text: Since the late 1970s, China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role. China has implemented reforms in a gradualist fashion, resulting in efficiency gains that have contributed to a more than tenfold increase in GDP since 1978. Reforms began with the phaseout of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, growth of the private sector, development of stock markets and a modern banking system, and opening to foreign trade and investment. China continues to pursue an industrial policy, state support of key sectors, and a restrictive investment regime. From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world's largest exporter in 2010, and the largest trading nation in 2013. Still, China's per capita income is below the world average. 
   
   In July 2005 moved to an exchange rate system that references a basket of currencies. From mid-2005 to late 2008, the renminbi (RMB) appreciated more than 20% against the US dollar, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing announced it would resume a gradual appreciation. From 2013 until early 2015, the renminbi held steady against the dollar, but it depreciated 13% from mid-2015 until end-2016 amid strong capital outflows; in 2017 the RMB resumed appreciating against the dollar – roughly 7% from end-of-2016 to end-of-2017. In 2015, the People’s Bank of China announced it would continue to carefully push for full convertibility of the renminbi, after the currency was accepted as part of the IMF’s special drawing rights basket. However, since late 2015 the Chinese Government has strengthened capital controls and oversight of overseas investments to better manage the exchange rate and maintain financial stability. 
   
   The Chinese Government faces numerous economic challenges including: (a) reducing its high domestic savings rate and correspondingly low domestic household consumption; (b) managing its high corporate debt burden to maintain financial stability; (c) controlling off-balance sheet local government debt used to finance infrastructure stimulus; (d) facilitating higher-wage job opportunities for the aspiring middle class, including rural migrants and college graduates, while maintaining competitiveness; (e) dampening speculative investment in the real estate sector without sharply slowing the economy; (f) reducing industrial overcapacity; and (g) raising productivity growth rates through the more efficient allocation of capital and state-support for innovation. Economic development has progressed further in coastal provinces than in the interior, and by 2016 more than 169.3 million migrant workers and their dependents had relocated to urban areas to find work. One consequence of China’s population control policy known as the "one-child policy" - which was relaxed in 2016 to permit all families to have two children - is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the North - is another long-term problem. China continues to lose arable land because of erosion and urbanization. The Chinese Government is seeking to add energy production capacity from sources other than coal and oil, focusing on natural gas, nuclear, and clean energy development. In 2016, China ratified the Paris Agreement, a multilateral agreement to combat climate change, and committed to peak its carbon dioxide emissions between 2025 and 2030. 
   
   The government's 13th Five-Year Plan, unveiled in March 2016, emphasizes the need to increase innovation and boost domestic consumption to make the economy less dependent on government investment, exports, and heavy industry. However, China has made more progress on subsidizing innovation than rebalancing the economy. Beijing has committed to giving the market a more decisive role in allocating resources, but the Chinese Government’s policies continue to favor state-owned enterprises and emphasize stability. Chinese leaders in 2010 pledged to double China’s GDP by 2020, and the 13th Five Year Plan includes annual economic growth targets of at least 6.5% through 2020 to achieve that goal. In recent years, China has renewed its support for state-owned enterprises in sectors considered important to "economic security," explicitly looking to foster globally competitive industries. Chinese leaders also have undermined some market-oriented reforms by reaffirming the "dominant" role of the state in the economy, a stance that threatens to discourage private initiative and make the economy less efficient over time. The slight acceleration in economic growth in 2017—the first such uptick since 2010—gives Beijing more latitude to pursue its economic reforms, focusing on financial sector deleveraging and its Supply-Side Structural Reform agenda, first announced in late 2015. ||||| China plans to increase defense spending 11.2 percent this year as the country’s expanding global commitments and lingering territorial disputes drive demand for more warships, missiles and fighter planes. 
   
