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This electronic representation of RAND intellectual property is provided for non- commercial use only. Permission is required from RAND to reproduce, or reuse in another form, any of our research documents. This product is part of the RAND Corporation monograph series. RAND monographs present major research findings that address the challenges facing the public and private sectors. All RAND mono- graphs undergo rigorous peer review to ensure high standards for research quality and objectivity. Modernizing China’s Military Opportunities and Constraints Keith Crane • Roger Cliff • Evan Medeiros James Mulvenon • William Overholt Prepared for the United States Air Force Approved for public release; distribution unlimited The research reported here was sponsored by the United States Air Force under Contract F49642-01-C-0003. Further information may be obtained from the Strategic Planning Division, Hq. USAF. Library of Congress Cataloging-in-Publication Data Modernizing China’s military : opportunities and constraints / Keith Crane ... [et al.]. p. cm. “MG-260.” Includes bibliographical references. ISBN 0-8330-3698-X (pbk. : alk. paper) 1. China—Armed Forces—Reorganization. 2. China—Military policy. I. Crane, Keith, 1953– UA835.M63 2005 355.3'0951—dc22 2004030176 The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. R® is a registered trademark. Cover design by Stephen Bloodsworth © Copyright 2005 RAND Corporation All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from RAND. Published 2005 by the RAND Corporation 1776 Main Street, P.O. Box 2138, Santa Monica, CA 90407-2138 1200 South Hayes Street, Arlington, VA 22202-5050 201 North Craig Street, Suite 202, Pittsburgh, PA 15213-1516 RAND URL: http://www.rand.org/ To order RAND documents or to obtain additional information, contact Distribution Services: Telephone: (310) 451-7002; Fax: (310) 451-6915; Email: [email protected] Preface This report is designed to help the U.S. Air Force assess the resources the government of the People’s Republic of China is likely to spend on its military over the next two decades. The study projects future growth in government expenditures as a whole and the military in particular, evaluates the current and likely future capabilities of China’s defense industries, and compares likely future expenditure levels with recent expenditures by the United States and the U.S. Air Force. The research reported here was sponsored by AF/XOX and PACAF/CC and conducted within the Strategy and Doctrine Program of RAND Project AIR FORCE. It is part of the RAND Corporation’s ongoing research on China and China’s military establishment. The study builds on previous RAND Project AIR FORCE work: • Roger Cliff, The Military Potential of China’s Commercial Technol- ogy, MR-1292-AF, 2001 • Mark Burles and Abram Shulsky, Patterns in China’s Use of Force: Evidence from History and Doctrinal Writings, MR-1160-AF, 2000 • Erica Strecker Downs, China’s Quest for Energy Security, MR-1244- AF, 2000 • Richard Sokolski, Angel Rabasa, and C. R. Neu, The Role of South- east Asia in U.S. Strategy Toward China, MR-1170-AF, 2000 • Mark Burles, Chinese Policy Toward Russia and the Central Asian Republics, MR-1045-AF, 1999 • Daniel L. Byman and Roger Cliff, China’s Arms Sales: Motivations and Implications, MR-1119-AF, 1999 iii iv Modernizing China’s Military: Opportunities and Constraints • Zalmay Khalilzad, Abram N. Shulsky, Daniel Byman, Roger Cliff, David T. Orletsky, David A. Shlapak, and Ashley J. Tellis, The United States and a Rising China: Strategic and Military Impli- cations, MR-1082-AF, 1999 • James C. Mulvenon and R. H. Yang (eds.), The People’s Liberation Army in the Information Age, CF-145-CAPP/AF, 1999. RAND Project AIR FORCE RAND Project AIR FORCE (PAF), a division of the RAND Corpo- ration, is the U.S. Air Force’s federally funded research and develop- ment center for studies and analyses. PAF provides the Air Force with independent analyses of policy alternatives affecting the development, employment, combat readiness, and support of current and future aerospace forces. Research is performed in four programs: Aerospace Force Development; Manpower, Personnel, and Training; Resource Management; and Strategy and Doctrine. Additional information about PAF is available on our web site at http://www.rand.org/paf. Contents Preface ...................................................................iii Figures ................................................................... xi Tables .................................................................. xiii Summary ................................................................ xv Acknowledgments ......................................................xxix Acronyms and Abbreviations ...........................................xxxi CHAPTER ONE Introduction ............................................................. 1 Will China Become a Serious Military Threat in the Western Pacific? ..... 1 Purpose of This Study .................................................... 4 Outline of the Book ...................................................... 5 CHAPTER TWO The Chinese Economy ................................................... 9 Introduction ............................................................. 9 The Current Size of the Chinese Economy ................................ 9 China’s Economy Compared to That of the United States .............. 9 Dollar Estimates of the Size of the Chinese Economy .................. 12 Measures of GDP and Military Spending .............................. 16 Chinese Economic Growth .............................................. 17 Overall Determinants of Chinese Economic Growth .................. 17 Sources of and Constraints on Future Economic Growth: The Rural Economy ............................................... 18 Declining Rates of Growth in Agricultural Output .................... 18 Widening Differences Between Rural and Urban Incomes ............. 20 v vi Modernizing China’s Military: Opportunities and Constraints Financial Difficulties of the Town and Village Enterprises .............. 21 The Service Sector: Current and Future Source of Employment ........ 23 Will Industry Remain the Driver of Economic Growth? ............... 24 Foreign Direct Investment: A Diminishing Driver of Growth .......... 26 Exports Will Become Less of a Factor in Growth ...................... 29 Balance-of-Payments Pressures Are Unlikely to Constrain Economic Growth ................................................. 31 Threats to Growth from the Financial System .......................... 33 The Impact of Demographic Changes on the Chinese Economy ......... 35 Urbanization and Internal Migration .................................. 35 The Aging of China ................................................... 36 Aging and the Military ................................................ 38 Future Economic Growth ............................................... 39 Biases in Chinese Statistics on Economic Growth ...................... 39 Prospects for Growth Through 2025 ..................................... 41 Key Factors Affecting Future Growth in China ........................ 41 Projections of Growth in GDP ........................................ 44 CHAPTER THREE Government Revenues and Expenditures ............................... 51 Introduction ............................................................ 51 Information About China’s Budget .................................... 52 China’s Budgetary Policy History ........................................ 53 The Pre-Reform System ............................................... 53 Reform and Taxation .................................................. 56 Tax Revenues ............................................................ 63 Division Between Central and Local Governments .................... 63 Detailed Sources of Central Government Revenues .................... 64 Local Government Revenues ............................................ 65 The Large and Vital Role of Extra-Budgetary Revenues .................. 68 Government Expenditures ............................................... 71 The Central-Local Division of Responsibilities ......................... 71 Local