CHINA'S ECONOMY IN 1984 AND PROSPECTS FOR ECONOMIC REFORM IN 1985

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00447R000201690001-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2010
• Sequence Number: 1
• Publication Date: June 6, 1985
• Content Type: MEMO

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Central Intelligence Agency
Washington. D. C 20505
DIRECTORATE OF INTELLIGENCE
6 June 1985
China's Economy in 1984 and Prospects for Economic Reform in 1985
Summary
When judged on the basis of a 12-percent growth in GNP,
China's economic performance in 1984 was the best worldwide.
Throughout 1984, the "responsibility system" and associated
reform measures contributed to impressive results in the
countryside, as agricultural output increased by 14.5 percent
over 1983. Industry, although planned to grow by only 5
percent, soared instead by 14 percent. Beijing is worried,
nonetheless that last year's growth rate--especially the
18-percent pace in the fourth quarter--was too high and that
the economy may become dangerously overheated. Longstanding
energy, raw material, and transport bottlenecks have been
exacerbated, while factory managers, taking advantage of
loopholes and confusion surrounding newly enacted urban
reforms, have engaged'in widespread abuses, causing financial
problems and inflationary pressure. Moreover, these problems
have created a degree of political embarrassment for the
reformers, who have been at pains to prove that economic
reforms adopted in October did not cause recent difficulties.
Although the enthusiastic pro-reform crescendo that peaked
last year apparently has subsided somewhat, the reformers
still maintain the initiative. In 1985 Beijing plans to
implement several key economic reform measures--in both
agriculture and industry--but the scope and pace of new policy
initiatives may be more cautious. In addition, this year's
reforms will be accompanied by measures--such as tightening
the central bank's control over the supply of credit, hiking
interest rates, and altering tax rates--specifically intended
to prevent a recurrence of last year's problems.
This memorandum was prepared by the Domestic Policy Branch, China
Division, Office of East Asian Analysis in response to a Treasury Department
request. Questions and comments are welcome and should be directed to the
Chief, Domestic Policy Branch, China Division, OEA
85-10103
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Agriculture--A,Good Year in,1984 but Policy Changes, Cloud 1.985 Prospects
Last year, total agricultural output value--an official Chinese statistic
that until 1985 included both agricultural production and the share of
industrial output produced by village industry--grew 14.5 percent over 1983.
Even with village industry excluded, agricultural output during 1984
registered an impressive 9.9-percent rate of growth. Although grain output
was up by a relatively modest 5.1 percent, cotton production soared by 31.1
percent, sugar output grew by 18.9 percent, and edible oil production
increased by 12.3 percent. In response to growing consumer demand--and
leadership exhortations--for increased supply and more varied sources of
protein-rich nonstaple foods, Chinese farmers also produced more meat (up 8.8
percent), milk (up 19.9 percent), and aquatic products (up 11 percent).
Reforms in the Chinese countryside since 1979 have succeeded in both
boosting production and raising living standards to unprecedented levels.
Giving farmers more direct control over production through the highly touted
"responsibility system" has helped, but the 50-percent increase in procurement
prices that Beijing has paid farmers since, 1978 is also a significant factor.
These price hikes have led, however, to mushrooming budget subsidies because
Beijing refused to raise commensurately the retail prices of processed foods
in urban markets. In an effort both to reduce the state's financial burden
and to improve the efficiency of agricultural marketing, Beijing has now
decided to revamp its agricultural procurement system and to allow market
forces to operate more widely in the countryside.
Under the terms of Beijing's previous procurement system, the government
promised to purchase virtually all agricultural output that farmers were
willing to sell. The government will now purchase only the amount of farm
output specified by contract. Consequently, Beijing will no longer pay a
premium price (50 percent higher than the basic procurement price) for
over-contract output and producers will be forced to market their output on
the free market. To soften the blow to farmers, Beijing has retained a safety
net: if the free market price of an over-contract staple farm good falls
below the basic procurement price, the government has promised to buy all
over-contract supplies of that good directly from the farmer at the higher
price.