   Military spending is set to rise this year to about 670 billion yuan ($106.4 billion), Li Zhaoxing, spokesman for China’s National People’s Congress, said yesterday ahead of a speech today by Premier Wen Jiabao to open the annual 10-day session of the country’s legislature. 
   
   China’s defense spending, the second highest in the world after the U.S., has risen in tandem with the expansion of its economy and a new focus by the Obama administration on the Asia- Pacific region. China is also involved in spats with Vietnam, the Philippines and Japan over control of oil- and gas-rich waters and has a lingering territorial dispute with India that erupted into a war in 1962. 
   
   “China’s got a lot of things that require a state to have military hardware for,” Geoff Raby, who was Australia’s ambassador to China until last year, said in a telephone interview. “China lives in a neighborhood where it doesn’t have any natural allies or friends.” 
   
   Satellite Maker Rises 
   
   China North Optical-Electrical Technology Co. (600435), the maker of military control systems and sensors, rose as much as 9.7 percent in Shanghai trading, the biggest intraday gain in more than a month. The Beijing-based company was up 6.3 percent at 10.31 yuan as of 10:14 a.m. China Dongfanghong Spacesat Co. (600118), which builds satellites, advanced as much as 3.9 percent. 
   
   Defense spending has more than doubled since 2006, tracking a rise in nominal gross domestic product from 20.9 trillion yuan to 47.2 trillion yuan in that time. China’s spending on domestic security will be higher than military spending this year for the third straight year, according to Finance Ministry figures released today, underscoring the government’s concerns about growing social unrest and threats to stability in Tibet and Xinjiang province. 
   
   The growing defense budget has stoked concerns among China’s neighbors and the U.S., which announced last year a strategic shift toward Asia including deploying forces to a base in Australia. Chinese defense spending as a percentage of GDP was about 1.3 percent in 2011, falling from about 1.4 percent in 2006. 
   
   ‘Reasonable and Appropriate’ 
   
   “The Chinese government has maintained reasonable and appropriate growth of defense spending on the strength of rapid economic and social development and the steady increase of fiscal revenues,” Li said. 
   
   He spoke a day before the start of the annual meeting of the National People’s Congress, the 3,000-member parliament that is legally the highest governmental body in China. Sessions run from today to March 14. 
   
   U.S. analysts say actual Chinese defense spending is much higher than the amount announced by Li yesterday. Phillip Saunders, director of the Center for the Study of Chinese Military Affairs at National Defense University in Washington, estimates China’s true defense spending is 50 percent higher than the official budget because items such as research and development as well as foreign weapons procurement are not included. Li said research and procurement are included. 
   
   Off-Budget Items 
   
   Taylor Fravel, a professor at the Massachusetts Institute of Technology who studies China’s relations with its neighbors, said the number of off-budget items such has foreign arms procurement have decreased in recent years. China includes support for veterans in its budget while the U.S. does not, Fravel said. 
   
   While Chinese military spending is still officially less than a fifth of U.S. defense spending, its neighbors are concerned about the country’s expansive territorial claims. China claims indisputable sovereignty over the islands, reefs and shoals of the South China Sea and their surrounding waters, demarcating a tongue-shaped claim on Chinese maps extending hundreds of miles from mainland China. 
   
   China is “always ready” to use force if necessary to ensure its territorial integrity in the South China Sea, Maj. Gen. Luo Yan, deputy secretary general of the Chinese Academy of Military Science, said today. China’s military should be “strong and big,” and the country should do more to mark its rightful claim to the area, he told reporters in Beijing. 
   
   ‘Scared Its Neighbors’ 
   
   It also contests control over the Senkaku, or Diaoyu islands with Japan, which sparked a diplomatic standoff in 2010 after Japan detained a Chinese fishing boat captain when his vessel collided with a Japanese patrol boat. Japan is “closely watching” China’s military spending and is seeking greater transparency in its outlays, Chief Cabinet Secretary Osamu Fujimura told reporters today in Tokyo. 
   
