CHINESE DEFENSE SPENDING, 1965-79

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP11S00229R000100230001-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: April 18, 2014
• Sequence Number: 1
• Publication Date: July 1, 1980
• Content Type: REPORT

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"au" al
IA Foreign
b.,31ki Assessment
Center
Chinese Defense
Spending, 1965 79
A Research Paper
SR 80-10091
July 1980
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National
Foreign
Center
Chinese Defense
Spending, 1965-79
A Research Paper
Information available as oil July 1980 was used
in the preparation of this report.
Comments and queries on this unclassified report
are welcome and may be directed to:
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SR 80-10091
July 1980
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Overview
Chinese Defense
Spending, 1965-79
Estimated Chinese defense spending over the past 15 years shows two
distinctly different trends. Spending rose rapidly from 1965 to 1971?at an
average rate of about 10 percent a year?then fell sharply in 1972; and since
then it has grown at an average rate of only 1 to 2 percent annually. The
abrupt shift was associated with a policy change that gave greater priority to
general economic development.
The recent pattern of limited growth in defense spending may reflect
technological constraints as well as government policy. Although China
produces a wide range of weapons, they are mainly copies or adaptations of
Soviet designs first developed in the 1950s. A shutdown of high-level
education during 1966-76, which was associated with the Cultural
Revolution, crippled the country's technological effort. As a result, China's
military research and development program has so far brought only a few
indigenous designs to full operational status.
In the 1980s we expect defense spending to continue the slow-growth trend
of the 1970s. China will continue to modernize its military forces, but
economic and technological weaknesses will restrict the pace. The present
leaders recognize that they cannot begin an extensive upgrading of defense
capabilities until the economy is stronger.
Even if China's military modernization received broad foreign support
during the 1980s, that support would have little impact until late in the
decade. The national military-industrial base and the military forces would
need time to assimilate new foreign technology.
General economic development will enhance China's ability to achieve its
long-term defense goals, but the process will be slow. Defense modernization
will be spread over decades rather than years because of the competing
demands on the nation's limited resources.
These conclusions are based on cost estimates derived by a building-block
method similar to the one used by the Central Intelligence Agency for
costing Soviet defense activities. This approach is necessary because the
Chinese publish almost no information on their defense spending.
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Contents
Page
Overview iii
Introduction 1
Background 1
Expenditure Trends 2
Spending by Resource Category 3
Investment Expenditures 3
Operating Expenditures 4
RDT&E Expenditures 4
Spending for the Forces 5
Ground Forces 5
Naval Forces 5
Air Defense Forces 5
Air Attack Forces 5
Ballistic Missile Forces 5
National Command and Support Activities 5
Relation of Defense Spending to National Income 5
Outlook 5
Appendix
Costing Methodology 9
Figures
1.
China: Estimated Defense Spending 3
2. China: Defense Spending by Resource Category
4
3. China: Defense Procurement and Industrial Production
6
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Chinese Defense
Spending, 1965-79
Introduction
The building-block approach used in this paper con-
sists of identifying the various Chinese defense activi-
ties in as much detail as possible, estimating the cost of
each, and summing these individual cost estimates for
each year.' The activities covered are those which in
the United States would be defined as national security
programs.
Our estimates differ markedly from those reported by
the Chinese. In June 1979 they published in their state
budget an entry for defense of 16.8 billion yuan for
1978 and 20.2 billion yuan planned for 1979. Our
analytical constructs suggest, however, that the com-
ponents of the Chinese defense effort, as defined in US
terms, add up to about twice the published amount?
that is, to about 40 billion yuan for 1979.
The Chinese did not explain what activities were
covered by the reported figures?the first released
since 1959?but they clearly represent only a part of
the total. This would be analogous to the single-figure
defense entry in the Soviet state budget, which also
reflects only a portion of estimated total defense
spending.
