China Raising 2012 Defense Spending to Cope With Unfriendly ‘Neighborhood’

China plans to increase defense spending 11.2 percent this year as the country’s expanding global commitments and lingering territorial disputes drive demand for more warships, missiles and fighter planes.

Military spending is set to rise this year to about 670 billion yuan ($106.4 billion), Li Zhaoxing, spokesman for China’s National People’s Congress, said yesterday ahead of a speech today by Premier Wen Jiabao to open the annual 10-day session of the country’s legislature.

China’s defense spending, the second highest in the world after the U.S., has risen in tandem with the expansion of its economy and a new focus by the Obama administration on the Asia- Pacific region. China is also involved in spats with Vietnam, the Philippines and Japan over control of oil- and gas-rich waters and has a lingering territorial dispute with India that erupted into a war in 1962.

“China’s got a lot of things that require a state to have military hardware for,” Geoff Raby, who was Australia’s ambassador to China until last year, said in a telephone interview. “China lives in a neighborhood where it doesn’t have any natural allies or friends.”

Satellite Maker Rises

China North Optical-Electrical Technology Co. (600435), the maker of military control systems and sensors, rose as much as 9.7 percent in Shanghai trading, the biggest intraday gain in more than a month. The Beijing-based company was up 6.3 percent at 10.31 yuan as of 10:14 a.m. China Dongfanghong Spacesat Co. (600118), which builds satellites, advanced as much as 3.9 percent.

Defense spending has more than doubled since 2006, tracking a rise in nominal gross domestic product from 20.9 trillion yuan to 47.2 trillion yuan in that time. China’s spending on domestic security will be higher than military spending this year for the third straight year, according to Finance Ministry figures released today, underscoring the government’s concerns about growing social unrest and threats to stability in Tibet and Xinjiang province.

The growing defense budget has stoked concerns among China’s neighbors and the U.S., which announced last year a strategic shift toward Asia including deploying forces to a base in Australia. Chinese defense spending as a percentage of GDP was about 1.3 percent in 2011, falling from about 1.4 percent in 2006.

‘Reasonable and Appropriate’

“The Chinese government has maintained reasonable and appropriate growth of defense spending on the strength of rapid economic and social development and the steady increase of fiscal revenues,” Li said.

He spoke a day before the start of the annual meeting of the National People’s Congress, the 3,000-member parliament that is legally the highest governmental body in China. Sessions run from today to March 14.

U.S. analysts say actual Chinese defense spending is much higher than the amount announced by Li yesterday. Phillip Saunders, director of the Center for the Study of Chinese Military Affairs at National Defense University in Washington, estimates China’s true defense spending is 50 percent higher than the official budget because items such as research and development as well as foreign weapons procurement are not included. Li said research and procurement are included.

Off-Budget Items

Taylor Fravel, a professor at the Massachusetts Institute of Technology who studies China’s relations with its neighbors, said the number of off-budget items such has foreign arms procurement have decreased in recent years. China includes support for veterans in its budget while the U.S. does not, Fravel said.

While Chinese military spending is still officially less than a fifth of U.S. defense spending, its neighbors are concerned about the country’s expansive territorial claims. China claims indisputable sovereignty over the islands, reefs and shoals of the South China Sea and their surrounding waters, demarcating a tongue-shaped claim on Chinese maps extending hundreds of miles from mainland China.

China is “always ready” to use force if necessary to ensure its territorial integrity in the South China Sea, Maj. Gen. Luo Yan, deputy secretary general of the Chinese Academy of Military Science, said today. China’s military should be “strong and big,” and the country should do more to mark its rightful claim to the area, he told reporters in Beijing.

‘Scared Its Neighbors’

It also contests control over the Senkaku, or Diaoyu islands with Japan, which sparked a diplomatic standoff in 2010 after Japan detained a Chinese fishing boat captain when his vessel collided with a Japanese patrol boat. Japan is “closely watching” China’s military spending and is seeking greater transparency in its outlays, Chief Cabinet Secretary Osamu Fujimura told reporters today in Tokyo.

Vietnam recently filed a protest saying China assaulted its fishermen and prevented them from entering the Paracel Islands. China responded by claiming sovereignty over the islands and said it didn’t board the vessels.

“China scared its neighbors,” Saunders said in an e-mail. “Now it is back on the path of greater restraint, but its neighbors are still alarmed.”

U.S. concerns stem from Chinese progress in developing modern fighters and precision ballistic missiles that can target U.S. aircraft carriers, Saunders said.

In the past year, China began sea trials of its first aircraft carrier, a refurbished Soviet-era vessel acquired from Ukraine more than a decade ago.

Military Buildup

Beijing is also continuing a military buildup across the Taiwan Strait. The U.S. is obligated by a 1979 law to provide defensive weapons to Taiwan, which China claims as a province. A Pentagon report published last August said that as of December, 2010, China’s People’s Liberation Army had deployed between 1,000 and 1,200 short-range ballistic missiles to units opposite Taiwan even as cross-Strait ties have improved.

Last year the U.S. announced it would sell Taiwan $5.3 billion in upgrades for its 145 Lockheed Martin Corp. (LMT) F-16 fighters.

China will boost spending on domestic security by 11.5 percent this year to 701.8 billion yuan, outstripping spending on defense by 31.5 billion yuan, according to a table in the work report issued by the Finance Ministry.

Economic Interests

Economic interests around the world, including 812,000 workers abroad at the end of 2011, mean China’s military may increasingly deploy across the globe. China set a frigate to Libya last year to help evacuate thousands of Chinese nationals during the revolt that saw the overthrow of Muammar Qaddafi. Li said Chinese warships have made eight deployments to help international efforts to protect sea lanes from Somali pirates. Chinese peacekeepers now patrol as part of a United Nations mission in Sudan.

The country is also increasingly dependent on global commerce for its well-being, factors which in past eras led countries such as the U.K. and the U.S. to boost military spending. Combined imports and exports last year amounted to $3.6 trillion, and China, the world’s biggest energy consumer, is also the world’s second-biggest oil importer after the U.S.

The U.S., with an economy less than three times the size of China’s, has a military budget about between five and six times as big. The Pentagon is asking for $613.9 billion next year, which also includes $88.5 billion in supplemental spending for wars. Unlike China’s, the U.S. defense budget is shrinking. The Pentagon’s request is $31.8 billion less than the amount enacted by Congress for 2012.

China’s defense spending increased an average of 16.2 percent a year from 1999 to 2008, according to figures from a defense white paper published in 2009. While building up spending, China has also proclaimed that it takes a nonconfrontational approach in the region.

“China’s limited military strength is aimed at safeguarding sovereignty, national security and territorial integrity,” Li said. “It will not in the least pose a threat to other countries.”

To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net; Yidi Zhao in Beijing at yzhao7@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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