In addition to changing its procurement policy, the government has
permitted farmers to market many nonstaple foodstuffs--such as fruits and
vegetables--at floating prices in urban and rural free markets. The aim of
this measure is twofold: to reduce government price subsidies, and to
encourage farmers to increase supplies of nonstaple foods to the cities, which
will ultimately benefit the urban consumer and the farmer. Reports from the
provinces indicate that short-term prices already have risen sharply, however,
causing considerable consumer complaints. The government has anticipated
rising nonstaple food prices and has responded in cities with cost-of-living
subsidies and, where necessary, by intervening in the market and selling
produce at prices lower than those in the free market. It is difficult to
predict with confidence what effect these new policies will have on
agricultural output. Grain production probably will decline as peasants plant
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more acreage to cash crops. The major question is how far. Beijing will let
grain output slip before forcing farmers to plant more grain.
Industry--Explosive Growth Creates Strains; Balanced Growth-and Cautious
Reform Called for in 19 85
Although planned to record a modest 5-percent rate of growth, China's
total industrial output in 1984 rose by a remarkable 14 percent--15.9 percent
if brigade and team industries are included. Premier Zhao told Secretary
Baldrige that fourth-quarter 1984 growth was 18 percent and first-quarter 1985
industrial output rose by a staggering 23 percent. Beijing clearly is worried
that these growth rates are too high and that the industrial sector is
becoming dangerously overheated. Longstanding energy, raw material, and
transport bottlenecks are being strained to the limit and factory managers
have engaged in widespread abuses--such as unauthorized wage and bonus hikes--
that have caused serious financial problems and generated considerable
inflationary pressure.
China's light industry sector, which accounted for slightly less than half
of total industrial output, turned out impressive quantities of various types
of consumer durable goods, such as television sets, refrigerators, and the
like. Due to the poor quality and low reliability of many of these products,
however, Chinese consumers have displayed a reluctance to purchase
non-namebrand commodities. The textile industry is becoming a major problem
in the light industry sector. Last year, cloth production dropped by 10
percent, reflecting increased raw cotton prices for factories. Since the
spring of 1983, when Beijing removed an input subsidy previously given to
cotton textile factories, enterprise managers faced skyrocketing production
costs and reacted by reducing the amount of cotton inputs they purchased.
Despite the 30-percent increase in raw cotton production last year, we expect
China's textile industry to continue growing very slowly.
In China's heavy industry sector, energy output increased at a rate faster
than expected, but serious shortages continue to plague the economy. Overall
energy output grew by 7.4 percent (measured in millions of tons of coal
equivalent, MTCE), with coal and crude oil production both rising by 8
percent.We believe, however, that China will have difficulty sustaining this
rate of growth, owing to the inevitable diminishing productivity of key
onshore oilfields--such as Daqing--and continuing price and transportation
problems for coal. Energy conservation (measured in MTCE) reportedly reached
2.6 percent of total energy output. Electrical output also grew steadily last
year (up 6.6 percent), but hydropower declined by one percent Urban Reforms
Last year, China's leadership made a major decision to extend economic
reforms to urban areas--trying to duplicate the success achieved in the
countryside. The key to Bejing's new urban reform program is industrial price
reform. Chinese industrial ex-factory prices have changed very little since
the 1950s and currently reflect neither relative scarcities in the economy nor
production costs. Most western economists have observed for several years
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that Chinese. economic reform cannot be,achieved until price reform is
accomplished. Chinese reformers long have recognized the importance'bf price
reform, but the political risks involved have made price reform a
controversial issue among the leadership. After several years of debate,
pressure for price reform noticeably increased during the first half of 1984.
In late October 1984, the Central Committee met in plenary session to ratify
the decision on urban reforms and announced formally that price reform was now
one of the party's major goals for the next five years.
Although a crescendo of enthusiasm for price reform raised expectations
among some Chinese,and foreign observers that Beijing would make a dramatic
policy move, the leadership has insisted that the pace of price reform will be
cautious, starting with agricultural prices. Beijing has promised that urban
living standards will not fall as a result of price hikes and announced that a
major wage reform move will take place in July. China's leading price
official recently told journalists in Beijing that three major price policy
measures will be adopted in 1985:
-- Government procurement methods and prices for staple farm goods
were changed effective 1 January 1985;
-- Market forces will be allowed to determine the prices of pork in
urban markets, but city dwellers will be given food
subsidies to cover increased living costs; and
-- Short-haul railway fees will be raised during the first half of
this year.
Beijing has also implemented various other price reform measures, such as
permitting prices of fruits, vegetables, and other nonstaple foodstuffs as
well as of certain consumer durable goods to float in.free markets, reducing
the number of commodities regulated by the state plan, and attempting to link
prices to quality.