The "direct-costing" methodology makes it possible to
analyze expenditure patterns in a variety of different
ways. For example, analysis of expenditures by re-
source category provides a measure of Chinese force
expansion and modernization, whereas analysis by the
individual force components can give an insight into
Chinese defense priorities.
These individual cost estimates have a margin of error,
however, which could be substantial for some categor-
ies. We have greater confidence in our estimates of
spending trends than in those for absolute levels, and
for any given year we have more confidence in the
higher levels of aggregation than in the lower ones.
' For a brief description of this analytical approach, see appendix.
1
We have the greatest confidence in our weapons
procurement estimates, which account for about 40
percent of total Chinese expenditures for the period.
We have less information about facility construction,
personnel, and operations and maintenance and there-
fore have less confidence in our estimates for these
activities?which together account for close to 45
percent of our total estimate. Military research,
development, testing, and evaluation (RDT&E) ac-
count for the remaining 15 percent. Because of our
many uncertainties about Chinese military RDT&E
programs and their costs, we have the least confidence
in this part of our estimate.
Background
China is a large, slowly developing country, with at
least three-quarters of its labor force engaged in
agriculture and with a low level of output per capita in
industry. Nevertheless, it maintains the world's largest
Army 2 and manages to produce a wide range of
weapon systems. The production technology used,
however, and the military equipment produced are less
advanced than those in industrially developed coun-
tries. The weapons are primarily copies or modifica-
tions of Soviet designs of the 1950s.
The People's Liberation Army (PLA) emphasizes
large conventionally equipped ground forces. The
troops have a wide range of time-tested weapons such
as tanks and tube artillery, but they have few modern
weapons such as antitank guided missiles or short-
range tactical rockets. The air forces consist largely of
air defense fighters capable of making intercepts only
in good weather during daylight hours, and the naval
forces are equipped primarily for coastal defense.
China has 4.3 million men assigned to combat and combat support
units and probably another 3 or 4 million uniformed personnel in
administrative and service support units. As large as these forces are,
they are less than 1 percent of the population, now estimated at one
billion.
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China also has a small number of nuclear weapons and
delivery systems?bomber aircraft, medium-range
ballistic missiles (MRBMs), and intermediate-range
ballistic missiles (IRBMs)?that can cover most
targets in the Far East. It has only a few
intercontinental ballistic missiles (ICBMs); these can
reach the western USSR, but none currently oper-
ational can reach the continental United States. The
development and manufacture of strategic nuclear
weapon systems and reconnaissance satellites attest to
China's desire to pursue military programs similar to
those of a modern military-industrial power.
Defense currently absorbs 5 to 10 percent of China's
estimated GNP. It is in competition for economic
resources, however, with the rest of the "four modern-
izations" areas, especially for the high-technology
machinery and skilled managerial and technical man-
power which are already in short supply.' This
competition will become more intense as China contin-
ues to implement its "four modernizations" campaign.
Most of China's defense industrial base was developed
during the late 1950s. It was developed largely with
Soviet assistance and was seriously damaged by the
withdrawal of that assistance in 1960. After a period of
recovery (1961-65), China began a broadly based
program to expand and disperse its defense industries.
Several hundred factories have been built since 1965.
about tripling Chinese defense plant capacity. Much of
this capacity, however, uses antiquated production
processes, and for unknown reasons much of it appears
to be idle. Imports of special high-quality raw materi-
als, machinery, and precision instruments from Japan
and the West continue to play an important role in
China's production of its more advanced military
equipment.
Expenditure Trends
The pattern of Chinese defense spending shows consid-
erable variation (see figure 1). Arms production
virtually stopped in the early 1960s, as the effects of
the Great Leap Forward (1958) compounded the
decline following the cutoff of Soviet economic and
military assistance. By the middle of the decade,
however, the output of nearly all types of weapons had
'The "four modernizations" (agriculture, industry, defense, and
science and technology) aim at achieving developed-nation economic
status for China by the year 2000.
recovered. This recovery may have been stimulated by
US involvement in neighboring Vietnam.
