• China defence budget to rise 7%, lowest rate since 2021.
• China pledges development of ‘advanced combat capabilities’.
• Premier reiterates goal of “reunification” with Taiwan.
  

China will boost defence spending by 7% in 2026, it said on Thursday, the lowest rate in five years but still outpacing wider economic growth targets and the rest of Asia at a time of growing regional tension, including over Taiwan.

Security analysts and regional military attaches are watching China’s budget closely as it scrambles to modernise the military by 2035, while stepping up deployments across East Asia and purging the top brass to tackle graft.

China will improve combat readiness and accelerate the development of “advanced combat capabilities”, Premier Li Qiang said at the opening of parliament’s annual meeting, at which he unveiled a broader GDP growth forecast of 4.5% to 5%.

“All these steps will boost our strategic capacity to safeguard China’s sovereignty, security, and development interests,” Li said in his work report, adding that President Xi Jinping held ultimate command responsibility.

The figure of 7%, which follows three years of annual rises of 7.2% and is the lowest since 6.8% in 2021, is part of a spending campaign in which China’s military has developed new advanced missiles, ships, submarines and surveillance methods.

This year’s increase showed Beijing was keeping to a long-held principle of balancing economic growth with national defence goals, said James Char of the S. Rajaratnam School of International Studies in Singapore.

“Essentially, the People’s Liberation Army budget has been growing at a fairly consistent rate as a percentage of GDP … roughly the rate of GDP growth plus inflation,” added Char, a China defence scholar.

It comes amid the highest-profile purge of upper military ranks in decades, with the two most senior generals ensnared in disciplinary investigations.

Zhang Youxia, a veteran military ally of Xi, was placed under investigation in January, while another, He Weidong, was expelled in October last year.

The purge leaves just two members of the usual seven on the supreme Central Military Commission, Xi himself as its chair, and a newly promoted vice chairman, Zhang Shengmin.

The corruption crackdown showed “Beijing will keep a tighter watch on military spending,” said Wen-Ti Sung, a security analyst based in Taiwan, although it was clear all levels of government were getting more frugal.

The government remains committed to the ruling Communist Party’s “absolute leadership over the armed forces”, Li added.

“Guided by the principle of ensuring political loyalty in the military, we will continue to improve military political conduct and make major strides towards the centenary goals of the People’s Liberation Army.”

Some regional analysts believe the founding anniversary, which falls next year will bring further increases in military drills and deployments around Taiwan, the democratically-governed island that Beijing views as its territory.

‘Reunification with Taiwan’

China would “resolutely fight against separatist forces aimed at ‘Taiwan independence’ and oppose external interference”, Li vowed, virtually reprising comments of last year.

That would “promote the peaceful development of cross-Strait relations and advance the cause of national reunification”, he added.

Taiwan says only the island’s people can decide their future. Its government said it did not see any major policy changes towards Taiwan in Li’s comments, but was concerned about China’s defence spending.

“Even under conditions of an unstable economy and weak private consumption, they are still willing to allocate a very large budget to military spending,” said Liang Wen-chieh, a spokesperson of the Mainland Affairs Council in Taipei.

“And of course, that poses a threat to Taiwan,” the spokesperson told reporters.

International environment

Li toned down a warning about the international environment from a year ago, calling it “complex and challenging” rather than “increasingly complex and severe” in comments that had cited “changes unseen in a century”.

In Tokyo, Japan’s Chief Cabinet Secretary Minoru Kihara said China was not sufficiently transparent about its continued high level of defence spending and stronger capabilities.

Despite China’s efforts to change the status quo in the East and South China Seas by “force or coercion”, Japan would keep up efforts to build constructive, stable ties with it, Kihara told a press briefing.

While the graft crackdown left gaps in the PLA’s command structure and dented short-term readiness, it was expected to keep improving capabilities and broaden modernisation, the International Institute of Strategic Studies said.

Growth in Chinese military spending was consistently outpacing the rest of Asia amid a global surge in defence budgets, the London-based IISS said in a report last month.

China’s share of Asia’s total military expenditure grew to almost 44% in 2025, up from an average of 37% between 2010 and 2020, it added.

China gives no breakdown of defence spending, though its budget of 1.91 trillion yuan ($277 billion) is just about a quarter of a $1-trillion defence bill US President Donald Trump signed into law in December.

Members of the Reuters Gulf team, like so many of our neighbours in the region, have huddled in stairwells and windowless bathrooms, listening to volleys of missiles being intercepted above our homes while trying to soothe frightened kids and field messages of concern from abroad.

We have become newly alert to where a window might blow in, how to track down difficult-to-find supplies of basics like chicken or bananas and how every rumble, even a neighbour closing a cupboard, can send the heart racing.

Across a region whose newly treacherous airspace is closed and where the only viable escape route is a long cross-desert drive through territory under Iranian attack, we’re all weighing the same impossible questions: stay or go, and how?

Federico Maccioni, a member of Reuters’ finance team in Dubai, said that for the first time, he perceived a hint of doubt about what lies ahead for the city. Still, Rachna Uppal, the news agency’s Abu Dhabi-based chief economics correspondent, said she was struck by how normal life continued, with people shopping, attending dental appointments, and even jetskiing.

