Is China catching up to the United States in defense spending? At early 2024 market exchange rates, China’s 2024 official defense budget of 1.67 trillion yuan is equivalent to $232 billion.1 In comparative terms, this is less than one-third of the 2024 U.S. Department of Defense budget of $825 billion.2 Careful analyses of Chinese military spending conclude that Beijing actually spends more than its official defense budget would suggest.3 These studies find that its spending has been 27 percent to 33 percent higher than the official figures in recent years. Using this range as a guide would indicate that China’s 2024 defense spending is about $295 billion to $309 billion.4
Yet some analysts have recently argued that China’s defense spending is much larger still, and their new numbers have gained the attention of wider audiences.5 The Economist has reported that China’s defense spending has already reached two-thirds of U.S. spending and is “catching up quickly.”6 Then-Chairman of the Joint Chiefs of Staff Gen. Mark Milley told Congress in 2021 that “the Russian and Chinese budgets exceed our budgets if all the cards are put on the table.”7 In September 2023, U.S. Sen. Dan Sullivan claimed that China’s defense spending is “probably close to about $700 billion” — three times higher than Beijing’s official defense budget.8 Apparently worried that China is poised to match or even surpass U.S. spending, Congress introduced legislation in June 2023 calling for the development of new methods for measuring, comparing, and reporting on China’s defense spending.9
Estimating the value of adversary spending on defense has never been easy.10 China’s defense spending has been the subject of intense scrutiny.11 However, gaps in research and policy analysis persist, particularly with respect to estimating defense-related spending not included in China’s official defense budget (“off-budget spending”) and how to convert Chinese spending in Chinese currency to a comparable U.S. dollar equivalent. In this article, we outline a method for more accurately assessing China’s defense spending. We include comparable spending categories for both the United States and China and apply appropriate means for currency conversion.
Contrary to estimates that China spends nearly $700 billion annually on defense, we estimate that China’s 2024 defense spending is equivalent to about $471 billion,* compared to U.S. 2024 defense spending of about $1.3 trillion.12 We show that off-budget items comprise a similar percentage of defense spending in both China (30 percent) and the United States (31 percent to 36 percent, depending on how spending by the Department of Homeland Security is treated).
Any estimate is highly dependent on assumptions about what should be included, what should be excluded, and how exchange rates should be treated. Although we provide a single estimate to illustrate our approach, that estimate falls within a plausible range of figures that might vary according to specific choices about which spending categories to measure, and how. Therefore, our most important contribution is to present a set of transparent, reasonable assumptions and calculations that can be evaluated by others seeking to understand what China spends on defense and how to compare that to spending by other countries.
We also show how to avoid getting it wrong. The highest estimates of China’s defense spending involve two adjustments to its official defense budget. Both adjustments could produce reasonable results — but only if correctly and consistently applied. The first is to supplement China’s official defense budget with off-budget items that contribute to China’s defense. The second is to adjust China’s spending in its local currency, the yuan, for purchasing power parity (PPP). The PPP adjustment is meant to reflect the Chinese currency’s ability to purchase more domestic goods and labor than its market exchange rate (MER) would suggest.
Making these adjustments is difficult, and getting either one wrong can produce significant errors. Recent high estimates that suggest China is on the cusp of overtaking U.S. defense spending get both wrong. First, they do not compare like-for-like off-budget items between the two countries. Cherry-picking spending categories and omitting areas where the United States spends more than China is a common problem.13 Second, some estimates misuse PPP to excessively inflate spending categories where China’s defense economy has cost advantages, while mistakenly applying PPP adjustments to those spending categories where it does not.14
Some of these calculations lead to conclusions that defy common sense. China’s defense spending is purported to be larger (and implicitly more threatening) because China is a developing country with cost advantages in labor-intensive sectors. This emphasizes the importance of labor-intensive military capabilities and equipment, counter to the modern military emphasis on much more lethal capital- and technology-intensive systems. It also appears to run counter to the established strategy of China’s People’s Liberation Army of waging “informatized wars.” That strategy requires a less manpower-intensive and more technology-intensive force. Nor does China appear to have the actual material capabilities — numbers and quality of ships, planes, and other major systems — that it should possess if its defense spending was on par with U.S. defense spending.