In 1966 Mao Zedong launched the Great Proletarian
Cultural Revolution. Although the central authorities
tried to protect defense industries from the general
disruption, the personnel purges at the local level and
the political activities in factories and transportation
centers took their toll. During 1967, the first full year
of the Cultural Revolution, the value of output of new
military equipment fell by about 20 percent.
The worst effects of the Cultural Revolution on the
weapons industries had passed by late 1968.
Heightened tensions with the Soviet Union then began
to spur defense expenditures, which rose rapidly to a
peak in 1971. Growth in annual defense expenditures
for the period 1965-71 averaged 10 percent.
In 1972 defense procurement was again cut severely. A
decline of about 70 percent in aircraft procurement
was responsible for most of the drop; production of
naval ships and land arms declined also, but its impact
on total spending was less. Defense spending as a whole
dropped 20 percent. Three factors apparently were
responsible: a new emphasis on agriculture; reduced
military influence in policymaking as the shattered
Party and government apparatus recovered from the
Cultural Revolution and the fall of Lin Biao;4 and a
realization by the military that continued large-scale
output of older weapons was at the expense of its long-
term efforts at defense modernization.
Overall defense spending increased 1 or 2 percent per
year between 1972 and 1978, but expenditures in 1978
were still below the 1971 peak.
In February and March 1979 (after an extended
period of mobilization and force buildup beginning in
late 1978) the Chinese engaged Vietnam in a month of
intense fighting. We can estimate only generally the
direct costs of that war, but we judge that their
addition to ongoing defense expenditures caused a
sharp increase in the total for 1979, a total which
probably exceeds the calculated 1971 peak.
4 Before his fall in late 1971, Lin Biao was Defense Minister and
Mao's constitutionally designated successor. The growth in defense
spending between 1965 and 1971 coincided with his rise in power.
2
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Figure 1
China:
Estimated Defense Expenditures
Index: 1965=100
200
180
160
140
120
100
80
60
40
20
1965 67
? ? ? Preliminary
???????
69 71 73 75 77 79
582605 7-80
Spending by Resource Category
Chinese defense expenditures may be separated into
three resource categories?investment, operating, and
RDT&E. Investment expenditures reflect the flow of
new or replacement equipment and facilities to the
forces; operating expenditures are the costs associated
with their day-to-day functioning; and RDT&E ex-
penditures support activities concerned with future
force modernization.
About 50 percent of the estimated spending over the
1965-79 period went for investment in equipment
(roughly 40 percent) and facilities (roughly
10 percent). Operating costs absorbed about
35 percent of the total and RDT&E an average of
about 15 percent (see figure 2).
3
Investment Expenditures. Defense investment consists
of both the procurement of weapons and equipment
and the construction of military facilities. About
80 percent of investment spending has been for weap-
ons procurement, with about one-half of this allocated
for aircraft, missiles, and ships.
The Chinese continue to procure large quantities of
equipment that was first produced in China during the
mid-1960s or earlier?items that were designed in the
USSR in the 1950s. The weapons which the Chinese
began to produce in the 1970s are still being procured
in only small numbers. This pattern may reflect limited
capabilities to mass-produce the more technologically
advanced hardware.
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Figure 2
China:
Defense Spending by Resource Category
Index: 1965 total=100
200
180
160
140
100
80
60
40
20
1965
? ? ? Preliminary
Investment
Operating
Research, development,testing, and evaluation
67 69 71 73 75 77 79
582606 7-80
Procurement is the category that largely determines
the total Chinese expenditure trend. In addition to its
sheer volume-40 percent of total outlays?spending
for procurement of new equipment is the most volatile
element of defense spending and the one most suscep-
tible to policy change. For example, the sharp drop in
total spending in 1972 resulted mainly from the slash
in the production of military equipment.
