This has obvious implications for China’s military posture. While the U.S. Navy can sail across the Pacific and call on practically dozens of ports, China’s warships can sail just outside its territorial waters and, other than the Russian port of Vladivostok, have nowhere to go.

This places China at an enormous strategic disadvantage. Beijing has no allies to provide bases, share burdens, pool intelligence or lend moral support.

Race with inflation

Since 1990, China’s defense spending has swelled by at least 10 percent annually, resulting in a tenfold overall budget increase in just 24 years. Some observers point to China’s seemingly huge military outlays as evidence of sinister intent.

But the budget boosts aren’t nearly as big as they seem.

China’s economic growth over the past two and a half decades has been meteoric, and has allowed the country to spend more on a modern military. But as a proportion of its economy, China’s defense budget is in line with international norms.

And if you take into account inflation, China’s real increase in defense spending is actually in the single digits annually—hardly the massive influx of cash that alarmists decry.

It’s important to view China’s arms spending in historical context. A quarter-century ago, Beijing’s military was big and low-tech. In 1989, the PLA had 3.9 million people on its payroll—many of them leg infantry lacking vehicles and sophisticated weaponry. The army’s main tank was a version of the Soviet T-55, a design dating to the early 1950s.

The air force and navy were capable only of coastal defense. China had a single nuclear missile submarine, which was rumored to have caught fire and sunk in port.

China was a poor country. Its GDP was $451 billion. By comparison, the USA’s GDP in 1989 was $8.84 trillion. That year, Beijing spent $18.33 billion on defense. By comparison, the same year Japan spent $46.5 billion and tiny New Zealand, $1.8 billion.

China’s 1989 defense budget amounted to spending $4,615 per soldier. At the same time, the United States appropriated $246,000 per individual service member.

In the late ’80s, China’s military doctrine still emphasized “People’s War,” a defensive strategy for drawing an enemy deep into the Chinese interior and then destroying him with conventional and guerrilla warfare. It was based on China’s wartime experiences … and was totally inadequate.

In 1991, Beijing watched in shock and horror as a U.S.-led coalition easily smashed Saddam Hussein’s Iraqi army and ejected it from Kuwait. An air campaign lasting several weeks and a ground offensive just 100 hours in duration destroyed a numerically superior Iraqi force.

Suddenly, China’s large, impoverished military looked like a liability.

Beijing had a lot of work to do reforming its armed forces. That required money. The good news for China was that, thanks to a booming economy, it actually didn’t have to devote a larger share of national output to defense in order to invest more in competent troops and modern weaponry.

One way to look at defense spending is as a percentage of GDP. China’s major neighbors, with the exception of Japan, allocate more to their militaries as a percentage of their respective GDPs. India allocates 2.5 percent, South Korea 2.8 percent and Russia 4.1 percent. The United States, with the best-equipped military on the planet, spends 3.8 percent of its GDP on defense.

The paradox of China’s military budget is that spending has risen even as defense’s share of the economy has dropped. As a percentage of the economy, China’s arms spending has actually fallen by a little more than 20 percent. Beijing spent 2.6 percent of GDP on defense in 1989. Between 2002 and 2010, it appropriated an average of 2.1 percent. In 2013, China’s military budget accounted for just two percent of GDP.

The PLA’s slice of the economic pie has gotten smaller. It’s just that the pie itself is much, much bigger than it was 25 years ago.

Public security

By some calculations, in 2013 China spent more on “public security”—Internet censorship, law enforcement and the paramilitary People’s Armed Police—than it did on external defense. China’s internal security budget for 2014 is a secret, leading to speculation that once again, the Chinese Communist Party is spending more to defend itself from its own people than from other countries.

The Party knows what it’s doing. Many Chinese are unhappy living under a totalitarian regime. Environmental damage, labor abuses, corruption and land grabs can—and do—quickly escalate into riots.

On top of that, China must contend with low-level unrest in the far western province of Xinjiang—where ethnic Uighurs resent colonization by the rest of China—and in Tibet.

