CHINA'S 13TH PARTY CONGRESS: ECONOMIC ISSUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000300600001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 10, 2012
• Sequence Number: 1
• Publication Date: September 30, 1987
• Content Type: MEMO

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1
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
30 September 1987
China's 13th Party Congress: Economic Issues
Summary
China's economic performance for the first half of 1987 has
intensified debate about reform in advance of the forthcoming 13th Party
Congress. Conservative critics have sounded the alarm at inflation,
excessive increases in wages and investment, and growing budget deficits,
while reform leaders have touted eight years of rapid economic growth
and improved living standards. We believe the two sides have reached an
uneasy standoff, with agreement on steps designed to improve enterprise
efficiency. But the rift in the Chinese leadership over the extent and pace
of market-oriented reforms threatens to turn the key policy issuance of
the Congress into a vague and guarded endorsement of the role of market
forces--and-the disagreement seems certain to persist after the Congress
This memorandum was prepared by ~ Office of East Asian Analysis. It is the
sixth in a series of typescripts examining issues, personalities and factors bearing on
this fall's Congress. Information available as of 23 September 1987 was used in its
preparation. Comments and queries are welcome and may be directed to the Chief,
Economic Assessments Branch, China Division, OEA,
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Economics in the Spotlight
According to accounts in the Hong Kong media, China's economic performance in
the first half of 1987 was debated with special intensity in meetings leading up to the
13th Party Congress, scheduled to convene on 25 October. The Chinese press has
highlighted sharply divergent signals on economic policy, which we believe reflect deep
divisions among China's senior leaders over the extent and pace of market-oriented
reforms. In late August, for example, Beijing announced a temporary freeze on
previously decontrolled prices and tighter restrictions on how state enterprises can use
their retained earnings. But, at the same time, party journals and reform leaders have
touted the gains from reforms and affirm that the 0 entation of new measures
will be accelerated after the Congress. ~ m-a7
To be sure, China's uneven economic performance in the first half of 1987 has
given ammunition to both the reform and conservative camps. Spurred by a 20-percent
surge in investment spending, for example, industrial output has increased at a
15-percent annual rate. But the Chinese press has noted that product quality is poor
and inventories of unsalable goods are growing. Competition for raw materials for
industry, and growing demand for consumer goods, have outstripped supplies, pushing
prices up by an 8-percent annual rate in June--high by China's standards.
Economic performance in the countryside has, to some degree, bolstered
reformers' arguments, because the output of nonstaples and rural industries have
increased rapidly this year. But production of grain--a politically critical staple--has
stagnated, and will fall far short of its 3.5-percent growth target, according to a senior
Chinese economist. News on the foreign trade front is equally mixed, for Beijing has
continued last year's effort to trim the foreign trade deficit, slashing it by almost 70
percent in the first half of 1987. But although central government holdings of foreign
exchange increased modestly to more than $3 billion by midyear 1987, they remain well
below the $12 billion level Beijing recorded several years ago.
To complicate matters, increased investment and wage payments are contributing
to the declining profitability of state enterprises, and therefore to budget worries.
Chinese statistics show enterprise losses rising at about a 25-percent annual rate, and
more than one-fifth of state-owned industrial enterprises have recorded deficits this
year. China's central bank has tried to rein in enterprise spending by raising interest
rates, but the move has not deterred borrowing because enterprise managers are
convinced the state will bail them out if they cannot repay the loans.
The Conservative Critique
Conservatives have cited China's inflation, excessive investment, budget deficits,
and foreign exchange shortfalls to criticize reformers for economic mismanagement.
They argue that market-oriented reforms, which have reduced the scope of
administrative controls and mandatory planning, are the cause of the economic
dislocations. They are probably particularly alarmed by State Statistical Bureau figures
showing that China's inflation rate has increased each month since April. Conservatives
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may argue that social stability is jeopardized because the living standards of as many as
one-fifth of urban workers have fallen this year because their wage gains have not kept
pace with inflation.
Conservatives are correct in believing that by relaxing central controls Beijing has
increased inflationary pressures. Since the early 1980s, Beijing has broadened enterprise
autonomy--particularly by allowing state factories to retain a larger share of their
revenues and permitting them to sell overquota production of industrial goods at
"negotiated," above plan, prices. However, it has not implemented effective measures to
make enterprise managers accountable if funds are used inefficiently.
A source of Asiaweek, a Hong Kong-based news magazine, reported in mid-July
that the conservatives' strategy approaching the party congress would be to take
advantage of any economic problems or public disturbances to press for endorsement
of sharply limited reforms in the Congress policy document and for acceptance of their
own personnel choices. Judging from past responses to economic problems, we believe
conservatives want the Congress to strengthen central control of economic decision
making and increase attention to mandatory plans. Conservatives would also like to
lessen enterprise discretion over investment; lower monetary growth; tighten control
over prices, land use, and trade; and emphasize hard work. They support efforts to
increase enterprise efficiency, hence the Congress policy document may endorse wider
implementation of enterprise performance contracts with supervisory bureaus.