Like should be compared to like, and categories should not be cherry-picked to exaggerate differences.
China’s relative material capabilities — economic, technological, and military — plus its growing expenditure on defense, make it the country most capable of challenging American interests. However, America must manage multiple international security challenges and important domestic budget requirements as well. An accurate picture of how much China spends on its military is essential to help ensure that Washington invests in appropriate military capabilities to deter and if necessary defeat potential threats from Beijing. Underestimating China’s defense spending could lead to underinvestment in capabilities required to counter China. Exaggerating that spending could lead the United States to misallocate resources, focus on the wrong threats, or respond in ways that exacerbate security dilemmas in the Indo-Pacific.
We start by pointing out the pitfalls common to many analyses of China’s defense spending, with a focus on off-budget spending and PPP calculations. We next discuss four specific problems involving PPP calculations. These problems have led to greatly inflated estimates of Chinese spending. We then introduce our own estimate, which is based on comparing similar budget items for both China and the United States and uses tailored PPP conversion factors for the personnel, operations, and equipment portions of China’s defense spending. We conclude by discussing the implications of our analysis for U.S. national security policymaking.
Official Budgets and Off-Budget Spending
All countries omit important elements of their defense-related expenditure from their official defense budgets. When comparing Chinese and U.S. defense expenditure, the same spending categories should be included on both sides of the ledger — often, they are not. For example, China’s People’s Armed Police and its Coast Guard are not included in China’s official defense budget. Many analysts argue they should be included in overall defense spending estimates. However, if spending for these forces is included, then similar items should be added to the total for the United States when comparing the two budgets.15 The U.S. Coast Guard budget is held by the Department of Homeland Security, not the Department of Defense, so for comparison that spending should be added to the Defense Department’s budget. The Department of Homeland Security also conducts counter-terrorism activities and thus contributes to U.S. national security, so other elements of its budget might also be included. Likewise, many analysts argue that social welfare support, benefits, and payments to People’s Liberation Army veterans should be included in the Chinese total.16 For an accurate comparison, this should be matched by adding similar spending on healthcare and other benefits to veterans from the Department of Veterans Affairs to the U.S. total.
Counting errors have also been made in estimating defense research and development expenditure. The Defense Department and many recent studies all argue that China’s official military budget does not include all defense-related spending, such as defense-related research and development.17 Some estimates have attempted to deal with this problem by not counting defense research and development expenditure at all. Yet one prominent 2020 study by Federico Bartels from the Heritage Foundation subtracts the research and development component from the Department of Defense budget, but it then compares the reduced U.S. defense spending number to an estimate for China that was enlarged by the addition of off-budget Chinese spending on military-related research and development.18
The core principles are simple: Like should be compared to like, and categories should not be cherry-picked to exaggerate differences. These principles are often ignored, especially by those who seek to depict Chinese defense spending as on par with or rapidly approaching U.S. levels. Any legislation Congress may adopt to assess Chinese military spending could have far-reaching influence by defining the methods of analytical tradecraft for years to come. The June 2023 draft of the China Defense Spending Transparency Act calls for including “military-civil fusion” items for China but not for the United States, excluding veterans’ benefits other than pensions (which is a large component of total U.S. defense-related spending), and requires consideration of defense-related expenditures by Chinese state-owned enterprises — without also accounting for defense-related expenditures by any element of U.S. industry.19 The provisions of this measure thus have the potential to obscure the stated “transparency” goal of the legislation’s name.
Purchasing Power Parity Adjustments: Unbalanced and Error-prone
The second modification often used to estimate China’s defense spending is to account for the relative purchasing power of China’s currency using a PPP adjustment. This is potentially useful because price levels in developing economies tend to be lower than price levels in developed economies, where higher productivity is translated into higher wages and prices.20 In a lower- or middle-income economy, the costs of goods such as food, clothing, or concrete are largely determined by (lower) local prices and wages. These items tend to be labor-intensive rather than capital- and technology-intensive. Since a bowl of rice, a t-shirt, or a cubic yard of concrete are essentially the same products in all economies, the purchasing power for these goods (and the level of domestic economic welfare) in a lower-income economy is often higher than that implied by market exchange rates. PPP exchange rates thus attempt to convert prices for equivalent goods across economies into a common currency unit that eliminates the effect of different economic development and price levels.
