China has always stressed rationally scaled expenditure on defense. The costs of defense are allocated based on the needs of defense and the country's financial capacities and the principle of overall balance. Since the introduction of the policies of reform and opening to the outside world, the Chinese government has strictly controlled its defense expenditure at a comparatively low level so that it can concentrate on economic construction.

The Chinese government has consistently stuck to the principle of strict control, strict management and strict supervision of defense spending; it has established and perfected a complete administrative and regulatory system. China's defense budget and final accounts are examined and approved by the NPC, and the state and army's auditing organs exercise strict audit and supervision of the execution of the budget.

China's expenditure on national defense falls into the following categories: personnel expenses, mainly including pay, food and clothing of military and non-military personnel; costs for maintenance of activities, mainly including military training, construction and maintenance of facilities and running expenses; and costs for equipment, including research and experimentation, procurement, maintenance, transportation and storage. In terms of the scope of logistic support, these expenditures cover not only active service personnel, but also militia and reserve requirements. In addition, a large amount of spendings are used to fund activities associated with social welfare, mainly pensions for some of the retired officers, schools and kindergartens for children of military personnel, training personnel competent for both military and civilian services, supporting national economic construction, and participation in emergency rescues and disaster relief efforts.

Plain living and hard working is a fine tradition of the Chinese armed forces. China's military personnel have launched a sequence of mass movements for practicing economy, such as conducting checkups of warehouses to make better use of the stored goods and repairing or utilizing old or discarded things. They have also done everything they can to join in agricultural and sideline production or engage in business, mainly for the purpose of providing employment for dependents of military personnel and improving the material and cultural lives of officers and men in grassroots units.

Since the introduction of the policies of reform and opening to the outside world the Chinese government has placed work in national defense in a position subordinate to and in the service of overall national economic construction and has made relatively major reductions in defense inputs. From 1979 to 1994 defense spending increased by 6.22 percent annually in absolute terms, which represented in real terms a negative growth of 1.08 percent compared to the 7.3 percent annual increase of the general retail price index of commodities in the same period.

China's annual defense outlay from 1995 to 1997 came to RMB 63.672, 72.006 and 81.257 billion yuan, respectively. The annual increase in defense outlay went for the most part to ensure that the living standards of military personnel keep up with the nation's social and economic development and with the increase of the per capita incomes of urban and rural residents, so as to improve the living conditions of officers and men. Even so, defense spending in the total state expenditure declined annually in the same period, accounting for 9.3, 9.1 and 8.8 percent respectively.

The composition of China's defense expenditure in 1997 (Table 1) was as follows: 29.162 billion yuan for personnel expenses, accounting for 35.89 percent; 26.536 billion yuan for maintenance of activities, 32.66 percent; and 25.559 billion yuan for equipment, 31.45 percent. From the above, we can see that most of the defense outlay went to the personnel's living costs and maintenance of normal activities. In addition, more than four billion yuan, or about 5 percent, was spent to fund activities associated with social welfare.

Table 1 Composition of China's Defense Expenditure in 1997 (unit: billion yuan)

Compared with the defense expenditures of some other countries, China has a fairly low level of defense spending (Table 2).

Table 2 Comparison of China's Defense Expenditure with Those of Some Other Countries in 1997 (unit: US$ billion)
Note: The exchange rate, calculated by China's State Administration of Exchange Control, was one US dollar=RMB 8.29 yuan in 1997.

Based on the above exchange rate, China's defense expenditure in 1997 was US$ 9.80 billion, which was 3.67 percent of the USA's, 61.25 percent of Russia's, 27.53 percent of Britain's, 26.7 percent of France's, 22.79 percent of Japan's, and 56.98 percent of the Republic of Korea's (ROK).

China's defense expenditure is low in relative terms, as well as in absolute terms. In the past two decades the percentage of China's defense expenditure in the gross domestic product (GDP) has declined successively (Table 3). Compared with the USA, Russia, Britain, France, Japan and the ROK, China has a comparatively low burden of defense expenditure (Table 4).

Table 3 The Percentage of China's Defense Expenditure in the GDP in 1978-1997

Table 4 Comparison of the Percentage of China's Defense Expenditure in the GDP and Total Financial Expenditure with Those of Some Other Countries in 1997

Notes:

• Percentages of defense expenditure in total financial expenditure.
  Percentages of defense expenditure in the GDP.
• 2.The above data are taken from defense, financial or other government reports announced by said countries.