The Colossal (Adjusted For PPP) Scale Of China's Military Buildup

If you’re an avid China watcher you probably already know that the military balance of power in Asia has shifted significantly over the last two decades. However, if you’re just now starting to take a closer look at the region given the heightened US-China tensions with the ongoing trade war, then you may not fully grasp the scale of China’s recent military buildup. Based on current trends, respected analysts predict that China could achieve military parity with the United States in less than fifteen years.

We must be wary of extrapolating too far into the future from trends which may not continue. There are a host of challenges currently facing Beijing. China has an approaching demographic cliff, an asset bubble worse than Japan’s in the 1990s, and worries about capital flight if the yuan continues to devalue.

COMPARING US AND CHINA’S MILITARY SPENDING

Regardless, China’s astounding economic growth over the last few decades has already resulted in a dramatic shift in military power on the ground. Although The US military still surpasses China’s, in many realistic conflict scenarios China already now holds the advantage.

You may be surprised that China is closing the gap with the US militarily if you have heard the often repeated statistic that the US spends more on defense than “the next eight nations combined.” While this statistic is technically true, It is grossly misleading. A classic example of lies, damn lies, and statistics. While the US still outspends China by a wide margin this gap is far less significant than it first appears.

When comparing the military expenditures of different nations there are key adjustments that must be made for the comparison to be meaningful.

Firstly, there is the issue of purchasing power parity. In today’s world of free-floating currencies, it is common for countries to manipulate the currency exchanges to boost their own exports (For the mechanics of how this works see: Why Did China Just Devalue the Yuan). What this means is that the prices of currencies themselves can be manipulated. Currencies can be undervalued or overvalued relative to each other.

One might logically suppose that when six Turkish Lira can be exchanged for one American dollar, the actual purchasing power of one dollar would be roughly the same as six Turkish Lira. In other words, if a cheeseburger cost $5 in the United States, when you exchange currency you may get ¥500 yen, but a cheeseburger in Japan should then cost roughly ¥500 yen. But this is not the case. Many nations manipulate the currency exchanges to undervalue the purchasing power parity (PPP) of their own currencies. Making everything priced in their currency cheaper for buyers from foreign countries.

Because of this, a direct comparison of military spending in dollar terms without adjusting for the purchasing power parity (PPP) drastically underestimates other nations’ military expenditures - especially when produced domestically. Looking at a comparison of US and China’s military spending adjusted for PPP makes a dramatic difference.

Additionally, While China has been focusing on building a modern navy and hypersonic missile technology, the United States has spent a great deal of its military budget over the last few decades fighting hugely expensive wars in Iraq and Afghanistan. If you take the direct costs of the conflicts out of the U.S. Defense budget, the situation becomes even more realistic, and it becomes clear how China has been able to catch up to the U.S. militarily.

However, even adjusting for PPP and the Mid-East wars does not fully capture how much the US spends on personal costs and benefits compared to the Chinese (almost 40% of US defense spending goes directly to personal salaries and benefits). That’s why when Bloomberg looked at this same issue in “China Outspends the U.S. on Defense? Here’s the Math”, they went even further in their analysis of the two countries military spending. They attempted to take into account the substantially higher salary costs of the all-volunteer US military and concluded that China likely already outspends the US on defense when the pay and benefits are taken into account.

Bonus Graph:

Current Chinese Military Capabilities

The massive increase in Chinese military spending, as we have seen, is already near parity with US spending in realistic terms (and arguably surpasses if you account for personal costs). Naturally, the massive increase in military spending has significantly improved Chinese military capabilities. Again, even more than simply looking at even the adjusted numbers would suggest, as Chinese resources are concentrated in Asia while the United States has resources dispersed around the globe.

According to the 2018 annual report of congressional commission - U.S.-China Economic and Security Review, the decades of modernization and buildup of the PLA has:

...already resulted in a force capable of contesting U.S. operations in the region, presenting challenges to the U.S. military’s longstanding assumption of enjoying ground, air, maritime, and information dominance in a conflict in the post-Cold War era.

In war games simulating great-power conflicts held by RAND Corporation, China now consistently comes out on top. In a report on the wargames, Breaking Defense quotes RAND analyst David Ochmanek who says that “In our games, when we fight Russia and China,” “blue [the color traditionally representing the US in the games] gets its ass handed to it.”

This is because the massive increase in military spending has transformed China’s military - particularly their navy. According to a recent Reuters special report on the modernization of the Chinese navy:

In just over two decades, the People’s Liberation Army (PLA), the Chinese military, has mustered one of the mightiest navies in the world. This increased Chinese firepower at sea - complemented by a missile force that in some areas now outclasses America’s - has changed the game in the Pacific. The expanding naval force is central to President Xi Jinping’s bold bid to make China the preeminent military power in the region. In raw numbers, the PLA navy now has the world’s biggest fleet. It is also growing faster than any other major navy.

While the U.S. navy still surpasses China in quality and tonnage if not in number of ships, this gap is quickly closing. Moreover, some have argued that the PLA’s missile force could neutralize much of the US’s current advantages. Reuters reports that (A result of the INF Missile treaty tying the US’s hands in Asia) the Chinese have an edge over the United States in missile capability:

With the Pentagon distracted by almost two decades of costly war in the Middle East and Afghanistan, the Chinese military, the People’s Liberation Army (PLA), has exploited a period of sustained budget increases and rapid technical improvement to build and deploy an arsenal of advanced missiles.

Many of these missiles are specifically designed to attack the aircraft carriers and bases that form the backbone of U.S. military dominance in the region and which for decades have protected allies including Japan, South Korea and Taiwan.

Even China’s nuclear capabilities have made significant improvements. According to analysis from the RAND corporation:

Nuclear exchange modeling suggests that, as late as 2003, only a handful of Chinese systems might have survived a U.S. first strike—and even this outcome would have depended largely on China deploying its single, unreliable Xia class SSBN (ballistic missile submarine) prior to an attack. In the 2010 and 2017 cases, more Chinese warheads survive, and no foreign leader could contemplate a disarming first-strike against China with any degree of confidence.

Tactical vs Strategic Victory

Despite China’s massive military buildup, China has natural geographic disadvantages. China is boxed in - surrounded by historic enemies, many of whom are US allies. Moreover, even if China was to achieve military success - in the strategic sense it would likely be a pyrrhic victory. China is dependent on the global economy in a way the US is not. Trade makes up almost 40% of China’s GDP - much of it with the US and its allies. China is also the world’s largest oil importer. China might be close to being able to achieve a military victory, but it has quite a bit to go before the country could best US and achieve a strategic success.

Key Takeaways

• China’s spending on their military has probably already reached parity with the US in realistic terms. Particularly Within Asia. Look for the US military advantage over China to continue to shrink.

• China’s military power in the region is such that within the next 5-10 years Beijing may feel confident it could win in a regional conflict with the US. Already, some analysts believe China would have an edge in a conflict.

• All of this should be understood in the context of China’s larger problems. While its military buildup makes a tactical victory possible, in the larger strategic sense China faces an unprecedented demographic cliff, the country is dependent on trade with the rest of the world, and geography has left the country boxed in.

The real struggle between China and the United States is likely to continue to remain in the economic realm - making it important to understand Why Did China Just Devalue The Yuan?

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About the Author Joshua Konstantinos Founder and Global Macro Strategist at Cassandra Capital LLC and author of Sleeping on A Volcano: The Worldwide Demographic Upheaval and the Economic and Geopolitical Implications, Joshua has been obsessively following global trends and collecting data for over a decade. His analysis takes into account not only the larger view of the rapidly changing global economy but also the longer demographic and geopolitical trends.