China’s military spending is a bright spot amid economic slump


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China’s plans to target economic growth of about 5 per cent this year should prompt some scepticism. Uncertainty from a property sector crisis and weak consumer spending make it difficult to be optimistic.

But one thing is certain. Few things — not even a budget deficit of 3 per cent of gross domestic product — will stand in the way of Beijing increasing defence spending. Many stand to benefit.

Beijing’s military budget will increase 7.2 per cent, in line with last year’s rise despite a slowing economy and making China the second largest spender after the US globally. This military budget of Rmb1.67tn ($232bn) has more than doubled over the past decade under Chinese leader Xi Jinping. US lawmakers and experts have argued that the actual military expenditures are far higher than official figures, thanks to classified expenditures that are not included.

Increases in military spending have been matched by a growing number of regional disputes. Tensions have been rising in the South China Sea and the Taiwan Strait, whose median line had once been the unofficial boundary between Taiwan and China. Last year, the number of Chinese military incursions into the air defence zone of Taiwan, which China views as its own territory, hit a record.

That only looks set to increase. Xi has a 2027 deadline to make the country’s military a “world-class force”. That comes during a time of escalating geopolitical tensions with the US. President Joe Biden signed an annual $886bn defence bill last year, which includes measures to counter Chinese military activity in the Indo-Pacific region and assist Taiwanese forces.

Line chart of Share prices rebased in Chinese renminbi terms showing China's defence companies rebound

Local defence related groups should benefit with share prices rising in the past month on the back of growing demand expectations. Shares in Avic Xi’an Aircraft Industry Group and China Shipbuilding Industry Co are up a fifth. China’s largest helicopter maker AviChina Industry & Technology stock is up 13 per cent. But even after those gains the latter trades at about 7 times forward earnings, a significant discount to European peers, leaving room for upside.

Not everything can be sourced at home. Growing import demand for equipment such as radars and helicopters should mean beneficiaries start to reach outside of China to include the world’s defence-related suppliers such as Singapore Technologies Engineering and Frances’s Thales. This is a sector that will grow regardless of the economic health of China.

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