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Global Defense - Bombs, Bullets, and Bucks

Jim O'Leary on 2/3/2011 12:00:00 AM

Two weeks ago, U.S. Secretary of Defense Robert Gates visited China with the intent to strengthen defense ties between the two countries. However, the Chinese military’s not-so-subtle timing of the unveiling of its J-20 stealth fighter overshadowed the trip and was intended as a message to the U.S. and the rest of the world that the PRC is on a power trip that goes beyond economic growth (read more). But it is the flush, ever-growing economy that opens China’s budget to endless military spending.

Not everyone has it so good. While defense is a crucial component of any nation’s “musts,” unbalanced expenditures can have financially devastating consequences without deep pockets. With this in mind, China is ‘putting it to’ the rest of the world. And that includes the United States; hence, the in-your-face flaunting of the sleek state-of-the art J-20 ‘Dirty Bird’ fighter with the big red star on its tail.

China is also adding to its increasingly formidable arsenal of Super-Class aircraft carriers that will boost its naval prowess to new heights. The carrier is a refurbished vessel purchased from a then cash-strapped Russia nine years ago and was due to be operational by 2010 (read more). Meanwhile, the United States is, at present, the only nation with functional super-carriers.

China has also announced it is about ready with its game-changing carrier-killer missile, the Dong Feng 21D (read more), which would potentially nullify U.S. military dominance in the South and East China Seas. This maritime region is especially important because of North Korea and disputed interests over Taiwan with China.

National defense is an expensive political proposition. Defense budgeting can be tricky in the face of political controversy, which, of course, is part and parcel of democratic states. One of China’s major advantages in maintaining its military is that the PRC doesn’t have to engage in domestic and internal political discussions on how much to spend when it comes to bullets and bombs. The other major factor at work for China is, obviously, that plentiful coffer endlessly funded by the growing economy.

While bombs and bullets are generally perceived as something bad for the world, making them and selling them clearly has a good business side to it. Global defense spending exceeds more than a trillion dollars annually. U.S. defense and homeland security expenditures account for nearly 5% of GDP. The United States military budget last year was approximately $663 billion, and that excludes the costs of the Afghanistan and Iraq conflicts. Of the $663 billion spent on armament, 90% went to domestic defense industry companies. Those same companies reaped substantial rewards from arms exports. The U.S. leads the world in arms production and sales to other countries. From 2002 to 2009, America accounted for about 40% of global arms sales, far outpacing the next supplier, Russia, at 18%, according to Global Issues data.

As the U.S. continues holding the upper-hand over everyone else in defense spending, China is moving forward at an alarming rate. According to the Stockholm International Peace Institute, Chinese defense spending increased to nearly $100 billion in 2009, from about $59 billion the year before. That put China in second place, leaping far ahead of the UK, France, and Russia, all of whom maintain expenditures ranging from $60 billion to $70 billion.

While China spends and builds from a point of economic strength, most other nations are struggling. Europe is coming off the threat of a severe sovereign debt crisis last spring, with the potential for a new crisis in view. Individual nations in the European Union must balance budgets with great care. Regional self-defense is, in some measure, dependent upon regional economic stability.

As for the United States, despite its superior military, a five-year defense budget reductionof $78 billion was recently announced. America’s might is assured for the moment, but China is mounting a challenge based on its current rate of increase. The Chinese are said to be immeasurably impressed by America’s display of military might and the sophistication of its armaments in the Persian Gulf War --- so impressed that it became a prime motivating factor in its current quest to achieve the power and stature it is now pursuing.

Could all of the recent show-of-force by China be a gauntlet to the ground to see who is capable of being the last man standing at some potentially cataclysmic point down the road? China’s economy grows, while America’s economy slows. It’s not a pretty picture.

Navellier researches investment opportunities around the world. We have successfully managed non-U.S. equity portfolios for over a decade.  Our portfolios offer investors exposure to developed and emerging markets around the world through the sound stock selection of James O’Leary, CFA, a 30+ year veteran of the international markets.  To learn more about any of our international portfolios, please call us at 800-887-8671 or email Traci Sinclair at tracis@navellier.com

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Comments

James
1/3/2011 10:06:00 AM

GREAT BLOG

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