The Officer November/December 2011 : Page 18

CHINA PURCHASES POWER CAPT MARSHALL A. HANSON, USNR (RET.) ROA DIRECTOR OF LEGISLATION CAPITOL HILL CONNECTION Undervalued yuan modernizes military. hen the Pentagon released its annual assessment last August of China’s military capabilities, the Stockholm International Peace Research Institute contravened that the U.S. Department of Defense (DoD) budget is more than six times that of China’s defense budget. China announced that its annual defense budget is $91.5 billion for Fiscal Year (FY) 2011, while the U.S. defense budget is reported at about $700 billion. Y et, comparing the actual value of the two countries’ defense dollars is like comparing a Washington Red Delicious Apple with a Chinese Mandarin Orange, with both smelling a little overripe. Defense numbers can prove quite mutable. While President Obama requested a defense budget of $708.2 billion for 2011, his baseline request was for $549 billion. The request also included $159.3 billion to support overseas contingency operations. Though the overall budget is higher by $16 billion than last year, the DoD Discretionary Budget Authority dropped by 17 percent. The president’s request included $8.1 billion for family services, $16.9 billion for military construction, $19.7 billion for basic allowance for housing, and $50.7 billion for the unified DoD medical budget. Another $49.6 billion is budgeted for the Reserve Component and $26.5 billion for non-DoD defense– related expenses. This is $171.5 billion with few comparisons in the Chinese budget. A better comparison to China’s budget is about $377.5 billion to maintain U.S. defense for F Y 11. Unlike the U.S. budget request, China’s defense figures shy away from specific systems and capabilities. Further, the official Chinese defense budget figure excludes nuclear arms spending, foreign weapons purchases, and defense research and development (R&D), reports the W orld Politics Review . The administration requested $80.9 billion for R&D in F Y 11, reducing the U.S. defense budget comparison to $296.6 billion. The value of the Chinese defense budget should also be adjusted for purchase power parity (PPP). PPP originated from the concept that in absence of transaction costs and elimination of official barriers to trade, identical goods will have the same price in different markets when the prices are expressed in terms of one currency. Such adjustment allows for an undervalued Chinese yuan, cheap labor, and subsidized material costs. The Central Intelligence Agency (CIA) calculates the PPP for China to be a factor of 1.72 percent. This means that China’s published $91.5 billion actually would be at least $157 billion in U.S. dollars. But the CIA PPP numbers are based on a gross domestic product average, not a military procurement index. Using 2010 prices and exchange rates, Dod estimated China’s total military-related spending to be $160 billion rather than the $77.95 billion announced by the Chinese. Using those 2010 numbers to determine a factor for 2011, China’s defense budget would rise to $187.8 billion. Shen Dingli, an international affairs analyst, said China’s 2010 military spending, at $78 billion in PPP terms, is nearly half as much as the U.S. military budget (excluding antiterrorist expenditure). estimates that when the 2011 Chinese defense budget is adjusted, it is more like $400 billion. While the United States may seem to be investing six times that of its closest peer, when numbers are adjusted it appears to be closer to a parity of two to one, if not one to one. Add in a Russian military buildup and Iranian challenges to the United States, and threats are ever present. Comparisons aside, China’s defense budget has grown at double digits over the past 10 to 20 years. It has risen 200 percent since 2001, increasing 12.7 percent between 2010 and 2011. The DoD assessment states: “Over the past decade, China’s military has benefitted from robust investment in modern hardware and technology. Many modern systems have reached maturity, and others will become operational in the next few years.” Michael Schiffer, deputy assistant secretary of defense for East Asia, recognized this at a Pentagon briefing about the report. “The pace and scope of China’s sustained military investment have allowed China to pursue capabilities that we believe are potentially destabilizing to regional military balances, increase the risk of misunderstanding and miscalculation, and may contribute to regional tensions and anxieties,” he warned. Perhaps China hopes to develop its own version of “peace through strength.” But with its territorial claims to the South China Sea and periodic threats to independent Taiwan, China risks destabilizing Asia while preparing for a possible confrontation with the United States. [ 18 THE O FFICER / N OVEMBER –D ECEMBER 2011

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