The Chinese defense budget, which valued US$104.62 bn in 2010, is the largest defense budget in the Asia-Pacific region. Defense expenditure has grown at a CAGR of 11.5% during the review period. The Chinese defense budget is expected to grow at a CAGR of 8.49% during the forecast period, to reach an annual expenditure of US$174.9 bn in 2017 (reference see graph). China faces threats from neighboring countries and from hostile secessionist forces, which provide an additional incentive for increasing its defense expenditure. The country’s robust economic growth will continue to enable the Chinese government to increase its military spending during the forecast period. China’s total defense expenditure during the forecast period is expected to value US$722.4 bn.
Despite structural reforms, the Chinese defense industry remains under state control and contains very little competition. Barring a few industrial enterprises, the majority of organizations fail to compete with each other, which impedes the development of China’s modern indigenous defense industry as there is no incentive for companies to innovate.
Following the 1989 Tiananmen Square massacre, an arms embargo was imposed by the US and other European countries. During the review period, some European states have proposed lifting the arms ban, but the US and Japan have opposed this proposal due to fears that it will enable China to enhance its military capabilities. As a result, China’s defense industry is unable to acquire sophisticated military hardware from the US or Western European countries.