signaled by Beijing’s acquisition of numbers (two per ship) of maritime gas-turbine engines, probably from Ukraine, as discussed above. This program might also be supported with significantly increased production of Chinese-manufactured C-802 anti-ship cruise missiles.

Second would be the immediate transfer to the navy of Su-27s and Su-30s being acquired as a result of contracts with Russia (and the exercising of newly-acquired AWACs and aerial refueling aircraft with these fighters). Third would be the acquisition/conversion of naval craft dedicated to mine-laying, with a concomitant build-up of the PLAN’s stock of modern sea mines.¹¹

Fourth, a purchase of several more Kilo-class submarines from Russia, and a store of wake-homing torpedoes to arm them, would demonstrate China’s determination to rapidly expand this most dangerous naval warfare capability. This determination would be further buttressed by a significant increase in the production of the indigenously designed Song-class submarine. China is also building the first of a new class of SSN, the Type-093. It is very doubtful, given China’s record of indigenous production of very complex military platforms, that more than one or possibly two of these new SSNs will be deployed before the end of the decade. In any event, conventionally-powered submarines still pose a threat sufficiently serious enough to serve Beijing’s national security purposes in East Asian waters.

Finally, and perhaps most important, would be dramatically increased expenditures on PLAN training in ASW, AAW, and anti-surface warfare (ASUW). I deliberately omit amphibious warfare training/exercises from this list of indicators, given China’s demonstrable lack of interest in the relatively easy acquisition of the ships necessary to execute this mission in the classic sense.

A range of expenditures for future major ships and systems is provided by Bates Gill in the article cited above. His high and low “Estimate Range of Costs for Annual Chinese Defense Procurement, circa 2000-2005” for 21 large surface combatants, 20 submarines, and 500 cruise missiles runs from $10.75 billion (low estimate), to $14.3 billion (high estimate). As noted above, however, budget allocations serve as indicators which must be considered in conjunction with the tenor of the political climate in Beijing and in East Asia.

The processes by which China’s navy requests, receives, and spends its funding is no clearer than are many of the other processes through which Beijing administers the PLA. Nonetheless, it is a process we must continue to try to understand, since it provides the skeletal structure of PLAN capabilities and hence may serve as a important indicator of China’s intentions and capabilities in the contested East Asian security issues. That understanding requires not only classic intelligence work, but the closest interaction possible between our military and academic observers and their Chinese counterparts. The PLAN is a closely guarded book, but it is not closed.


FOOTNOTES


1. Cited by Bates Gill, “Chinese Defense Procurement Spending: Determining Intentions and Capabilities,” in James R. Lilley and David Shambaugh (eds.), China’s Military Faces the Future (Washington, D.C.: AEI and M.E. Sharpe, 1999), p. 195.

2. Charles Wolf, “Asian Economic Trends and Their Security Implications,” RAND, MR-1143-OSD/A,2000, p. 19, estimates Chinese military spending on an exchange rate and parity basis: $120-180 billion is the figure for 2000; $249-373 billion is projected for 2015 under conditions of stable growth in China.

3. See Arthur S. Ding, “China’s Defense Finance: Content, Process and Administration,” The China Quarterly (June 1996), pp. 428-442; and Shaoguang Wang, “The Military Expenditure of China, 1989-98,” SIPRI Yearbook 1999: Armaments, Disarmament and International Security (Oxford: Oxford University Press, 1999), pp. 334-349, for discussion of this process.

4. Ellis Joffe, “The PLA and Economy: the Effects of Involvement,” paper presented at IISS/CAPS Conference on “Chinese Economic Reform: The Impact on Security Policy,” Hong Kong (8-10 July 1994), p. 12.

5. One nautical mile equals 2076 yards, or approximately 1.15 statute miles. I am not aware of an authoritative description of these waters by Chinese strategists.

6. The U.S. Department of Energy estimates China’s daily oil use at 4.6 million barrels per day, with 1.4 million barrels of that imported. See: .

7. The United States sold China five LM-2500 marine gas-turbine engines manufactured by GE; four of these engines power the two Luhus; the location of the fifth is not known. China has acquired an unknown number of engines from Ukraine; two of these power the Luhai.

8. The first gas-turbine powered warship went to sea in 1936, and one of the curious shortcomings of China’s military-industrial complex is its apparent inability to design and produce an effective maritime gas-turbine engineering plant.

9. This discussion draws on two articles by Shaoguang Wang, who lists thirteen categories of “the Chinese official defense budget” in his SIPRI Yearbook article (p. 37), and eleven categories of China’s “military expenditure” in his China Quarterly article (p. 890).

10. Described by PLAN commander Admiral Shi Yunsheng: quoted in Huang Caihong, Chen Wanjun, and Zhang Zhao, “China Enhances the Navy’s Comprehensive Strength—Interview with Naval Commander Vadm Shi Yunsheng,” Liaowang, Nr. 16 (Beijing), 19 Apr 99, 13-15, in FBIS-CHI-99-0513. Also see Ren Yanjun, “Forging A Shield of Peace for the Republic—Part 1 of Roundup on 50 Years of Achievements in Army Building,” Jiefangjun Bao, 6 Sep 99, 1, 2, in FBIS-CHI-99-0911; and Xu Zuzhi, “Backgrounder on National Day Celebrations,” Zhongguo Xinwen She (Beijing), 1 Oct 99, in FBIS-CHI-99-1002.

11. The PLAN currently operates one dedicated minelayer, although some of its surface combatants (and presumably its submarines) are nominally required to exercise at least once a year at laying mines.

12. Gill, pp. 220, 222. Estimates are in $U.S. and, while obviously very approximate, are useful when attempting to decipher China’s defense spending.