Operating Expenditures. We estimate that operating
expenditures between 1965 and 1979 grew at an
average annual rate of slightly less than 5 percent.
Operating expenditures include personnel costs and
the cost of the operation and maintenance (O&M) of
equipment and military facilities. Within this cate-
gory, O&M costs have grown somewhat faster than
personnel-related costs?primarily reflecting a slow
increase in the weapons inventory.
RDT&E Expenditures. The Chinese have limited their
RDT&E efforts to a few major projects. These have
generally included one or two models in each major
type of weapon system (such as aircraft, missiles, and
ships). The systems being developed show a substantial
technological improvement over those currently being
produced, but they still only represent weapons tech-
nology of the early 1960s.
4
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Progress in general has been slow, and many projects
that were begun in the late 1960s are still under
development. This difficulty in translating research
into production may reflect limitations caused by the
scarcity of trained scientific personnel and the under-
developed condition of China's technological base.
Spending for the Forces
Another way of analyzing our estimated cost data is by
use. For the purposes of this paper, we have divided
Chinese defense spending into six functional compo-
nents. Five are related to different types of combat
forces: ground, naval, air defense, air attack, and
ballistic missile. The sixth functional component in-
cludes activities?such as command and support and
RDT&E?that provide common services to all the
others.
Ground Forces. With a population of 1 billion, China
maintains an army that is huge in comparison with the
armies of other countries. The costs of this force are
small relative to its size because the Chinese troops are
paid low wages and are lightly equipped. Spending for
the ground forces has gradually increased, however,
and since 1965 has averaged over 20 percent of total
defense spending.
Naval Forces. Estimated spending for China's naval
programs (which include a small land-based force of
naval aircraft used for fleet defense and maritime
reconnaissance) more than doubled between 1965 and
1972, primarily reflecting growth in the procurement
of ships and boats. Since that time, the level of
spending has been relatively constant, as a recent
slowdown in the construction of submarines and small
combatants has been offset by increased production of
destroyers and frigates. Naval expenditures accounted
for roughly 20 percent of military spending during the
1965-79 period.
Air Defense Forces. The overall level and trend of
spending for air defense forces has been determined
primarily by the rate at which Beijing has produced
new aircraft and surface-to-air missiles. Spending for
this component increased rapidly between 1965 and
1971, decreased sharply in 1972, and then increased
gradually through 1978. Air defense expenditures
represent nearly 20 percent of China's total defense
CDspending for the 1965-79 period.
5
Air Attack Forces. The spending pattern for air attack
forces reflects the uneven nature of Chinese aircraft
production. Expenditures rose steeply during 1965-71
but began a decline in 1972. The trend continued
slightly downward through 1974 and then followed a
fluctuating pattern through 1979. Somewhat less than
5 percent of cumulative defense spending for 1965-79
has gone to these forces.
Ballistic Missile Forces. The investment and operat-
ing costs for China's ballistic missile force (about
100 MRBM and IRBM launchers and a few ICBM
launchers) have amounted to less than 5 percent of
cumulative defense spending since 1965. We do not
include in this figure the considerable expenditures
associated with ballistic missile RDT&E, which ac-
count for about two-thirds of our total estimate for
Chinese RDT&E.
National Command and Support Activities. About
30 percent of Beijing's total defense expenditure was
accounted for by the remaining activities, which
include RDT&E and command and support compo-
nents. Command and support components include a
variety of general rear-service functions such as
logistics, security, intelligence, medical services, and
administration.
Relation of Defense Spending to National Income
We estimate that military spending in China is taking
a much smaller share of China's gross national product
during 1970-80 than it did in 1965-71. GNP is now 60
percent above the 1971 level and industrial production
is 100 percent above, but military spending is only now
reaching the 1971 level. Figure 3 shows how general
industrial production has outstripped defense procure-
ment. A comparison of their respective trends shows
that defense procurement growth conformed closely to
the growth of industrial output through 1971. Since
1972, however, industrial output has continued its
upward trend while defense procurement has increased
only slightly.