However, PPP estimates also have limitations. PPP exchange rate estimates were not developed to measure internationally competitive and tradable goods, services, and technologies, or goods largely comprised of components and technologies that are internationally traded, such as high-end semiconductors and aircraft engines.21 The cost of these items is largely determined by international prices, both because international trade involves international financial flows (settled at market exchange rates) and because internationally traded goods are exposed to cost input and price competition across multiple markets.22 Market exchange rates generally better reflect purchasing power for these goods.
The most commonly used PPP exchange rates are based on field surveys done by the International Comparison Program and published by the World Bank. The most recent detailed estimate for China was published in 2020 and is based on data collected in 2017.23 In that report, the broadest measure for a PPP exchange rate for gross domestic product (GDP; i.e., all sectors of the economy) was 4.2 yuan to one U.S. dollar.24 The market exchange rate that year averaged approximately 6.8 yuan per dollar. So by the very broad measure of PPP-adjusted GDP, the purchasing power of the yuan was 1.6 times greater than what was implied by the MER. The World Bank also produces sector-level PPP exchange rates that estimate price levels for food, transportation, housing, consumption, total investment in capital goods (i.e., capital formation), and various other sectors.25
Despite the differences in PPP data across different sectors of the economy, some estimates of Chinese defense spending use a single economy-wide PPP exchange rate, which inflates China’s entire defense budget.
Although PPP arguably should be applied to defense spending, doing so requires careful consideration of how the PPP adjustments relate to real-world inputs and outputs. Any PPP exchange rate that is used should correspond — within reasonable bounds — to the spending category under consideration. The World Bank’s methodological guidelines for the use of PPP methods should be followed to ensure that the products under consideration are comparable.26 The recent high-end estimates of Chinese defense spending fail in this regard.27
Despite the differences in PPP data across different sectors of the economy, some estimates of Chinese defense spending use a single economy-wide PPP exchange rate, which inflates China’s entire defense budget.28 This is misleading because any defense budget includes a mix of domestic labor-intensive components on one hand, and internationally traded or capital-intensive components on the other. If PPP exchange rates are used, these different components of defense spending should be estimated using the appropriate PPP exchange rate.
Notably, in the case of developing economies, PPPs can also reflect lower relative purchasing power than market exchange rates for capital- and technology-intensive goods. This can occur where there are trade barriers for such goods, or where the cost of barriers to entry or learning curves must be overcome. The most recent World Bank PPP data show that China’s PPP exchange rate for machinery and equipment is 9.3 yuan per dollar (table 1).29 Unlike the overall GDP PPP of 4.2 yuan per dollar, this implies China’s purchasing power for some capital-intensive goods is less than the market exchange rate indicates. Compared to what the United States needs to spend on the same unit of similar equipment, in some equipment sectors China needs to spend more than the market exchange rate suggests. This has been a consistent result in all World Bank PPP price surveys of China since their inception in 2005 (table 2).
Table 1. China Market Exchange Rates and Purchasing Power Parity Exchange Rates
| Units: Chinese yuan per 1 U.S. dollar | 2005 | 2011 | 2017 |
|---|---|---|---|
| Market Exchange Rate | 8.2 | 6.5 | 6.8 |
| GDP Purchasing Power Parity | 3.4 | 3.5 | 4.2 |
| Equipment Purchasing Power Parity | 8.8 | 7.7 | 9.3 |
Source: World Bank International Comparison Program, 2005, 2011, and 2017 surveys, https://www.worldbank.org/en/programs/icp/data#1
Table 2. China’s Indicative “Purchasing Power” Relative to the Market Exchange Rate
| Units: Market Exchange Rate/Purchasing Power Parity | 2005 | 2011 | 2017 |
|---|---|---|---|
| GDP Purchasing Power Parity | 2.4 | 1.9 | 1.6 |
| Equipment Purchasing Power Parity | 0.9 | 0.8 | 0.7 |
Source: Calculated from Table 1.
