Measuring Hard Power: China's Economic Growth and Military Capacity

China’s rapid economic development has facilitated a dramatic increase in its military capacity and international security presence. But there is considerable disagreement over how large its economy and military capacity is. Underlying the debate is the fact that market and PPP exchange rate comparisons give very different pictures of China’s relative economic size, and neither is the appropriate price deflator with which to compare relative military capacities. We address this issue by deriving a relative military cost (RMC) exchange rate for China which converts RMB to US dollar expenditures in terms of real military services. This shows that both market and PPP exchange rate comparisons of China’s real GDP understate its relative military capacity. Nevertheless we also show that the real expansion of China’s military capacity over the last decade has been much smaller than its GDP growth, due to the rapidly growing wage costs faced by China’s military.