Steven Collins

September 12, 2007


In this blog I am pleased to present an article which explains how China’s military budget is being dramatically understated in US dollar comparisons. Mr. Hulley is an internationally known financial and economic analyst who is currently based in Jerusalem. I had the opportunity to meet Mr. Hulley when I was in Jerusalem in August, 2000, and he is a delightful person as well as a keen analyst. The piece below was adapted from an original article in the “Jerusalem Post, Christian Edition”, February 2007.

His article shows how the often-reported comparisons dollar comparisons on the respective sizes of the US and Chinese military budgets are very misleading. As I’m sure readers know, the China’s military manufacturers don’t pay “union scale” to their employees and China also doesn’t give huge signing bonuses to entice recruits to enlist in their military forces. For this reason, China gets far more “bang for the buck” than does the USA in fielding its military forces. Mr. Hulley’s analysis is easy to understand, and I’m delighted to offer his analysis to readers of this blog.


Mr. Hulley’s article also confirms that China is becoming far more dangerous that most US analysts and writers care to admit. His documentation of China’s rapid military build-up is very consistent with my view that the new alliance of Russia, China, and Iran was prophesied in Ezekiel 38’s prophecy to occur in the latter days at the end of our age. Ezekiel 38 also prophesies that these very nations will form an alliance which will attack the modern nations descended from the ancient ten tribes of Israel. The bellicose actions and statements of Russian, Chinese and Iranian leaders against the Western nations further indicate that Ezekiel 38’s prophecy is going to be fulfilled in the years ahead of us.


There is another bonus. Mr. Hulley also understands that the descendants of the ten tribes of Israel reside in the nations of the modern Western world. While all researchers have some differences of opinion, Mr. Hulley’s research on this subject is brought to your attention so you can consider his viewpoints as well. I am pleased to announce that our websites will be directly linked. You may check out Mr. Hulley’s website at: .


Steve Collins


1. “Do NOT Underestimate China” by John Hulley *
           On January 11th  the Chinese proved their ability to shoot down an old satellite of theirs 500 miles up in the sky.   And last September they used a ground-based laser to “paint” a U.S. satellite.   They thereby conveyed the message that they either have or may soon have the technical know-how to disable it.  
Both events seem to have surprised authorities in Washington.   These and similar surprises in the past could be the result of an extraordinary and dangerous under-estimate.   The Chinese are probably four, yes,  four, times stronger than officially calculated by the U.S. Department of Defense (DoD). 
My slight experience in warfare does not qualify me as a military expert, but I do claim to be an international economist.  I worked for some years at the World Bank, which manages the International Comparison Program.   Said to be the world’s largest statistical initiative, the ICP compares economic and social data from more than 100 countries.   For further assurance I have checked my statistical analysis with a couple of former colleagues at the Bank.  They endorse it.

There are at least 1.3 billion Chinese, the largest national population in the world, more than four times the American.   Result: average income in China needs only to reach one quarter the U.S. level to bring the whole economy to a level exceeding the American.  And China can then support a defense effort that is also bigger than that of the U.S. 
Languishing in poverty, this supernumerous people used to be no threat to the great powers of the world.   But after the death of Chairman Mao Zedong in 1976 that all changed.  A radical reform of the economic system “from altogether socialist to largely capitalist” soon led to record rates of progress.   During the last thirty years the Chinese economy has grown nearly four times faster than the American (averaging 8.2% compared to 2.2% per year).  
And their military program has been expanding in proportion.  In fact they put a higher share of their economic output into defense than does the U.S.  As a result the gap between the two countries is rapidly narrowing.   Total military expenditures of the Chinese could surpass the American less than five years from now.   After that it might take a few more years to build up reserves of weapons such as those held by the U.S.   China would then be the world’s greatest military power.
How much further the process could go is anyone’s guess.  Traditional disciplines of hard work and obedience have brought Hong-Kong, Japan, Singapore and Taiwan to levels of average income comparable to those of northwestern Europe “about” that of the U.S.    Suppose the Chinese reach  the same level of income per person as them: with a population more than four times the American they would then produce an economic output more than three (= ? x 4) times bigger.  If the same share of that economy goes into defense as at present, the Chinese military will also be three times the size of the American. 
Of these dangers Washington seems blissfully ignorant.  The economic growth of China in the 1980s and 90s did lead a concerned Congress to ask Department of Defense  for an annual report on its military strength, including an assessment of prospects 20 years ahead.   And in 2002 the Department of Defense did start submitting such reports.  But the latter show Chinese power as far smaller than it really is or is likely to be.
The problem is in the method of accounting.  The old OER (official exchange rate) or MER (market exchange rate) method is much easier to figure; but it is far less accurate in this case than the modern PPP (purchasing power parity) method.  Using the old system would work reasonably well in comparing countries at roughly the same level of income, such as Sweden and Denmark.  But the larger the gap between the income levels of the countries being compared, the larger the error.  
 For example you can hire at least six Chinese soldiers for the price of one American.  Also available at lower prices are land and buildings, medical and other services, pensions and local manufactures such as transport vehicles, clothing, furniture and much other equipment.  Higher prices apply primarily to imports, fuel, and high-tech items, including advanced weaponry.  But these are only a small share of total defense expenses.  As a result $100 billion will get you a much bigger army in China than it will in the U.S.  
To make a reasonably accurate comparison of the size of the Chinese economy and military effort with the American it is therefore necessary to make corrections for the differences in wages and other prices of the different components.    This is the PPP method, which economists and statisticians have been using for decades. 
DoD however has chosen the easier path of assuming that the same amount of money, according to the exchange rate, will get you the same amount of defense in both countries.   The difference is enormous – about 4 to 1!    Thus, according to the Department of Defense, the Chinese economy in 2006 was $2.5 trillion less than 20% of the American.  By the more modern method of accounting however it was $10 trillion more than 75% of the American (see Chart).  
In 20 years according to the Department of Defense the Chinese economy will still be less than $7 trillion.   By the modern method it already exceeded that size some three or four years ago!  
The difference in the results of the two methods of accounting has major implications for American policy.  According to the old method the U.S. may be free to focus most of its attention on trying to export democracy to Iraq.   But according to the modern method the number one problem is defending our own democracy against the greatest threat in history.  
          Officially the National Security Strategy of the U.S. is to deter potential adversaries from seeking to surpass or even equal American power.   But the Chinese challenge to the military superiority of the U.S. is more real and more imminent than Washington seems to realize.    Any effort to limit the quantities and types of Chinese weapons is more likely to succeed if it is done sooner rather than later. 
The difference in perception of reality is amazingbut not amusing when you consider what the world would be like under Chinese domination.  If they become the greatest power in the world, they could push their interests and their way of life wherever they wish.   How they would do it can be inferred from what they have done to date.  In countries they control they have applied such practices as: overwhelming force in support of one-party rule; censorship of all media; regimentation of religions to bring them in line with Communist beliefs; persecution, torture and killing of political and religious dissidents.  
North Korea is reported to have concentration camps the size of cities.  In Laos about 30% of the population is estimated to have been killed, in Tibet 15% and in China itself also about 15%.  Figure it out: with a population of 400,000,000 at the time, the total of Chinese executed was awesome.  Even now, with 1/5th of the world population, that country routinely executes far more people than do the other 4/5ths of the world put together. 
Currently the Chinese are emplacing batteries of missiles along the shore opposite the democratic island of Taiwan.   And at the UN they are using their veto power to protect the efforts of North Korea and Iran to develop nuclear weapon systems.  
The leader of one of these countries, Iran, has announced his hopes of terminating Israel.