   Vietnam recently filed a protest saying China assaulted its fishermen and prevented them from entering the Paracel Islands. China responded by claiming sovereignty over the islands and said it didn’t board the vessels. 
   
   “China scared its neighbors,” Saunders said in an e-mail. “Now it is back on the path of greater restraint, but its neighbors are still alarmed.” 
   
   U.S. concerns stem from Chinese progress in developing modern fighters and precision ballistic missiles that can target U.S. aircraft carriers, Saunders said. 
   
   In the past year, China began sea trials of its first aircraft carrier, a refurbished Soviet-era vessel acquired from Ukraine more than a decade ago. 
   
   Military Buildup 
   
   Beijing is also continuing a military buildup across the Taiwan Strait. The U.S. is obligated by a 1979 law to provide defensive weapons to Taiwan, which China claims as a province. A Pentagon report published last August said that as of December, 2010, China’s People’s Liberation Army had deployed between 1,000 and 1,200 short-range ballistic missiles to units opposite Taiwan even as cross-Strait ties have improved. 
   
   Last year the U.S. announced it would sell Taiwan $5.3 billion in upgrades for its 145 Lockheed Martin Corp. (LMT) F-16 fighters. 
   
   China will boost spending on domestic security by 11.5 percent this year to 701.8 billion yuan, outstripping spending on defense by 31.5 billion yuan, according to a table in the work report issued by the Finance Ministry. 
   
   Economic Interests 
   
   Economic interests around the world, including 812,000 workers abroad at the end of 2011, mean China’s military may increasingly deploy across the globe. China set a frigate to Libya last year to help evacuate thousands of Chinese nationals during the revolt that saw the overthrow of Muammar Qaddafi. Li said Chinese warships have made eight deployments to help international efforts to protect sea lanes from Somali pirates. Chinese peacekeepers now patrol as part of a United Nations mission in Sudan. 
   
   The country is also increasingly dependent on global commerce for its well-being, factors which in past eras led countries such as the U.K. and the U.S. to boost military spending. Combined imports and exports last year amounted to $3.6 trillion, and China, the world’s biggest energy consumer, is also the world’s second-biggest oil importer after the U.S. 
   
   The U.S., with an economy less than three times the size of China’s, has a military budget about between five and six times as big. The Pentagon is asking for $613.9 billion next year, which also includes $88.5 billion in supplemental spending for wars. Unlike China’s, the U.S. defense budget is shrinking. The Pentagon’s request is $31.8 billion less than the amount enacted by Congress for 2012. 
   
   China’s defense spending increased an average of 16.2 percent a year from 1999 to 2008, according to figures from a defense white paper published in 2009. While building up spending, China has also proclaimed that it takes a nonconfrontational approach in the region. 
   
   “China’s limited military strength is aimed at safeguarding sovereignty, national security and territorial integrity,” Li said. “It will not in the least pose a threat to other countries.” 
   
   To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net; Yidi Zhao in Beijing at yzhao7@bloomberg.net 
   
   To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net
target: – China will up its defense spending by 11.2% in 2012 to $106.4 billion, citing its unhappiness with the US military presence in the Asia-Pacific region, reports the AP. China has made double-digit increases to its military spending in all but two of the years since the early 1990s, although this year's increase is down slightly from the 12.7% rise in 2011. Despite the seemingly dramatic rise, China's economy has also grown quickly over the past two decades, and military spending as a percentage of GDP has stayed relatively low, officially 1.3% last year. “Our defense spending is relatively low compared with other major countries,” says one Chinese official. However, security experts think China's true spending is likely much higher (the CIA estimated 4.3% of its GDP in 2006). With maritime disputes with Vietnam, Japan, and the Philippines and rough relations with India, China faces an array of security threats. “China lives in a neighborhood where it doesn’t have any natural allies or friends," a former Australian ambassador to China tells Bloomberg. “China’s got a lot of things that require a state to have military hardware for."