Under the status quo, China has no choice but to spend so heavily on public security. While that’s bad for the Chinese people, it’s actually a good thing for the region. Much of the military might that Beijing buys every year gets directed inward and never projects externally.

Matching U.S. military spending as a percentage of GDP would require China to spend 5.8 percent on internal and external defense. That’s just not a realistic prospect. Only three countries devote that much of their economy to their armies—Saudi Arabia, Oman and South Sudan.

Moreover, the dollars China does spend on external military force don’t stretch as far as most observers assume. “Throughout much of the post-1978 reform era, the real-world effects of China’s nominal defense spending have been mitigated heavily by rampant inflation,” wroteAndrew Erickson, a professor at the U.S. Naval War College.

In 2008, China’s spent 14.9 percent more on defense than it did in 2007. But that 14.9-percent increase coincided with 7.8-percent inflation, resulting in a net military-budget boost of only 7.1 percent. In 2010, defense spending rose 7.8 percent and was devoured by a 6.7-percent inflation rate, for a net gain of just 1.1 percent.

Adjusted for inflation, between 2004 and 2014, China’s defense spending increased by an average of 8.3 percent in real terms. That’s still a lot of money, particularly as defense spending has been falling in most of the West. But the PLA’s budget isn’t really growing by double digits, as many alarmists claim.

PLA, Inc. and the ‘rank factory’

Corruption is a huge and largely invisible problem for the PLA. Officials sell government property for their own profit. Contractors charge inflated fees for substandard work. Cronyism results in promotions for unqualified personnel.

For years, the PLA generated extra income—and food staples—by farming and raising its own livestock. As China’s economy took off, these survival efforts evolved into businesses. To farming and ranching, the PLA added hotels, theaters and bars—the profits from which as often as not ended up in top officers’ pockets.

In 1998, the Chinese Communist Party ordered the PLA to cut ties with commercial enterprises in order to improve military readiness. An infantry unit didn’t need to raise its own pork anymore—the defense budget could accommodate soldiers’ food needs. Units could get on with the business of soldiering.

But instead of ending them, corrupt military leaders simply obscured their profit ventures.

The business of illegally selling military license plates to wealthy civilians has been a particularly lucrative one. Plate bearers—who are often civilians with only tangential connections to the PLA—mount red lights and sirens on their cars to push through regular street traffic. Holders are often entitled to free gasoline.

The situation got so bad that in 2013, the PLA banned expensive imports—from Mercedes-Benz, BMW, Porsche and Bentley—from having military license plates.

Beijing has occasionally cracked down on corrupt officers. In 2007, a judge handed down a suspended death sentence to Vice Adm. Wang Shouye for embezzling $25 million in PLA funds.

As deputy director of the PLA’s General Logistics Department between 1997 and 2001, Wang was in a position to approve new military housing. The government accused Wang of receiving kickbacks from contractors.

Police arrested Wang in 2006 after the admiral refused blackmail demands from one of his many mistresses. Investigators found more than $8 million dollars stashed in microwave ovens and refrigerators in Wang’s homes in Beijing and Nanjing and another $2.5 million in a washing machine. There was evidence of an additional $8 million in pilfered funds in Wang’s bank accounts.

In March, police detained Xu Caihou, a retired general and former member of the powerful Central Military Commission, on allegations he made millions of dollars selling military ranks. Xu was in charge of high-level army promotions from 2004 to 2013.

We don’t know exactly how much money Xu made. However, the general’s subordinate Gu Junshan—who is also in custody and under investigation—gave Xu’s daughter a debit card worth $3.2 million as a wedding gift.

Gu reportedly sold “hundreds” of military ranks. “If a senior colonel [not in line for promotion] wanted to become a major general, he had to pay up to $4.8 million,” a source told Reuters.

That’s a lot of money. In most professional militaries, such bribes wouldn’t be worth it. But in the PLA, a payoff like that is an investment. The higher an officer’s rank, the greater the opportunities for self-enrichment.