Contents

Preface
I. The Security Situation
II. National Defense Policy
III. Modernization of the People's Liberation Army
IV. Deployment of the Armed Forces
V. National Defense Mobilization and Reserve Force Building
VI. Military Legal System
VII. Science, Technology and Industry for National Defense
VIII. Defense Expenditure
IX. Military Confidence-Building
X. Arms Control and Disarmament

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China adheres to the principle of coordinated development of national defense and economy. In line with the demands of national defense and economic development, China decides on the size of defense expenditure in an appropriate way, and manages and uses its defense funds in accordance with the law.

With the development of national economy and society, the increase of China's defense expenditure has been kept at a reasonable and appropriate level. China's GDP was RMB31,404.5 billion in 2008 and RMB34,090.3 billion in 2009. State financial expenditure was RMB6,259.266 billion in 2008 and RMB7,629.993 billion in 2009, up 25.7 percent and 21.9 percent respectively over the previous year. China's defense expenditure was RMB417.876 billion in 2008 and RMB495.11 billion in 2009, up 17.5 percent and 18.5 percent respectively over the previous year. In recent years, the share of China's annual defense expenditure in its GDP has remained relatively steady, while that in overall state financial expenditure has been moderately decreased.

China's defense expenditure mainly comprises expenses for personnel, training and maintenance, and equipment, with each accounting for roughly one third of the total. Personnel expenses mainly cover salaries, allowances, housing, insurance, food, bedding and clothing for officers, non-ranking officers, enlisted men and contracted civilians. Training and maintenance expenses mainly cover troop training, institutional education, construction and maintenance of installations and facilities, and other expenses on routine consumables. Equipment expenses mainly cover R&D, experimentation, procurement, maintenance, transportation and storage of weaponry and equipment. Defense expenditure covers costs to support the active forces, reserve forces, and militia. It also covers part of the costs to support retired servicemen, servicemen's spouses, and education of servicemen's children, as well as national and local economic development and other social expenses.

(Table 1: China's Defense Expenditure in 2009)

In the past two years, the increase in China's defense expenditure has primarily been used for the following purposes: (1) Improving support conditions for the troops: Along with the economic and social development and the improvement of people's living standards, the PLA has adjusted servicemen's salaries and allowances, increased funding for education and training, water and electricity supplies and heating, upgraded logistics support for grass-roots units in a comprehensive and coordinated way, and improved the on-duty, training and living conditions of border and coastal defense forces and units in remote areas and harsh environments. (2) Accomplishing diversified military tasks: China has increased investment in improving MOOTW capabilities, in supporting earthquake rescue and disaster relief operations, in escort operations in the Gulf of Aden and waters off Somalia, in flood control and emergency rescue operations, and in international rescue operations. (3) Pushing forward the Revolution in Military Affairs (RMA) with Chinese characteristics. In view of the upward trend in purchasing prices and maintenance costs, China has moderately increased the funds for high-tech weaponry and equipment and their supporting facilities.

In 2010, confronted by the residual impact of the global financial crisis and other uncertainties, the tension between revenue and expenditure in China's finances persists. Giving priority to socially beneficial spending in agriculture, rural areas and farmers, as well as in education, science and technology, health, medical care and social security, China has increased its defense expenditure moderately as needed. China's defense budget for 2010 is RMB532.115 billion, up 7.5 percent over 2009. The growth rate of defense expenditure has decreased.

(Chart 1: Share of China's Annual Defense Expenditure in the State Financial Expenditure)

China practices a strict system of financial supervision of defense funds. The annual defense budget is incorporated into the annual financial budget draft of the central government, and then submitted to the NPC for review and approval. The auditing offices of the state and the PLA conduct audit and supervision of the defense budget and its enforcement. In recent years, the Chinese government has strengthened systematic and meticulous management of defense expenditure, reformed and innovated financial management systems, pressed forward with reforms in asset management, reinforced budget implementation, supervision and management, and organized auditing of economic responsibilities of military leaders and special auditing of the use of funds and materials. In this way, transparency and standardization of defense expenditure are enhanced, and the proper and effective use of defense funds is ensured.