Forbes: China Might not be Able to Afford its Military and why it Ought to Concern us

Premier Li Keqiang this month announced that China’s military budget will increase 12.2% to 808.2 billion yuan ($131.6 billion) this year.

The dominant narrative is that, as large as it is, the spending plan is roughly in line with the expansion of the Chinese economy. For instance, Paul Burton of IHS IHS -0.35% Defence believes Beijing’s budgets are “broadly in keeping with recent year-on-year growth rates, tracking slightly above annual gross domestic product growth.” Samuel Perlo-Freeman of the Stockholm International Peace Research Institute agrees. Apparently using some variant of Beijing’s 3.5% inflation target for this year, he computes the after-inflation increase in military spending for 2014 as 8.4%, not too far from the official growth target of 7.5%.

This narrative is incorrect for two important reasons. First, it looks like there will be little or no inflation in China this year, so adjusting the nominal 12.2% figure to arrive at the real number is inappropriate. True, consumer prices rose 2.5% in January and 2.0% in February, but the producer price index fell during the period, down 1.6% in the first month of the year and 2.0% in the second. Because manufacturing is far more important to the economy than consumer spending, analysts are now worried that China is entering a deflationary period if it has not done so already.

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