China's defense spending is believed to be over $100 billion a year, and it has more than doubled in the last decade. This has triggered an arms race with its neighbors. Russia just announced a new military upgrade program that would increase defense spending by a third, and devote over half a trillion dollars in the next decade to buying new equipment. Japan, already possessing the most modern armed forces in the region, is increasing spending to expand it. A decade ago, China and Japan spent about the same on defense, but now China spends more than twice as much. Even India is alarmed. Spending only 30-40 percent as much as China does, the Indian generals and admirals are demanding more money to cope with China. India and China are actually devoting a lot of their additional spending to just bringing their troops up to date. Both nations have lots of gear that was new in the 1960s and 1970s. They don't expect to be as up-to-date as the U.S., which spends over $500 million a year, but there's plenty of newer, much better, and often quite inexpensive stuff to be had.
The perceived "Chinese threat" has persuaded neighbors to play down disputes and develop better military ties with neighbors. Such is the case with Russia and Japan, who still have a bitter dispute over ownership of the Kuril islands. Same with Japan and South Korea, who have a lot of bad history to keep them apart, but a growing Chinese military threat to overcome all that. Same deal with Taiwan, Vietnam and India. China has only been able to buy friends in Myanmar (an impoverished police state), North Korea (a very impoverished police state) and Pakistan (a corrupt and impoverished occasional democracy). China would like to upgrade in the allies department, but communist police states remain scary neighbors.
So alarmed has Japan become that, two years ago, it quietly established a foreign intelligence service (similar to MI6 or the CIA), for the first time since World War II. The Chinese noticed, as this new spy agency was mainly aimed at China and North Korea.
China is also worries about North Korea, and has had spies in that country for decades to confirm those worries. Chinese leaders are fed up with the self-destructive moves of the North Korean leadership, and are applying more pressure on the North Koreans to accept Chinese type economic reforms. The North Korea leaders resist this because they fear losing control of the country if they allow any large amount of economic freedom. China insists that the North Koreans have to take a chance, because the alternative is complete economic collapse, that even China won't be able to bail them out of.
Despite the growing military budgets, China continues to seek more economic ties with its neighbors. Some of the neighbors see this as another form of invasion and domination (the U.S. still gets hit with that, especially on a slow news day). But for the Chinese, business is business, and the neighbors tend to respond favorably. Thus Russia and China recently cleared up legal disputes that had stalled use of a rail link between the two countries for a decade. Chinese investors are putting more money into Japanese firms, and are now allowed to invest in Taiwanese high-tech companies. While the neighbors fear nationalistic Chinese politicians and generals (who have, for centuries, used "foreign threats" to justify their control of the nation), Chinese investors are interested in making money, not starting a war. The neighbors are betting that the investors will ultimately dominate the politicians. That may be, but it's not a sure thing. Power junkies have a hard time sharing control.
Chinese leaders are currently running scared because of the wave of popular uprisings in the Middle East over the last two months. These were rebellions against corrupt police states, very similar to the one that's run China since the late 1940s. Chinese reformers tried to organize similar demonstrations, but the government out-organized them. Nevertheless, the message was received, and the government has suddenly issued orders for officials to follow the rules, or suffer swift and painful punishment. The government usually follows up on these pronouncements, at least for a while, just because to do otherwise results in accusations of being a "paper tiger." The problem is that the government needs a sustained anti-corruption crackdown. There is lots of damning evidence out there, but the government is reluctant to risk weakening the powerful provincial governments with lots of (well deserved) prosecutions. The provincial officials are the first line of defense against rebellion, but these guys are also the source of most of the corruption, and lack of punishment for lower level (town, and rural district) misbehavior. What haunts officials most of all is the long Chinese history of massive, and successful, popular uprisings against corrupt rule. But many of the criminals in government feel that, if they steal enough, they can buy their way out of any trouble. The reformers among the national leadership have, so far, been unable to overcome these corrupt optimists and their fat bank accounts.
February 27, 2011: Pro-reform demonstrations were held in over a hundred Chinese cities. The government was ready to crack down on some of them, especially in the larger cities. But the sheer number of cities that unexpectedly sprouted demonstrations caught officials by surprise. The national government quickly promised more reforms and cleaner government. Unimpressed, reform minded Chinese called for another round of demonstrations on March 6th. In addition to much less government corruption, reformers want free politics (more than one party, the Communist Party, allowed to operate) and laws that curb the excesses of large companies, and bad business and government practices in general.
February 26, 2011: The new Five Year Economic Plan marks a big change. The new direction for the economy is the development of internal markets, rather than stressing export growth. This has actually been going on for the past decade, but now it's official.
Police have been rounding up known reformers, and anyone identified as calling for mass demonstrations in 13 Chinese cities tomorrow.
February 25, 2011: China has ordered one of its two frigates on anti-piracy patrol off Somalia, to hurry into the Mediterranean to help protect the evacuation of over 30,000 Chinese citizens who were working in revolution-torn Libya. For the Chinese, this sort of naval maneuver is a source of pride. Chinese participation in the anti-piracy patrol was a big deal, because it was the first time in centuries that Chinese warships had operated so far from the homeland. Now, one of those warships is going a little further, to protect Chinese working overseas. This is all a big deal in China.
February 22, 2011: China and Pakistan announced two joint military exercises (one army, and one air force) later this year.
February 18, 2011: Vietnam complained to China about Chinese warships operating among the disputed Paracel islands (that both countries claim.) China generally ignores such complaints. At the same time, China pursues its "the enemy of my enemy is my friend" policy by announcing closer military and economic ties with Poland (who, like China, has an unpleasant history with Russia.) China has been all over East Europe seeking similar deals. Russia has long considered East Europe as a Russian protectorate, something the East Europeans don't care for at all.
February 12, 2011: Chinese census officials estimated that the population reached 1.341 billion at the end of 2010. One of those 1.341 billion, the Minister of Railways, has been removed from his job and is being prosecuted for corruption.
Japan demands, that China pay for damage Chinese ships did to Japanese patrol boats off the disputed Senkaku Islands, were rejected. China has been increasingly aggressive, in a non-threatening (using non-military ships) to assert ownership of disputed waters.