The Determinants of China's Defense Expenditure Before and After Transition

This paper examines the determinants of China's defense expenditure over the period 1960—1999, and two sub-samples before and after transition for 1960—1980 and 1981— 1999, applying official Chinese data and SIPRI Yearbook data. An empirical econometric model is set up on the basis of standard neo-classical theory. The empirical results suggest that earlier defense expenditure, changes in the strategy environment, and GDP are major determinants of China's defense expenditure on the long run. For the split periods, the national security environment, economic factor, and earlier defense expenditure are the main determining factors prior to 1981, but earlier defense expenditure is the main determinant after 1981 (when official Chinese data are used). The impact of Taiwanese military spending on Mainland China's demand for defense expenditure was not statistically significant.