Accelerating the PLA's Intelligent Transformation: The Military Modernization Strategy Behind a 7% Increase in the 2026 Defense Budget

China's defense budget for 2026 continues to maintain steady growth. At the National People's Congress held in early March, Premier Li Qiang announced in the government work report that the defense budget for 2026 is 1.91 trillion yuan (approximately 264 billion USD), representing a year-on-year increase of 7%. Although this growth rate continues the single-digit growth trend of the previous decade, it is still significantly higher than China's economic growth target of 4.5% to 5%, highlighting Beijing's prioritization of national security and military modernization amid increasing economic pressures.

This year's defense budget growth exhibits several noteworthy characteristics. First, despite the slowdown in China's economic growth and increased fiscal pressures, military spending continues to show rigid growth, reflecting the Chinese Communist Party's strategic determination to prioritize national security over short-term economic interests. According to analysis by the New York think tank SinoInsider, China's defense spending accounts for approximately 44% of total military expenditure in the Asia-Pacific region, indicating an intensifying regional arms race. Second, this budget increase is closely related to the key milestone of the People's Liberation Army's (PLA) centenary in 2027, with the Chinese military repeatedly emphasizing the need to achieve significant military modernization goals before this date.

According to publicly available data, many observers in China believe that actual military spending is much higher than the reported figures, as some military procurements are hidden within civilian expenditures, and the reported amounts appear lower due to China's relatively low production costs. This military-civil fusion strategy makes it difficult to accurately assess the true level of military investment.

The third phase of PLA modernization—intelligent construction—is accelerating comprehensively. Following mechanization and informatization, the military application of artificial intelligence (AI) technology has become a current focus. According to an analysis by Georgetown University's Center for Security and Emerging Technologies of thousands of publicly available PLA procurement requests over the past three years, the Chinese military is urgently advancing the integration of AI across various military domains, with a breadth and speed of experimentation that is remarkable.

In terms of specific applications, the PLA is developing AI capabilities that can drive unmanned combat vehicles, detect and respond to cyberattacks, track maritime vessels, and identify and strike land, sea, air, and space targets. Additionally, the military is developing systems capable of processing, analyzing, and enhancing large amounts of data to improve tactical and strategic decision-making, as well as deepfake tools for misinformation campaigns.

During the Victory Day parade in September 2025, China showcased a series of next-generation weapon systems, including unmanned ground vehicles, underwater and aerial drones, and collaborative combat aircraft—autonomous jets capable of flying alongside manned aircraft to assist in missions. These systems were presented as core components of China's future combat capabilities, signaling to Washington Beijing's intent to undermine U.S. technological advantages.

Notably, the PLA is developing AI-assisted decision-making systems to track international news, identify foreign public political views, predict social unrest, and manipulate opponents' perceptions and decisions. China's political and military leadership lacks trust in the PLA's command chain, fearing that they may be at a disadvantage in rapidly evolving conflicts. AI decision support systems could help them understand and predict opponents' actions, potentially allowing PLA leadership to overcome the disadvantage of limited battlefield experience.

In the field of equipment manufacturing, China is rapidly expanding its fighter jet production capacity, focusing on advanced stealth platforms such as the J-20 and J-35. Analysis based on commercial satellite imagery shows significant improvements in manufacturing infrastructure and capacity. Chengdu, Shenyang, and Jingdezhen are key aerospace hubs supporting this expansion, enabling the PLA to acquire more fifth-generation fighter jets and military aircraft.

The Chengdu factory has added approximately 278,700 square meters of manufacturing space since 2021 and currently has five active production lines, with an estimated annual output of between 100 and 120 J-20s. Satellite imagery also shows that about 20 hectares of land near the factory has been cleared, possibly for further expansion or future sixth-generation fighter production.

Shenyang is becoming a major center for the assembly of next-generation fighter jets. A new facility under construction includes over 370,000 square meters of manufacturing space and a 3,660-meter runway, expected to produce J-35 and J-35A stealth fighters. Naval variants are being developed for carrier operations, including electromagnetic catapult launches from the Fujian aircraft carrier, while land-based variants will serve the Air Force.