Outlook
China will continue to modernize its military forces,
but at the conservative pace that has characterized
expenditure trends since 1972. The current leaders,
now more than ever, recognize that they must correct
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Figure 3
China:
Defense Procurement and Industrial Production
Index 1965 =100
375
250
Industrial production
Defense procurement
1965 67
? ? ? Preliminary
69 71
73 75
77 79
582607 7-80
the fundamental weaknesses in the economy before
they can undertake an extensive upgrading of defense
capabilities.
The forces are unlikely to receive large numbers of new
weapon systems. Although China's military RDT&E
effort began in the 1960s, few new weapon systems
were ready for large-scale deployment in the 1970s.
This movement from research to production is unlikely
to speed up until the Chinese overcome the limitations
imposed by the weakness of their technological base.
China has only a limited number of scientists, most of
whom were trained abroad in the 1940s and 1950s.
They are aging now, but because of the hiatus in higher
education during 1966-76, the country has not trained
enough scientists to replace them. The universities are
only now beginning to reestablish their science curricu-
lums, and in the meantime, large numbers of scientific
personnel are being sent to the United States, Western
Europe, and Japan to update their scientific
knowledge.
For several years the Chinese have been surveying the
technology and equipment of Western arms producers.
They have expressed an interest in such defensive
weapons as antitank and antiaircraft missiles, but they
also appear to be interested in aircraft and electronic
equipment. They have imported from the West some
equipment and technology that could be modified for
weapons purposes, but they have imported few, if any,
6
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complete weapon systems. The Chinese apparently
would rather purchase the complete technology of a
particular weapon system, including the manufactur-
ing process, than large quantities of hardware.
Even if China were to acquire foreign defense-related
equipment or technology, the impact on force
capabilities would not become apparent until the late
1980s. Time is needed to assimilate new technology
into the existing production processes, to develop
associated maintenance and logistic structures, and to
train military personnel in the use of the equipment.
The Chinese might participate in joint ventures or
coproduction programs with other nations, but assimi-
lation would still take time.
Thus, the Chinese defense effort probably will be
largely a continuation of the trend before the invasion
of Vietnam. The major constraints on more rapid
defense modernization are economic and technologi-
cal. Under the current, more pragmatic leadership,
China is likely to make progress in these areas, and in
the long run this progress will benefit the military. But
unless Beijing receives large-scale foreign assistance?
which is unlikely?its limited resources and the
competing demands throughout the economy will
restrict it to gradual advances in military technology
and defense modernization.
7
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Appendix
Costing Methodology
Our estimates of Chinese defense spending are based
on a building-block methodology similar to that which
has been developed over many years to assess the
defense costs of the Soviet Union. We compile a
detailed list of the activities and physical components
of the defense program for each year. This list includes
data on order of battle, manpower, production of
equipment, construction of facilities, and the operating
practices of the military forces.
These force components and activities are then con-
verted into monetary estimates. For some components
we have yuan prices, and these components are costed
directly in yuan. For each of the remaining compo-
nents, we estimate what it would cost if produced in the
United States and then convert these dollar costs to
yuan using suitable yuan-dollar ratios.
We use several conversion ratios, which are con-
structed to reflect the relative differences in the US
and Chinese price structures. They are based on an
extensive sample of prices for comparable US and
Chinese industrial products. For example, the price of
a particular Chinese diesel engine or tractor is
compared to the price of its closest US counterpart,
and the dollar price is adjusted for obvious differences
in quality and design. Using the yuan-dollar ratios
derived from our samples, we then construct another
set of ratios for converting the dollar cost of military
activities into yuan. The ratios range from 8.5 to 0.6
yuan per dollar; the ratio at the high end of the range is
applied to some electronic equipment, and that at the
low end to transportation services.
9
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