The notion that China has a cost disadvantage in some forms of equipment and technology may seem at odds with China’s ability to make cheaper manufactured products and export them across the globe. China is a global manufacturing superpower. How is it possible that China’s purchasing power for some technology and equipment could be less than the purchasing power implied by the market exchange rate? Much of China’s manufacturing prowess is based on imported equipment and technologies. Many of China’s manufactured exports, such as consumer electronics, are assembled from imported components that often comprise the bulk of the product’s technological capability and total value.30 Most advanced Chinese manufactured goods (such as cars) are assembled in factories using imported machine tools and robots.31 China also depends on imported technology (e.g., advanced semiconductors) in new technology fields with military applications, such as AI.32
In some technology and equipment subsectors, China and other developing economies face constraints that raise the overall cost of such equipment. These include but are not limited to tariffs, non-tariff trade restrictions such as sanctions, taxes, the cost of delivery and other transaction costs (such as legal, contractual, and negotiation costs), and the cost of installation.33 Other additional costs may include technology indigenization or assimilation, which refers to the cost of learning how to use and maintain a technology or piece of equipment as well as the cost of integrating it into an overall production process, as distinguished from the simple purchase price of the equipment.34
The effects of learning curves and barriers to trade are often seen with respect to advanced manufacturing equipment but may also apply to sub-component units that make up a larger system such as a vehicle or aircraft. There are other reasons why the cost of an imported technology or piece of equipment could be higher in a developing economy than in a developed economy. For example, the market for a specific technology or equipment (e.g., the newest smartphone, the flashiest sportscar, or business jet aircraft) may be smaller or less competitive in a developing economy than the market in an advanced economy, raising unit costs.
Finally, in certain higher technology sectors such as aerospace, submarine vehicles and propulsion, and AI, the total cost for a developing economy to develop and procure domestic equipment or technology with performance equivalent to existing global alternatives may be higher than the cost of competing products from advanced economies. The additional costs may include research and development, the cost of failed or abandoned programs, the cost of training and retaining skilled or specialized workers and managers for that sector, and the cost of learning to produce a new good and setting up a new manufacturing supply chain. The high cost of developing a domestic alternative (and at least initially, the lack of export markets) may limit the total number of units that can be purchased, which in turn may contribute to high per-unit costs.
Inflating the Least Lethal Capabilities the Most
The highest estimates for China’s defense spending rely on PPP exchange rates, but these estimates have four problems. First, some estimates focus on wage differentials rather than on the equipment or technology that underpins modern military power. Moreover, besides a focus on labor rather than technology, the wage values employed exaggerate China’s unit labor cost advantage in the defense sector.
Peter Robertson’s 2019 study drew media and policy attention to China’s lower relative wages as a source of defense spending advantage relative to the United States and other advanced economies.35 After this study was published, references by U.S. military leaders, politicians, and the sponsors of the 2023 China Defense Spending Transparency Act in the Senate to China’s low wages as a factor in higher estimates of Chinese defense spending also increased.36 In his 2019 study, Robertson calculated a bespoke PPP for China’s defense sector wages. He argued China’s defense labor exchange rate was 1.2 yuan per dollar, or more than five times lower than the market exchange rate and almost four times lower than the general PPP exchange rate for China’s GDP of 4.2.37 A lower value for the exchange rate will imply a larger equivalent amount spent when converting to U.S. dollars. The Robertson estimate is based on a complex methodology for deriving a defense labor exchange rate, constructed from proxies for wages as a share of GDP and further adjustments for human capital — all without reference to labor productivity.
A growing share of China’s military budget comprises spending on such advanced equipment, but existing estimates of China’s defense spending fail to use a sector-specific PPP for technology and equipment, leading to an inaccurate assessment of total defense spending.
