Are the Defense Policy and Military Expenditure in China Economically or Politically Driven?

This study employs the time-varying parameter/stochastic volatility vector autoregression model to investigate the determinants of China’s military expenditure. The results indicate that China’s military expenditure is influenced by both economic and political factors, adapting to the evolving times and international environment. However, economic growth may not be an important determinant. Further, the primary function of China’s military expenditure is as a countermeasure to inflation-induced price rises. Military and nondefense expenditures are complementary, with no crowding-out effect. Moreover, domestic political risks and bilateral political relations positively affect military expenditure, mainly because China has invested several military resources to counter terrorism, engaging in joint military exercises and acquiring weapons. The influence of geopolitical risk on military expenditure is unstable, with the relationship shifting from positive to negative post 2008. Moreover, the military expenditure of other countries has minimal impact on China, implying the nonexistence of the arms race. This conclusion aligns with China’s defensive national defense policy. Our study underscores the significance of national security and the international environment, offering valuable policy references for China to reasonably allocate military expenditure, safeguard national security, and prevent invasion by hostile countries.