Written Testimony for U.S.-China Commission
Public Hearing on China's Budget Issues - 12/7/01
Xiaonong Cheng
1. What is your best estimate of China's annual budget?
The official figure of China's annual budget includes only tax revenues. It
is 1,180.6 billion RMB in year 2000 and 1,275.4 billion RMB in 2001, about 13.4
% of China's GDP. However, the real annual budget of Chinese government at different
levels is much larger than the official figure. Chinese government offices also
collect extra fees legally and illegal fees as well. According to estimates
of research fellows of General Bureau of Taxation of China, the legal and illegal
fees are both about 10 % of GDP in the past years. So if one takes all the tax
revenues, legal fees and illegal fees into consideration, the best estimate
of China's annual budget is about 33% of GDP, a percentage not really much lower
than that of years before reform.
2. How is the budget divided between economic development and defense priorities?
Funds for defense priorities are managed and distributed by Finance Department
of General Logistics Department of PLA, that only follows orders of Central
Military Commission, while funds for economic development are managed by State
Council and distributed by Ministry of Finance. As State Council has no rights
or any way to know details of military budget, it has actually no authority
in control of military budget. The key rule of thumb in dividing the two funds
in Chinese government is to keep the share of military use in state budget stable
or a slow increase. When funds are not sufficient for PLA, State Council may
open doors for military units to run business for their own purpose.
3. How is the budget determined? Who Decides? What is the scope of the influence
of the PLA over the budget process?
The determination of military budget is a process quite independent from State
Council and Politburo. The Central Military Commission is in charge of determining
the whole size of military budget and its distribution among Army, Air Force,
Navy, Strategic Force and so on. Neither Army nor Air Force alone involves in
negotiations with State Council or Ministry of Finance for their budget. PLA
as a whole deals with State Council for budget issue.
At the first step of the process the Central Military Commission decides size
of military budget, some politburo members who are also members of Central Military
Commission join the discussion. The General Logistics Department is responsible
to prepare a draft of the budget for the discussion. When Central Military Commission
approves, the draft becomes an order from the Commission to Ministry of Finance,
while the latter can't raise questions or ask for details. The final result
of the discussion at the meetings of the Central Military Commission is not
reported nor is admitted by politburo.
At the second step of military budget process technocrats of Division of Defense
Budget in Ministry of Finance therefore work with officials of the General Logistics
Department to arrange the time and flow of draw-down funds. The final step is
an internal distribution of the funds within PLA. Senior commanders of Army,
Air Force, Navy and Strategic Force will meet and negotiate each other for the
distribution in internal meetings of the Central Military Commission. When priorities
and policies are decided, officials from Finance Departments of Army, Air Force,
Navy and Strategic Force will attend meetings held by the General Logistics
Department to arrange fund allocation.
4. To what extent do China's export earnings enhance the military budget of
the PRC?
Only export earnings of corporation groups in defense industries, such as Aviation
Industries of China, China National Aero Technology Impex (CATIC), China State
Shipbuilding Co., China North Industries Group (NORINCO), China National Nuclear
Corp., and China National Electronics Impex., might enhance the military budget
in two ways. First, with export earnings the defense industries are able to
increase funds for R&D of military equipment in their institutes. Second,
and probably more important, the export earnings feed factories of the defense
industries to maintain potential capabilities of military production, that otherwise
may have to be shut down for lack of sufficient funds from civilian part of
fiscal budget.
5. Could you provide an overview of China's defense budget structure and process
to include both revenues and expenditures?
The official figure of defense budget is only part of sources for military expenditure.
According to Statistics Bureau of China, the defense budget was 20.08 billion
RMB in 1986, 29.03 billion in 1990, 63.1 billion in 1995, 106.9 billion in 1999,
119.8 in 2000 and is estimated as 141.0 billion in 2001. In recent three years
the defense budget is about 7.9% of total fiscal expenditure and 1.4 % of China's
GDP.
This figure, however, is the smallest category of military expenditure in China.
It covers only personnel and maintenance costs of PLA, and has excluded costs
of maintaining one fourth of Chinese military force, the People's Armed Police
with one
million soldiers, and the investment for military R&D and production. Many
other funds or resources available for military force are either hidden in fiscal
categories for civilian use or not calculated for lack of information. Of course,
the category does not accord with NATO standards.
According to available official source, from 1986 to 1992, about 40% of the
official defense budget is used for food and clothing of PLA members, salaries
of PLA officials and subsidies for soldiers. The rest of the budget covers expenses
for operating the army, including purchase order for military goods from defense
industries or abroad, maintenance costs of military equipment and operating
costs of military industries.
In China the military industries are different from defense industries. PLA
directly runs some factories that mainly produce military uniforms and goods
for military daily use, and maintain military equipment. These factories belong
to General Logistics Department of PLA and can be labeled as Military Industry.
It is actually a quite small sector. Another much larger sector is called Defense
Industry. Factories in defense industries are run by civilian ministries under
State Council before and are now operated by corporation groups. These corporation
groups are civilian in the sense of making profit and are not fully depending
upon defense budget (80 % of output of the industries is for civilian use).
They are partially militarily in the sense that they follow regularly instructions
from PLA Headquarters (usually from Commission on Science, Technology and Industry
for National Defense) and from military representatives who are sent by PLA
and reside in these factories. The priority of factories in defense industries
is satisfying whatever demand PLA claims. The industries always maintain production
lines for military orders in well status. Also the industries have their own
R&D institutes and put a lot of resources to develop military products from
weapons to satellites. Most investment for military R&D in defense industries
does not come from defense budget but from civilian investment budget.
Another source of military expenditure available for PLA is profit earned through
its businesses. PLA businesses have almost extended into every economic sphere:
agribusiness, food processing, electronics, transportation, hotels, construction,
real estate, tourist attractions, medical services, karaoke lounges, even smuggling.
Estimated revenues of the businesses vary widely, from 3 to 8 times of official
defense budget. Taking a conservative estimate, e.g., 4 times of the official
defense budget, and an average profit rate of 15 % in China, the businesses
earn as much money as about 60 % of the official defense budget. Greater part
of the profit, however, goes to private pockets of military officials and their
relatives, and only one third of it, estimated by some scholar, is to supplement
military budget of PLA.
6. How does one dissect China's budget to determine the true allocation of national
resources dedicated to defense?
It may need a lot of research work by collecting all available statistics and
case information, most in Chinese, then through careful analysis, comparison
and estimate. It needs not only general knowledge about composition of PLA,
but also that about defense industries. Reading Chinese newspapers, journals,
even some PLA's literature journals, may help the researcher get sense about
what is going on in terms of military related activities and expenditures. An
experienced scholar may thus give a reasonable estimate about the true allocation
of national resources dedicated to defense.
7. What proportion of the China's defense-related expenditures is financed by
profits derived from PLA and/or Ministry-owned firms?
This might be the toughest work for such a research. While data of Ministry-owned
firms is mixed up with military and civilian activities, PLA owned businesses
are eventually a "black box," even unclear to Chinese government or
the General Logistics Department. Some experts, such as those in International
Institute of Strategic Studies and Stockholm Institute of Peace Research, suggest
that PLA's total spending is four or five times the official defense budget.