In place of such composite estimates, choosing actual Chinese and U.S. military wage data would have produced a more accurate result. In both militaries service income is affected by rank, time in grade, cost of living at duty station, and other factors. A U.S. Army sergeant with two years or less of experience in that rank earns about $2,730 per month, while the equivalent rank in the Chinese military, a zhongshi, earns about 7,300 yuan per month (or about $1,014 at 2024 MER).38 This wage data suggests a military labor PPP exchange rate of 2.7 yuan per dollar, indicating that China’s advantage in military labor costs is less than half that implied by Robertson’s 1.2 yuan per dollar figure.
Second, some studies that overestimate Chinese military spending apply PPP adjustments inconsistently. They use sector-specific PPP estimates for one type of defense spending, such as personnel costs, while applying the general GDP PPP exchange rate (which also includes wages and consumption goods) to the rest of the military budget, including to the acquisition of advanced weapons platforms and their component systems. A growing share of China’s military budget comprises spending on such advanced equipment, but existing estimates of China’s defense spending fail to use a sector-specific PPP for technology and equipment, leading to an inaccurate assessment of total defense spending.
A third issue in applying PPP exchange rates to defense spending relates to the definition and purpose of PPPs noted earlier. Properly applied, PPP exchange rates reveal price differences for the same or similar goods. A t-shirt in China may be the same as a t-shirt in America, but a fighter plane, a submarine, or a military servicemember may not be the same or even similar when capabilities, personnel training, operational context, and supporting systems are considered. China may have relatively lower wages for enlisted conscripts, but the effectiveness of those two-year soldiers relative to professional American enlisted personnel (who often serve for much longer periods) is questionable.39 The same applies at the level of noncommissioned officers, where U.S. noncommissioned officers perform many tasks performed by commissioned officers in China.
Another way of viewing the same or similar goods problem for PPPs applied to military personnel would be to consider units of GDP produced per worker in the overall economy. This shows that American workers are 7.5 times more productive than Chinese workers (at MER), or 4.7 times more productive after inflating China’s GDP for purchasing power.40 American military forces differ from Chinese forces in terms of actual experience, the extent and realism of professional training, and the longer-term commitment of professionals to their military career. The higher U.S. military wages, personnel costs, and veterans’ benefits that attract and retain these forces likely reflect an American military advantage, not a disadvantage.41
Finally, the estimates that suggest China is rapidly approaching American military spending levels and implied military effectiveness turn logic on its head. They argue that China’s lower wage and price levels — due to its lower level of economic and technological development — are a military advantage rather than a disadvantage. However, any hypothetical future conflict between China and the United States is more likely to be determined by the relative strength of advanced air, sea, and space capabilities on each side, not the relative number of low-wage infantry soldiers on each side. Chinese military systems meant to compete with American capabilities, such as fighter aircraft, submarines, or precision-guided weapons, will be based at least in part on globally sourced technology that is costly to acquire, or on costly indigenous development and substitution for globally sourced technologies — costs that low wages cannot offset.
None of these relative cost bases, whether MER or PPP, are static. In China’s case, the PPP data show that domestic prices have tended toward convergence with global prices as China develops and further integrates with the global economy. This trend is likely to continue, both for areas where China currently has a cost advantage (such as labor), and for areas where it currently has a disadvantage (such as equipment and technology). For this reason — and because we cannot assume that domestic Chinese weapons systems or personnel are equivalent to their U.S. counterparts — there is a strong argument for using the market exchange rate to convert local currency defense budgets. Using MER is easier and less susceptible to accidental or willful distortion. But if specialized sector-level PPP exchange rates are used for factors such as labor (the approach taken in the highest estimates for China’s defense spending), then specialized sector-level PPPs should be used for equipment and technology. This is the approach we take in the next section.
