Defense

China, the world's second largest defense spender, becomes a major arms exporter

Key Points
  • China is becoming a top arms dealer, joining the ranks of the U.S., Russia, Germany and France.
  • Top customers include Belt and Road Initiative partners as Beijing presents itself as an alternative to Russia, analysts say.
  • Second only to the U.S., China's massive defense spending may be contributing to greater overall spending in the region amid ongoing tensions.
Soldiers of People's Liberation Army stand inside tanks at a drill during an organized media tour at a PLA engineering academy.
Petar Kujundzic | Reuters

Beijing has not only become a major defense spender, but increasingly analysts say China is also turning into a top arms exporter.

Over the past five years, China was one of the largest exporters along with the United States, Russia, France and Germany and China, according to data from the Stockholm International Peace Research Institute (SIPRI) published in March. Those nations accounted for three-quarters of the total volume of arms exported, the data showed.

China has exported 16.2 billion units of ammunition — mostly to countries in Asia, the Middle East and Africa — over the past 12 years, according to SIPRI data.

Beijing is set to commemorate the 70th anniversary of Communist China on Oct. 1. The country did not open up its economy until 40 years ago and since then quickly became the world's second largest.

Exports to Belt and Road partners

The "potential market" and "loose restrictions" in the developing world may make China "well positioned to become one of the world's largest arms exporters," said Timothy Heath, senior international defense researcher at California-based policy think tank RAND Corporation.

Since 2007, China's top arms export countries by total units are Pakistan (6.57 billion units), Bangladesh (1.99 billion units) and Myanmar (1.28 billion units), according to SIPRI. All three countries are part of China's global development strategy — the Belt and Road Initiative.

In 2018 alone, China sold Bangladesh 75 million units, Myanmar 105 million units and 448 million units to Pakistan, according to SIPRI's calculations.

"China is likely to continue expanding its arms exports, especially to partner (Belt and Road) countries... Arms exports provides an efficient, lower cost way for China to both improve security in countries featuring major Chinese investments and to minimize spending and commitments by the PLA," Heath explained.

To put things into perspective, Chinese conventional weapons make up only 3% of the arms import market in North and South America, said Roy Kamphausen, president of Seattle-based non-profit research institution, The National Bureau of Asian Research (NBR). He said that market is dominated by the U.S. (19%), Russia (14%), and Germany (12%).

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While the number of countries China exports to has increased drastically, SIPRI said in its 2018 Trends in International Arms Transfer report that major arms importers such as India, Australia, South Korea and Vietnam "will not procure Chinese arms for political reasons."

China has positioned itself as a lower-cost alternative for advanced weapon systems, and a main competitor to Russian hardware, Kamphausen wrote in an email to CNBC.

"As Chinese weapons and equipment improve in quality and Russia's defense industry continues to atrophy, Chinese manufacturers will likely displace Russian defense industries in many key markets," said RAND's Heath.

According to SIPRI data, Chinese arms exports rose, while Russian exports decreased in the last five years.

Kamphausen also said that Russia's "similar 'no strings attached' arms sales regime" is another reason why there will be fierce competition between Moscow and Beijing.

An arms buying heavyweight

China may still be growing into its role as a major arms dealer, but that influence supplements Beijing's existing position as a top defense spender.

Second only to the United States, China wields a massive defense budget, which SIPRI estimates neared $250 billion in 2018. The U.S. Department of Defense similarly projected that China spent about $200 billion on defense last year.

Beijing's official projections are more modest. The Ministry of National Defense said its 2018 budget increased 8.1% year over year to 1.11 trillion yuan, about $175 billion.

The Pentagon's view on the difference between external estimates and official figures is that "China's published military budget omits several major categories of expenditures, including R&D and foreign weapons procurement."

For 2019, the Ministry of National Defense said that the budget for military spending is expected to increase by 7.5%, to 1.19 trillion yuan, about $177.6 billion. This make 2019 the fourth consecutive year of single-digit budget growth, according to the announcement written in Chinese.

Although Beijing said the growth of its defense budget growth is slowing, China is not planning on cutting its national defense budget. But China is currently faced with increasing pressure for social welfare programs as the population ages, RAND's Heath said.

"The costs to maintain expensive platforms like aircraft carriers and stealth aircraft, as well as the expenses required to retain skilled personnel will make it hard to cut defense spending in a major way," he explained.

On the other hand, NBR's Kamphausen said he believes the People's Liberation Army will be affected by overall economic slowdown if Beijing is "to hold defense spending constant as a percentage of total government expenditures."

But even as the world's second largest economy starts to see a slow down in growth, Heath said Beijing will likely maintain its budgeting position.

"But, if leaders were to give a higher priority to defense spending, there is certainly bandwidth to increase the defense budget and still be below levels of defense spending as a percentage of total government spending in competitor nations," said Kamphausen.

To be sure, China's military spending still pales in comparison to the United States. Washington still outpaces Beijing in terms of equipment and weapons significantly — but China has been keen to close that gap.

Regional 'anxiety'

In the last 24 years, China has continued to inject more money into its national defense budget. That "has coincided with increases in defense spending throughout Asia and Oceania, as well as the first significant increase in U.S. defense spending since 2010," Heath said.

"This shows that China's growing military power is fueling anxiety in Asia and spurring the U.S. and other countries to bolster their defenses in response," he said.

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In fact, the policy analyst said "China faces ongoing disputes with Taiwan and neighbors in the maritime domain, and the arms racing behavior in Asia raises the likelihood that Chinese defense leaders will continue to seek robust budgets."

In June, the U.S. State Department approved sales of weapons requested by Taiwan, including tanks and Stinger missiles estimated to be worth about $2.2 billion. China subsequently responded by saying it would impose sanctions on U.S. firms involved in such a deal.

The following month, CNBC and NBC reported that China conducted a series of anti-ship ballistic missile tests in the contested waters. Despite international warnings, China continues to tighten its grip in the South China Sea.

China has staked its claims on a massive section of the resource-rich South China Sea that extends roughly 1,000 miles from its southern shores. Parts of the waterway — one of the world's busiest — have also been claimed by the Philippines, Vietnam, Taiwan, Malaysia and Brunei.

In fact, Zhou Bo, a senior colonel of the People's Liberation Army said that "China does need to have necessary defense of these islands and rocks which we believe are Chinese territory" at the Shangri-La Dialogue, a three-day security forum held in Singapore.

— CNBC's Yen Nee Lee contributed to this report.

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Amanda Macias and Courtney Kube
Key Points
  • China is in the midst of conducting a series of anti-ship ballistic missile tests in the hotly contested waters of the South China Sea, according to two U.S. officials with knowledge of the matter.
  • The development comes as the U.S. and China have paused tensions in their ongoing trade battle.
  • The South China Sea, which is home to more than 200 specks of land, serves as a gateway to global sea routes where approximately $3.4 trillion of trade passes annually.