BEIJING. Mar 2: China announced a planned 12.7 per cent increase in annual defence spending Sunday, higher than inflation and despite a projected overall budget deficit, reports AP.

The announced increase in the military budget came after Chinese generals called for more high-tech arms and equipment to ensure that China can win regional conflicts.

The modernisation of the Chinese military, the world's largest with 2.9 million members. has made China's neighbours uneasy, several of whom have conflicting territorial claims with Beijing.

Finance Minister Liu Zhongli. speaking on the second day of the annual meeting of China's legislature, forecast spending of 80.57 billion yuan (9.7 billion dollars) on defence this year, compared to 71.50 billion (8.6 billion dollars) last year. The 12.7 per cent jump compares to plans to keep the inflation rate at 6 per cent this year.

Foreign analysts believe China spends much more on its army than appears in the annual budget. China says its military spending, which has grown steadily in recent years, remains low compared to the United States and other Western countries.

Liu did not explain this year's increase. But on Saturday, Premier Li Peng said China

needed to safeguard its territorial integrity and maritime rights.

China claims sovereignty over islands in the South China Sea the are also claimed by several of its neighbours. China also claims sovereignty over Taiwan and last year held threatening military exercises in waters around the island to weaken support for Taiwanese independence.

Gen. Zhang Wannian, part of a group of military leaders who met Saturday at the ongoing National People’s Congress session. said China should have "the ability to win any regional warfare." the state-run Xinhua News Agency reported.

In his budget address. Liu said the state plans to spend 896.79 billion yuan (108 billion dollars) this year, and increase of 13.3 per cent compared to last year.

With projected revenues of 839.79 billion yuan (101 billion dollars), up 14 per cent over last year, the deficit is expected to be 57 billion yuan (6.8 billion dollars). That compares to a 54.77 billion yuan 16.5 billion dollars) deficit in 1996, Liu said.

Liu admitted China will have difficulty fulfilling its objective of balancing the budget by the year 2000. He blamed widespread tax evasion, ineffective controls on expenditure, waste and other factors.