Proponents of market-oriented reforms have overridden the practical and
ideological objections of conservatives by arguing that monetary and fiscal policies can
guide the economy when central controls are relaxed, and by insisting that reforms be
judged by their ability to produce results, rather than by their conformity to dogma.
Consequently, reform leaders have been vulnerable to conservative criticism when the
economy performed poorly. It is thus no coincidence that in recent weeks reformers
have orchestrated an intense media barrage to deflect attention from the conservatives'
critiques, recounting improvements in the standard of living, economic growth, Inmduct
variety, and other successes since the introduction of reforms eight years ago.
While conservatives argue that the economy's problems derive from the fast pace
of reform, reformers believe that dislocations result--in part--from piecemeal
implementation of reforms. For example, reformers argue that Beijing should substitute
the threat of bankruptcy for the certainty of state subsidies, to motivate enterprise
managers to control investment spending and wage increases. To refo
policy flexibility is the appropriate response, not greater central control.
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The Clampdown on Prices
According to Hong Kong journals and diplomatic reports, since the early 1980s
China's top leaders have feared the sort of public uprising that occurred in
Poland when food price hikes contributed to the growth of the Solidarity trade
union movement. With the release of the economic performance statistics for
the first half of the year and the ensuing debates about policy, senior leaders
decided to implement an across-the-board freeze on prices and to tighten
restrictions on investment spending. Chinese press reports indicated that the
price freeze was in response to widespread consumer complaints about rising
prices, particularly of food:
? In late August, Beijing ordered prices of consumer goods, including
foodstuffs, frozen for the remainder of the year. To accomplish this, it
authorized local governments to set price ceilings on farm produce sold at
village markets and on overquota production of industrial goods--thus
retreating on recent policies that allowed sales at negotiated prices.
? Beijing announced that only capital construction projects already approved b4
the central government may be started in the second half of this year. And
if locally funded investment spending exceeds the targets set earlier this
year, the excess will be deducted from next year's target and responsible
officials will be disciplined.
? Enterprise managers were ordered to keep wage increases from exceeding
the growth of industrial productivity.
To ensure compliance, Beijing announced that its annual nationwide inspection
of prices and finances will begin early this year.
Reformers worry that, having exhausted the easy immediate gains from reform
policies in the late 1970s and early 1980s, mounting economic problems could erode
popular support for reform and slow its momentum. As a result, reform leaders are
constantly on the alert for opportunities to press for further gains and avoid economic
stagnation. We believe they would like to implement a series of related market-oriented
policies which are especially contentious within the leadership:
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? Reformers would like a bankruptcy mechanism to establish market accountability
for state enterprises.
? Reformers argue that the state should lease or sell small state enterprises,
particularly those sustaining losses, to individuals. This not only would ease the
government's subsidy burden but would make the factories more responsive to
market forces. Moreover, they view the expansion of private enterprises as a
means of absorbing surplus labor.
? Reform leaders call for further commercialization of agriculture. Recent articles
in the Chinese press argue that, to boost grain production, Beijing should hike
procurement prices and continue to reduce the amount of grain peasants must
sell under contract to state supply units.
Looking Ahead to the Congress
Because the mixed performance of the economy this year has awarded no clear
vindication to either the conservative or the reformist camp, we doubt that either side
will score a clear-cut victory on this issue at the Congress. If anything, we believe
conservatives have reached a modus vivendi with reformers that amounts to the lowest
common denominator of acceptable policies, focusing reform on improving enterprise
efficiency and deferring the hard choices--such as price reform--until after the
Congress. Recent public statements by conservative leaders seem carefully crafted to
appear supportive of reform--for example, by espousing reform of the planning
system--while stressing that priority should be given to restoring economic stability. F-] 25X1
Thus despite this year's economic problems, the Congress's policy document will
probably approve the general direction of economic reforms and affirm that market
forces can play a key role in driving China's modernization program. A senior Chinese
official told US Embassy Beijing that the document will lay the ideological basis for
far-reaching future reforms.
We believe, however, that, because of the sharp split among senior officials over
economic policy, the document will not provide a detailed account of how Beijing plans
to proceed with reforms. The Congress probably will couch its endorsement of reform
in rhetoric that reaffirms China's long-term commitment to socialism, thereby watering
down its endorsement of market mechanisms. Approval of the Congress document
therefore will not reduce contention over economic policy. In fact, by treat the
symptoms--excessive investment spending and price hikes--rather than attacking the
disease--lack of market accountability--reformers probably have prolonged the period
until Beijing will have adequate monetary and fiscal tools to moderate the strong
demand pressures generated by relaxed central controls.
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Subject: China's 13th Party Congress: Economic Issues
DISTRIBUTION:
White House and National Security Council
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Room 298
1 - James A. Kelly, Senior Director for Asian Affairs, Old Executive
Office Building, Room 302
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Department of State
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(EAP/CM), Room 4318
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(EAP/CM), Room 4318
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Chinese and Mongolain Affairs (EAP/CM), Room 4318
1 - Bob Goldberg, Office of Chinese and Mongolian Affairs (EAP/CM),
Room 4318
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Department of Treasury
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Security Affairs, Pentagon, Room 4E808
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Affairs/ISA, Pentagon, Room 4E817
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Pentagon, Room 2C238
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