Meanwhile, as reporters, they’re stretched across the Gulf to make sense of it all. This week in Gulf Currents, Iran’s drones are proving relentless, punching through Gulf defences and striking airports, hotels and data centres.

Tourism is buckling, business hubs are paralysed, and decades of Gulf state-building are suddenly in doubt. This briefing unpacks the economic shock, the strategic stakes and what this war may change forever.

Gulf fundamentals

For decades, the Gulf’s rise rested on two core assumptions, i.e. its cities offered a safe haven in an unstable region and that vast wealth from uninterrupted energy exports would keep flowing. This week’s events have shaken both pillars at once, perhaps irreversibly.

First to falter was the idea of the Gulf as a sanctuary insulated from the region’s violence. Dubai, the flagship embodiment of that promise, was built on the premise that turmoil stopped at its borders. But days of Iranian missile and drone strikes on airports, ports and luxury landmarks punctured that carefully constructed brand.

UAE President Sheikh Mohammed bin Zayed tried to project business-as-usual as he strolled through Dubai Mall on Monday evening, yet outside, flights were grounded, financial markets shut, and jumpy residents queued for supplies, all while deep thuds rolled through the skyscrapers as air defences intercepted barrage after barrage.

The psychological blow raises doubt about whether cities like Dubai, Abu Dhabi, and Riyadh — the success of which has been built on confidence, mobility, and positive perceptions — can maintain premium appeal when they suddenly prove vulnerable to regional turmoil.

Economic fragility, repercussions

The second rupture is economic, and deeper still.

The closure of the Strait of Hormuz and the shutdown of QatarEnergy’s vast LNG operations, supplier of a fifth of global LNG and long proud of never missing a shipment, have unleashed a supply shock once considered inconceivable.

Iraq has slashed production; Saudi Arabia is rerouting crude; hundreds of tankers sit idle near the port of Fujairah, which is still burning after an attack, without safe passage. Prices for oil, gas and related commodities have surged.

The Gulf’s ability to bankroll diversification, mega-investments and a generous social contract depends on secure energy exports. That assumption is suddenly fragile.

Some of this damage cannot be undone.

What future holds?

This war has unlocked a larger unknown: what will relations between the Arab Gulf and Iran look like after this?

After years of tentative détente, Gulf Arab states had begun recalibrating ties with Iran, acknowledging geography and mutual interest. That fragile trust has now been ruptured.

The scale of Iran’s attacks has erased the political space Gulf leaders had carved out for dialogue. Having been attacked directly, Gulf capitals must now confront a harder question: even if the fighting stops, can trust in Iran as a neighbour ever be rebuilt, or has the relationship entered a long, hostile freeze?

The implications are profound. The Gulf’s economic model, energy security, and regional diplomacy, long treated as constants, have all been destabilised. Even if the fighting stops soon, the era of hedging with Iran is perhaps over. And a more guarded, security-driven Gulf lies ahead.

China said on Thursday it would build a “childbirth-friendly society” in the next five years, pledging to address concerns over employment, education, medical care, health and income, according to an official government report.

Authorities will improve population services and respond proactively on ageing, including “promoting high-quality, full employment, improving the income distribution system, and refining the social security system.”

They will also foster “positive attitudes towards marriage and childbearing,” the report said, adding that it would boost housing support for families with children.

China’s population fell for a fourth consecutive year in 2025, as the birth rate plunged to a record low, official data showed in January, with experts warning of further decline.

Policymakers have made population planning a key part of the country’s economic strategy and this year Beijing faces a total potential cost of around 180 billion yuan ($25.8 billion) to boost births, according to Reuters estimates.

Key costs are the national child subsidy, which was introduced for the first time last year, as well as a pledge that women throughout pregnancy have “no out-of-pocket expenses” in 2026, with all medical costs, including in vitro fertilisation (IVF), fully reimbursable under its national medical insurance fund.

Authorities will continue to implement the childcare subsidy system and expand demonstrations and trials for subsidised childcare services, the report said, without giving further details.

Services for women in early stages of pregnancy as well as reproductive health would be improved while authorities aimed to better prevent and treat birth defects.

Authorities will also refine policies on free preschool education and increase the supply of regular senior secondary school places, with government spending on education mandated to be higher than 4% of GDP, the report said.

Developing the ‘silver economy’

China’s population has been shrinking since 2022 and is ageing rapidly, complicating Beijing’s plan to boost domestic consumption and rein in debt.

New policies will be introduced to promote “high-quality development of the silver economy”, targeted at those aged 60 and older, with elderly care services to be increased, particularly in rural areas, the report said.

Authorities will also draw up measures to refine supportive policies designed for seniors including pension finance, wellness and care, it said.

By 2035, the number of Chinese over-60s is set to hit 400 million – roughly equal to the populations of the US and Italy combined – meaning hundreds of millions of people are set to leave the workforce at a time when pension budgets are already stretched.

China has already increased retirement ages, with men now expected to work until they are 63 rather than 60, and women until they are 58 rather than 55.