Chinese and American Defense Spending: Getting It Right
In this section, we outline a set of principles for comparing defense spending more accurately.42 We begin by establishing a parallel and consistent set of budget items to compare. In the Chinese case, we include some aspects of off-budget spending (i.e., defense-related expenses not included in China’s official defense budget). Some of these are typically published in Chinese government sources but are not included in the official defense budget. These include spending on paramilitary domestic security forces and military construction. We include the published budget of China’s Ministry of Veterans Affairs as part of military pensions and financial support to families.43 We also include off-budget spending that must be estimated.44 We account for three types of off-budget spending that are not published in official Chinese government sources. First, we include China’s additional payments to military families (such as health benefits and welfare payments) and military pensions. Second, we estimate Chinese research and development spending that is relevant to defense applications but not included in the official military budget. Finally, we estimate the Chinese Coast Guard budget. We use data published by China’s Ministry of Finance for our estimate, and supplement this with benchmarking. Our benchmarking includes historical spending, growth trends, the long-term average ratio of certain off-budget spending to the official defense budget, and comparison to published sources, including data published by the Stockholm International Peace Research Institute.
An essential part of our method is to include similar U.S. spending categories for comparison: the Department of Defense base budget (including defense research and development), the Veterans Administration budget, and the Department of Homeland Security budget (at least those elements that have a role in national defense such as the Coast Guard). For this assessment, we have excluded the fissile material portion of both sides’ nuclear weapons programs. On the U.S. side, material for and maintenance of warheads are largely funded through the Department of Energy.45 The United States has far more nuclear warheads than does China — roughly 5,550 warheads (including 1,750 retired ones) versus a current estimate of about 500 for China (growing to about 1,000 by 2030).46 Therefore, our exclusion of nuclear weapons programs is conservative in the sense that it eliminates a category where the United States likely spends more than China. We also exclude intelligence programs and space programs that fall outside military purview and budgets.47 Budgets in these areas are classified, making them difficult to estimate, and resulting capabilities have a number of important non-military functions in addition to their military ones.
We estimate that China’s 2024 defense spending, including off-budget items and appropriately adjusted for PPP, is equivalent to $471 billion.
Second, we apply balanced and more accurate PPP exchange rate conversions to each relevant subcategory of Chinese defense spending: personnel, operations and training, and equipment. For personnel costs, we create a “personnel PPP” that includes both wages and consumables such as clothing and food, which determines non-salary compensation. For the personnel PPP, we use available data on military salaries and the World Bank–published PPP for individual consumption, weighted equally, to develop a PPP exchange rate for this category. We create an “operations and training PPP” that reflects a combination of military expenses including some items, like fuel, with global prices at market exchange rates; military consumables like ammunition (at a general economy-wide PPP); and items such as maintenance and repairs, temporary shelter, and general consumables (at a consumption PPP). These three components are weighted equally in the operations and training PPP. Finally, we create a “military equipment PPP.” Military equipment and weapons systems engage the most advanced sectors of the economy. The most capital-intensive systems comprise the largest part of the equipment budget. We use the World Bank’s published equipment PPP exchange rate to estimate the relative purchasing power for the equipment portion of China’s official defense budget.48 All calculations are available in the online appendix.49
Table 3. China’s Estimated 2024 Defense Spending
(Nuclear weapons, space, and intelligence programs not included)
| Billion yuan | Billion U.S. dollars, Market Exchange Rate | Billion U.S. dollars, Purchasing Power Parity-adjusted | |
|---|---|---|---|
| Official defense budget | 1,670.0 | 232.0 | 321.0 |
| People’s Armed Police | 183.7 | 25.5 | 30.9 |
| Coast Guard | 19.3 | 2.7 | 3.2 |
| Defense construction | 5.2 | 0.7 | 2.2 |
| Military pensions and family support | 267.2 | 37.1 | 79.2 |
| Additional defense R&D | 250.5 | 34.8 | 34.8 |
| Total | 2,396 | 333 | 471 |
We estimate that China’s 2024 defense spending, including off-budget items and appropriately adjusted for PPP, is equivalent to $471 billion (table 3). This is higher than the spending level implied by recent estimates from careful and credible sources such as the Stockholm International Peace Research Institute and the International Institute for Strategic Studies, but it is far below estimates claiming that China’s defense spending is nearly $700 billion — or 85 percent of the 2024 U.S. Department of Defense budget. Moreover, when similar categories of spending are included, U.S. defense-related expenditures total between $1,229 billion and $1,319 billion (table 4).50 Based on these figures, China’s defense spending is 36 to 38 percent as large as that of the United States when similar spending categories are included for both sides.