According to J. Michael Dahm, a senior researcher at the Mitchell Institute for Aerospace Studies, the comprehensive infrastructure expansion at major aerospace bases of the Aviation Industry Corporation of China (AVIC) exceeds 743,000 square meters, equivalent to about 8 million square feet, surpassing the total size of the F-35 manufacturing complex in Fort Worth, Texas. Dahm estimates that AVIC could achieve an annual production capacity of 300 to 400 fighter jets, including fourth and fifth-generation models. Even with partial utilization, the annual output is expected to reach at least 250 aircraft.

In contrast, the U.S. produces about 156 F-35 fighter jets annually, plus a maximum annual capacity of 48 F-16 Block 70/72 (with recent actual deliveries around 16) and 24 F-15EX. In Europe, France delivered 26 Rafale fighter jets in 2025, planning to increase production to 44 per year. While Western manufacturers maintain advantages in technology and system integration, China's strategy emphasizes scale, with high production volumes providing operational flexibility and sustained force generation capabilities.

China is also advancing experimental fighter jet projects. New aircraft include the J-36 and the smaller J-50 (also known as J-XDS), which are undergoing flight tests in Chengdu and Shenyang. The J-50 reappeared in March 2026, indicating that development is ongoing. These aircraft feature advanced designs, such as tailless configurations and potential thrust vectoring capabilities. U.S. Air Force General Kenneth Wilsbach stated that these platforms could be used for air superiority roles, roughly comparable to the sixth-generation projects being developed by the U.S. (including the F-47 and the Navy's F/A-XX).

A remote testing facility in Xinjiang (often referred to as China's Area 51) has undergone rapid expansion. Satellite imagery shows an addition of 5,570 square meters of hangar space and over 27,800 square meters of new facilities within a year. In 2025, a J-50 aircraft was observed publicly parked at the base. Analysts believe this visibility may be intentional, reflecting strategic signaling rather than operational oversight.

However, China's path toward intelligence integration is not without challenges. The PLA still faces obstacles in integrating AI into its forces and operations. As demonstrated by the war in Ukraine, developing technologies such as autonomous drones is one thing, but effectively deploying them in contested battlefields is entirely another. The ability to rapidly train drone operators, formulate attack plans, and prevent drone misfires (incorrectly destroying friendly-deployed drones) is as crucial as the technological capabilities of the drones themselves.

Moreover, training AI systems for military purposes requires vast amounts of data that are not easily accessible on the internet, such as classified images of military platforms or the electromagnetic signatures of various radars and weapons. The PLA's limited combat experience means it lacks many of these data sets. Nevertheless, even if certain AI systems fail, the PLA's rapid prototyping and experimentation will accelerate its learning and improvement. China is positioning itself to quickly and effectively adopt and deploy combat military AI, thereby narrowing the gap between the Chinese and U.S. militaries.

China's growing aircraft production capacity supports a broader military strategy focused on regional readiness and global influence. Increased output accelerates fleet modernization and sustains combat capabilities. A key focus remains Taiwan. Military planners have identified potential scenarios ranging from long-term blockades to direct cross-strait operations. The so-called 2027 Davidson Window (named after Admiral Philip Davidson) marks the timeline by which China is expected to be prepared for such actions, with U.S. officials stating that the Chinese military is actively rehearsing related scenarios.

Overall, the growth of the 2026 defense budget, along with ongoing military modernization investments, reflects China's strategic prioritization of national security and technological competition in the face of economic challenges. The comprehensive advancement of intelligent construction, the expansion of stealth fighter production capacity, and preparations for the 2027 centenary of military establishment all indicate that the PLA is undergoing a transformation across the entire military rather than a series of isolated procurement projects. This transformation aims to establish a military that can rapidly learn, adapt, and make more accurate decisions across all operational domains by leveraging advanced technology.