Abstract: This article has used data sets for defense expenditure and real GDP over the period 1978—2010 in China, and resorts to new-classic defense expenditure demand model and MS-AR model to estimate demand functions for military expenditure. Qualitative evidences suggest defense strategy gives rise to sudden structural change of defense expenditure demand, furthermore, defense strategy and lagged defense expenditure are more important dependent variables. We also identify that within this period defense expenditure dynamic consisting of three phases, separately “a phase of negative growth, a phase of low growth and a phase of compensatory growth.” In different phases, the coefficients of lagged defense expenditure and current GDP were quite different: in year 1989, the coefficient of current GDP changed from positive to negative. Meanwhile, in 1997 the contribution of lagged defense expenditure to independent variable increased 3.56 times than before. Thus, the empirical results demonstrate the rapid growth of defense expenditure in recent years is just compensating for historical debts, and it is the result of the harmonious development of Chinese defense and economic construction.