Beijing recognizes that the Chinese industrial system needs to carry out
other reform policies in addition to price reform. Sustained long-term
economic growth can only be achieved if efficiency is improved and
longstanding bottlenecks are removed. Beijing aims to accomplish this through
such policies as increasing the economic decisionmaking authority of factory
managers, giving them more authority over marketing their products,
reinvesting their profits, and hiring and firing their workers.
Beijing has encountered problems in. the process, however. Productivity
gains have consistently lagged behind gains in wages and bonus payments, and
increased enterprise autonomy has led to wasteful, redundant capital
investment as well as to other abuses. Last year's urban reform
decision--with its major focus on price reform--made urban dwellers especially
fearful of imminent price hikes. Enterprise managers came under considerable
pressure by workers to raise wages and bonus payments late in the year.
Consequently, managers scrambled to borrow money from the banking system to
pay for increased wages and bonus payments, causing a surge in the money
supply and exacerbating China's financial strains. Inflationary pressures
rose as bank loans nationwide reportedly grew by almost 30 percent and wages
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and bonuses by nearly 20.percent. Although we have not yet received, complete.
data, available reports suggest that the trend set during the-final quarter of
1984 continued during the first quarter of 1985.
Prospects
The leadership recognizes the dangers inherent in an overheated economy
and has criticized the "unhealthy" tendency of allowing enterprise managers to
expand production blindly, irrespective of supplies of inputs or demand for
outputs. Senior Chinese officials and authoritative press commentaries have
called for slower, more balanced economic growth, coupled with a redoubling of
efforts to cut production costs and boost efficiency. Planning chief Song
Ping, at the recently concluded National People's Congress session, reported
that China's industrial output during 1985 is planned to grow by a relatively
modest 8 percent and agriculture by 6 percent.
In an apparent effort to straighten out the ailing financial situation,
Beijing appointed Chen Muhua--former foreign trade minister and believed to be
a strong proponent of exercising central control over subordinate economic
units--to head the Chinese central bank. Chen has already exerted her
authority over the banking system by imposing strict controls over the use of
foreign exchange and by tightening the central bank's control over provincial
branches. The bank reportedly will also exercise greater control by
monitoring the wage funds of state-owned enterprises and by making it more
difficult for enterprises to borrow funds from the bank. A senior Chinese
economic official recently reported that the State Council has signed off on a
new set of loan regulations that gives banks written authority to take over
the pledged assets of any enterprises unwilling or unable to repay loans.
The reformers within the leadership have claimed--not convincingly in our
view--that the problems associated with last year's too rapid economic growth
were not caused by economic reform policies. They have been put on the
defensive by the development of these problems and must be mindful of
political opposition and criticism as they move forward with such
controversial reform measures as-price and wage reforms. In our view,
however, the reformers still maintain the initiative and probably will be able
to implement several key economic reform measures--this year in both
agriculture and industry. These reforms will be accompanied by measures, such
as tightening the central bank's control over the credit supply, which are
designed specifically to prevent a recurrence of last year's abuses.
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SUBJECT: China's Economy in 1984 and Prospects for Economic , Reform in 1985,
1 - Douglas Mulholland, Special Assistant Secretary for National
Security, Room 4326, Main Treasury, Department of Treasury
1 - Mary Yee, Office of East-West Economic Policy, Room 4426, Department
1
of Treasury
- Executive Director (7E12)
1
- DDI (7E44)
1
- NIO/EA (7E62)
1
- C/EA/RR (5D10)
I
- C/PES (7F24)
1
- PDB Staff (7F30)
-1
- CPAS/ILS (7G50)
5
- CPAS/IMC/CB (7G07)
1
- D/OEA (11F18)
1
- Research Director/OEA (4G48)
2
- C/China Division (4G32)
1
- C/China Division/FOR
(4G32)
1
- C/China Division/DOM
(4G32)
1
-.C/China Division/DEV
(4G32)
1
- C/China Division/DEF
(4G32)
2
- OCR/ISG (1H19)
1
- C/EA/CORR (5D38)
1
- FBIS/NEAD/CE (304 Key-Building)
1
- C/DO/PPS D10
DDI/OEA/CH/DOM (6 June 1985)
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