The Ming class submarines are based on ageing designs
Chinese President Hu Jintao has urged the faster modernisation of the navy after 70 sailors died in a mysterious submarine accident.
Military analysts are puzzling over what caused the deaths on board the Ming-class submarine 361, which China said suffered "mechanical difficulties" off its north-eastern coast.
Mr Hu sent condolences to the families of the sailors who died, describing the accident as "a great loss to the navy of the People's Liberation Army".
But he added: "We should turn our mourning into strength and learn from the accident in order to advance the capacity of our national defence and speed up the modernisation drive of the PLA."
The call comes against a backdrop of increasing in Chinese military spending in recent years.
The year 2001-2 saw its annual military budget raised by more than 17% to about $17bn - or up to $20bn according to intelligence reports.
There was a further rise of 10% in 2003 and more increases are scheduled until 2006.
BBC defence correspondent Jonathan Marcus says that while the Ming class boats are entirely obsolete by modern standards, they are a relatively inexpensive option for patrol and coastal defence duties.
But essentially they are a modernised version of an old Soviet design, itself based on late-World War II German U-boats.
Echoes of Kursk tragedy
The brief statement announcing the accident from China's official news agency left many questions unanswered, and some experts are speculating that the deaths may have been the result of a gas leak.
It remains unclear why none of the crew were able to escape, why the boat was recovered so quickly, and exactly when and where the accident took place.
It is the worst submarine accident since August 2000, when the Russian nuclear-powered Kursk sank with its 118 crew in the Barents Sea.
The Chinese submarine did not sink during the accident and it has now been towed to an unnamed port.
Wendell Minnick, a Taipei-based analyst, said: "A fire or a collision is a possibility. If it was a torpedo that blew up, it probably would have sunk it."
Michael McGinty, a defence analyst at the Royal United Services Institute in London, said the submarine's batteries may have leaked acid which mixed with seawater, producing toxic chlorine that could have killed the crew.
The Chinese were reportedly negotiating with Russia last year to buy eight 636 Kilo-class vessels, equipped with anti-ship missile systems, in a $1.6 bn deal.
According to reports, China's own submarine manufacturing programme is in difficulty, particularly its efforts to develop the Song class guided-missile submarine.
Jane's Defence Weekly says the first Song started sea trials in 1995, but proved a failure.
China's navy has also reportedly experienced operating problems because of inadequate crew training.