Table 4. United States 2024 Comparable Defense Spending51
(Nuclear weapons, space, and intelligence programs not included)
| Billion U.S. dollars | |
|---|---|
| Total Department of Defense | 846 |
| Of which: Department of Defense (discretionary) | 825 |
| Of which: Department of Defense (mandatory) | 21 |
| Department of Veterans Affairs | 369 |
| Department of Homeland Security | 104 |
| Of which: Coast Guard | 14 |
| Total Department of Defense, Veterans Affairs, Coast Guard only | 1,229 |
| Total Department of Defense, Veterans Affairs, Department of Homeland Security | 1,319 |
Notably, the U.S. Department of Defense budget is somewhat larger than what is indicated in most public policy and media discourse. For example, most coverage of the U.S. defense budget focuses only on the discretionary budget proposed by the administration subject to Congressional approval. In March 2024, this budget of $825 billion was approved by Congress and signed by the president.52 However, the Defense Department also has a material budget composed of mandatory spending items that are required by law (this is largely retirement pay). For fiscal year 2024, this mandatory budget is estimated to be just over $21 billion.53
Off-budget items not included in China’s official 2024 defense budget account for about 30 percent of China’s total defense spending. Similar off-budget items accounted for 31 percent to 36 percent of total U.S. defense spending in the same year, depending on what portions of the Department of Homeland Security budget are included.
Our assessment contains assumptions, simplifications, and uncertainties. For clarity and brevity, we show only a single estimate here. However, our method could be used to produce a high-low range for total Chinese defense spending, based on reasonable variations on assumptions including some uncertainty about Chinese data. There are different ways that one might compare American and Chinese defense spending. Including or excluding different categories of spending might provide a better sense of how spending compares in different contexts.54 However, no reasonable method of estimating overall expenditure would indicate that China is on the cusp of closing the gap in defense spending with the United States.
Conclusion
Recent estimates that claim that China’s defense spending will soon overtake that of the United States commit two methodological errors. First, they add off-budget items to China’s official defense budget without adding such categories to the American side of the ledger. Second, they apply inappropriate and exaggerated PPP exchange rates to inflate the value of spending on China’s side of the ledger. The appropriate PPP adjustments we have outlined help to formulate a more accurate “military PPP,” showing that China’s defense purchasing power is currently about 1.4 times greater than that implied by market exchange rates. This is well below the widely cited estimate of more than double the purchasing power of market exchange rates.55
Estimates that rely on a PPP adjustment are likely to become less relevant over time. As China continues to develop and integrate with the world economy, its overall price levels have been converging with global prices. This is indicated by the declining difference between the market exchange rate and the overall PPP exchange rate for GDP (tables 1 and 2).56 China’s ambition to create a more technologically advanced “world-class force” on par with the U.S. military will lead it toward greater emphasis on procuring capital- and technology-intensive equipment and away from the spending areas most advantaged by PPP differences, such as personnel-intensive forces.57
Washington must allocate scarce resources, and unbalanced assessments of China’s defense spending could undermine the ability of planners and policymakers to properly balance their efforts.
Observation and assessment of actual material capabilities is a complement to budget analysis. Simply counting weapons and platforms provides a check on some of the more alarming recent estimates of Chinese defense spending. China has fewer fourth- and fifth-generation aircraft, fewer nuclear submarines, fewer aircraft carriers, and lower naval tonnage (despite rapid construction of new ships) than would be expected if it were spending nearly $700 billion per year on defense.58 China continues to import key equipment and technologies such as aircraft engines, submarine and naval ship propulsion systems, radars, and advanced microprocessors.59 It also exports fewer military systems — and especially fewer high-tech components and subcomponents — than would be expected if it could produce military goods at the same quality but lower prices than others.60 This material gap provides evidence that is inconsistent with the claim that China is already spending nearly as much as the United States is on defense.
