Covid-19 Impact Scenarios on China Defense Budget Forecast

11 June 2020 (Last Updated June 11th, 2020 14:18)

China is on the road to recovery after being severely affected as the origin of the COVID-19 outbreak. Despite a GDP contraction during the first quarter of 2020, the economic pressure from mitigating the effects of COVID-19 has not caused defense budget cuts this year.

Covid-19 Impact Scenarios on China Defense Budget Forecast

China is on the road to recovery after being severely affected as the origin of the COVID-19 outbreak. Despite a GDP contraction during the first quarter of 2020, the economic pressure from mitigating the effects of COVID-19 has not caused defense budget cuts this year. China officially announced defense expenditure for 2020 to be US$186.7 billion (RMB 1.268 trillion), a 6.6% increase from 2019.

The defense budget is assessed to be higher due to areas of defense spending outside the budget, such as expenditures for the paramilitaries (People’s Armed Police, People’s Militia), National Defense Scientific Research, dual-use technologies, peacekeeping, subsidies for State-owned Enterprises in the defense sector, Militia procurement and operations. China’s civil-military integration strategy through the development of the national military-industrial complex further obscures expenditure for defense-related research and production. GlobalData estimates military expenditure to be US$258.7 billion (RMB 1.757 trillion), reflected by a 1.7% share of GDP instead of the official 1.23% figure for 2020.

GlobalData outlines three defense budget scenarios for China: Pre-COVID-19, GDP Percentage Status Quo and Austerity scenarios. These scenarios are projected trends to compare defense expenditure growth before the crisis with short-term and long-term COVID-19 recovery scenarios.

Pre-COVID-19 Scenario

The optimistic scenario projects rates of GDP and defense spending growth prior to COVID-19. GlobalData forecasts a 6.15% increase in GDP in a pre-COVID-19 scenario, achieving the 6% to 6.5% GDP growth target announced at the 2019 session of the NPC.

GDP Percentage Status Quo Scenario

The status-quo scenario keeps the same percentage of GDP allocated to defense as the Pre-COVID-19 scenario but anticipates a slower GDP growth rate for FY2020, forecasted by GlobalData to be 0.79%. Expenditure will slowly increase the GDP growth rate recovers. At present, the status-quo scenario reflects the expected situation for China, where COVID-19 will have a short-term impact on the national economy. GlobalData anticipates an 8% spike in GDP growth 2021. Defense budgets are most likely to be on the upswing in the 2020-2024 period as the economy rebounds.

Austerity Scenario

The austerity scenario also uses the 0.79% GDP growth rate for FY2020, a 5.32% contraction of 2019 GDP growth. Defense spending in this projection decreases from 1.7% share of GDP to 1.6% in the 2021-2024 period. GDP growth and defense expenditure recovery is projected have a slower rate of recovery in the austerity scenario as containing COVID-19 does not result in a recovery GDP growth spike, although defense expenditure is predicted to increase at a much slower rate than the status-quo trend.