While Chinese economic (GDP) growth has slowed from 10 percent to about five percent a year the defense budget has suffered much less and will still rise 8 percent in 2016. These annual Chinese increases peaked from 2005-2009, when they were 15-20 percent a year. Chinese defense spending is two percent of GDP, about half what the U.S. spends (as a percentage of GDP). According to NATO reporting standards (which take into account the many different ways you can calculate military spending) China is believed to spend about 40 percent more on the military than it admits. That would make 2016 military spending about $200 billion. The decrease in spending increases over the last few years is a result of the international recession that began in 2008. China was hurt by this more than it likes to admit and has internal problems (corruption, inflation, pollution, labor shortages) that continue to hurt their economy.
Official Chinese defense spending has more than doubled in since 2005 and is now more than a third of what the U.S. spends. This has triggered an arms race with its neighbors. Russia (ancient foe and current ally) is in the midst of a new military upgrade program that would increase defense spending by a third and devote over 700 billion dollars into the next decade to buying new equipment. That is being quietly scaled back because of low oil prices and sanctions. Japan, already possessing the most modern armed forces in the region, is increasing spending to maintain their qualitative edge. A decade ago China and Japan spent about the same on defense, but now China spends nearly four times as much. Even India is alarmed. Spending only a third of what China does, the Indian generals and admirals are demanding more money to cope. India and China are actually devoting a lot of their additional spending to just bringing their troops up to date. Both nations have lots of gear that was new in the 1960s and 1970s. They don't expect to be as up-to-date as the U.S., which spends over $500 billion a year, but there's plenty of newer, much better, and often quite inexpensive equipment to be had.
Meanwhile, the big mystery is figuring out what the Chinese military is up to with all this unofficial spending? This question's been rattling around inside intelligence agencies, and among diplomats, since 2000. There are some obvious culprits. For example the Chinese Coast Guard is not part of the defense budget but it is known to be undergoing enormous expansion. Hundreds of new coast guard ships are being built, most of them large (over 1,000 tons) and many of them 3,000 to 4,000 tons. While lightly armed, these “patrol ships” are very much in use as weapons of war and are being used, in lieu of more heavily armed ships, to take control of the South China Sea and other bits of disputed territory off China’s coast. Another military asset that is off the books is the Chinese Internet censorship system. The Golden Shield (or “Great Firewall of China) is known to employ two million people (many of them part-timers) to censor the Internet in China and regulate who uses it and how. This has direct military implications because such control makes it more difficult for a foreign power to conduct Cyber War operations in China. There is also a lot of military aid to foreign nations that is off the books and directly serves Chinese defense goals. Same with many intelligence operations, including foreign espionage. It adds up.
Once this sort of thing hits the mass media, however, the details get a bit distorted. For example, what alarms Americans most frequently is how the U.S. is being demonized by the Chinese military leadership. Chinese politicians speak in more friendly terms, while tolerating the bellicose attitudes of their generals and admirals. The politicians refuse to rein in the aggressive attitudes of their military commanders. China experts in the West counsel that the rants from the military are mainly to build morale within the ranks and make it easier for the politicians to reduce corruption in the armed forces. This corruption is an ancient problem in China. It's been reduced since the 1990s but is still there, in a big way. By whipping up this fervor for dealing with a major war it becomes unpatriotic (for many, but not all, officers) to steal and connive.
To outsiders, it looks like the Chinese are preparing for something ominous. This is reinforced by the increasingly aggressive Chinese attitudes towards its neighbors over ownership of uninhabited islands (often just rock outcroppings that are barely visible at low tide). Outright possession of these islets gives the owner possession of nearby oil or natural gas deposits. Something worth fighting for and that's what worries neighbors when it comes to China's growing naval strength. Yet the Chinese aren't really all that active, given the size of their forces. In reality, a lot of the budget still disappears into questionable projects or non-military activities. Corruption remains a major problem in the military, as it has for thousands of years. China does not like to give this much publicity and foreign media tends to ignore it. Corruption in the Chinese military is not as sexy a media event as, say, Chinese warships moving past Okinawa towards the United States.
Inside China, military analysts decry the sorry state of military leadership, training, and doctrine. It's easier to build new weapons than it is to train and maintain troops capable of using them effectively. The Chinese are more concerned with that but not having a lot of success in changing things. Meanwhile, the U.S. Department of Defense wants to portray China as a formidable foe, in order to justify a large defense budget. This is a pattern that developed during the Cold War and continues. China has replaced Russia as the arch-foe. While the U.S. still pays attention to the defense of Taiwan, Chinese military power is seen expanding farther and farther into the Pacific and Asia.
Just how real is Chinese military power? Technically, a lot of Chinese gear is well built. This we know by observing how China has absorbed Western (including Russian) technology since the 1950s. They can build good stuff. If you have an iPhone or iPod you are using Chinese built, or at least assembled, tech. China is still learning how to invent, design, and build many of the iPhone/iPod components. And attempts to design competitive products have, so far, produced mixed results. Chinese have the talent and persistence to acquire the needed management and technical skills. It takes time and Chinese leaders like to take the long view. That means realizing that current Chinese armed forces are not so good but are getting better.
Peacetime soldiers in general and Chinese ones in particular develop a lot of bad habits that translates into defeats early in a war. But in a world with nuclear weapons, the old Chinese strategy of fighting a long war and grinding down a superior (man-for-man) force, no longer works. If you use conventional forces you strike first and fast, then call for peace talks before the nukes are employed. This situation does not work to China's advantage. Chinese generals are going through the motions of creating a well-trained and led army, like many Western nations have, but are making very slow progress. Meanwhile, the Americans are particularly admired, with all their practical training methods and combat proven NCOs and officers. China still has far too much corruption in their military establishment, and too little initiative and original thinking, to create a force that can match the Americans. Going through the motions may work in peace time but not once the shooting starts.
China insists that its growing military power is for defense only. That makes sense, as a lot of money is going into the navy, which protects the imports (mainly of food and raw materials) and exports (of manufactured goods) that are driving the unprecedented economic growth. The Chinese try to explain away the military buildup opposite Taiwan as political theater. This may be true, for a failed attempt to take Taiwan by force would not only disrupt the economy (and create a lot of unhappy Chinese) but would be a major failure by the government. Dictatorships cannot survive too many such failures, or too many angry citizens. So it makes sense that the Chinese military growth is largely for defense. But those large defensive forces can also be used to bully or intimidate neighbors, which is what the neighbors are worried about.
Finally one should not forget that China is communist police state and as is the custom for operations like that the troops take an oath to protect the Chinese Communist Party first then, if the situation warrants it, China.