Providing a more accurate assessment of Chinese defense spending does not imply that the United States can relax or dismiss the threat China now poses to American power and influence. Budgets constitute inputs, rather than outputs. The capabilities they finance should be considered in conjunction with the missions, timelines, and geography in which those capabilities are applied. Indeed, as others have observed in the political context, China can pose problems without catching up.61
Accurate defense spending assessments are important for many reasons. First, they are essential for more effective American security preparedness and responses. Claims that China spends nearly as much on defense as the United States distract from the equally important debate about how the United States allocates resources to most effectively maintain or even improve U.S. military advantages relative to China. Two examples have been highlighted by the war in Ukraine: spending on big-ticket items such as major aircraft and naval ship programs — sometimes justified on the basis of increasing Chinese capabilities62 — should be reviewed in the context of the effectiveness of much cheaper uncrewed air and sea vehicles such as Mavics and Magura V5s, and the requirement for sufficient investment in munitions and munitions manufacturing capability, such as air defense missiles and 155mm artillery shells.
In a related example, there is currently a policy debate about whether the United States should retire older combat aircraft and recapitalize its aging airpower inventory.63 Central to this debate are estimates of current Chinese and U.S. capabilities, as well as expected spending and procurement trends. The next few years might be the moment of maximum volatility, as one recent commentary suggests.64 Those who argue against retiring older aircraft assert that the threat is imminent and that the magnitude of the current threat means that the United States cannot afford to do without the service of even older aircraft. Those who look to rejuvenate the force, on the other hand, argue that the U.S. military can and should accept some modest risk now in order to maximize capability in the longer term, when the challenges may become larger. Maintaining old aircraft in the inventory burdens the force with costs and inefficiencies that retard its capabilities in the longer term. Correctly understanding defense spending economics should inform this and other decisions.
Second, the United States faces multiple global security challenges. Foremost among these is the ongoing war in Ukraine caused by Russia’s full-scale invasion in February 2022. Europe remains a core American security and economic interest. Washington must allocate scarce resources, and unbalanced assessments of China’s defense spending could undermine the ability of planners and policymakers to properly balance their efforts. At the same time, while the United States must deter and if necessary meet any Chinese military challenge, Washington still has an interest in mitigating security competition and security dilemmas in the Indo-Pacific region — at a minimum, to help maintain existing alliances and partnerships. Overestimating China’s military spending could encourage American overreactions that might undermine its own interests in the Indo-Pacific. Alternatively, overestimating China’s military spending might encourage an opposite and equally unwelcome American response — an impulse to abandon interests in Asia that it might otherwise defend if the balance of power appeared less dire.
Finally, accurate assessments are also important for deterrence. Both sides should have an accurate assessment of the balance of material power — inaccurate assessments could lead either side to take unnecessary risks or to make fateful misjudgments. In other words, it is foolish to encourage hotheads in China by telling them that China’s defense spending is nearly equivalent to U.S. spending. It is not. Large gaps in spending, power, and capability remain, and it is better for policymakers in both the United States and China to know it.
M. Taylor Fravel is the Arthur and Ruth Sloan Professor of Political Science and Director of the Security Studies Program at the Massachusetts Institute of Technology (MIT).
George J. Gilboy is an executive at a global energy firm and a research affiliate at the MIT Center for International Studies.
Eric Heginbotham is a principal research scientist at the MIT Center for International Studies and is co-director of the Wargaming Lab at the MIT Security Studies Program.
Acknowledgements: The authors thank two anonymous reviewers whose comments and suggestions helped us improve this essay. We also thank our editor Rick Landgraf, who provided robust and supportive challenges and guidance. Steve Kosiak helped us navigate the arcana of U.S. federal budget sources and data.
*Addendum: Shortly after the Texas National Security Review published this essay, the World Bank published new PPP data collected in 2021 (https://www.worldbank.org/en/programs/icp/data). Using the new PPP data and our method would result in estimated 2024 Chinese defense spending equivalent to $474 billion, slightly more than the original $471 billion estimate in this essay. Notably, compared to the older data set, the new PPP data indicate a modest erosion of China’s relative purchasing power for some inputs necessary for a higher-tech military force such machinery, equipment, and education. The online appendix to this essay will be updated with the new data.
Appendix: See the online appendix at https://ssp.mit.edu/publications/2024/china-defense-spending-estimate-method.
Image: Dennis Sylvester Hurd