INDUSTRIAL ORGANIZATION AND PLANNING IN COMMUNIST CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01141A001000040001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 49
• Document Creation Date: December 23, 2016
• Document Release Date: June 17, 2013
• Sequence Number: 1
• Publication Date: December 31, 1957
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
N? 36
ECONOMIC INTELLIGENCE REPORT
INDUSTRIAL ORGANIZATION AND PLANNING
IN COMMUNIST CHINA
CIA/RR 119
31 December 1957
CENTRAL INTELLIGENCE AGENCY
OFFICE OF RESEARCH AND REPORTS
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
S -E-C -R-E-T
ECONOMIC INTELLIGENCE REPORT
INDUSTRIAL ORGANIZATION AND PLANNING IN COMMUNIST CHINA
CIA/RR 119
(ORR Project 41.1584)
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
FOREWORD
The emphasis of this report is on the central industrial plan-
ning process in Communist China, which involves primarily the
direction and administration of nationally operated industry.
Information on local industry, which constitutes almost half of
the industrial output of Communist China, is too sparse to warrant
more reporting at this time.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79R01141 A001000040001-4
CONTENTS
Page
Summary and Conclusions . . . . . . . . . . . . . . . . . . 1
I. Historical Development . . . . . . . . . . . . . . . . 4
A. Regional Planning . . . . . . . . . . . . . . . .
B. National Planning . . . . . . . . . . . . . . . . .
II. Industrial Organization . . . . . . . . . . . . . . . . 8
A. State Council . . . . . . . . . . . . . . . . . . . 8
B. Industrial Ministries . . . . . . . . . . . . . . . 9
C. Industrial Enterprises . . . . . . . . . . . . . . 11
1. State Enterprises . . . . . . . . . . . . . . . 12
a. Nature of the Enterprise . . . . . . . . . 12
b. Enterprise Organization . . . . . . . . . . 14
2. Joint State-Private Enterprises . . . . . . 16
III. Planning Organization . . . . . . . . . . . . . . . . . 20
A. Policymaking Machinery . . . . . . . . . . . . . . 20
B. Executive-Administrative Machinery . . . . . . 21
1. Central Government . . . . . . . . . . . . . . 21
a. Commission for National Planning and
National Economic Commission . . . . 21
b. National Technological Commission . . . . . 23
c. Commission for National Construction . . . 23
2. Local Government . . . . . . . . . . . . . 24
IV. Planning Process . . . . . . . . . . . . . . . . .. . . 25
A. National Government Commissions . . . . . . . . . 26
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79R01141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Page
B. Ministries . . . . . . . . . . . . . . . . . . . . 28
C. Local Governments . . . . . . . . . . . . . . . . 29
D. Enterprises . . . . . . . . . . . . . . . . . . . 30
1. Composition of the Plan . . . . . . . . . . . 30
2. Formulation of the Plan . . . . . . . . . . . 32
V. Some Problems of Industrial Organization and
Planning and Attempted Solutions . . . . . . . . . . 31+
Appendixes
Percentage Distribution of Total Industrial Output
in Communist China, by Type of Enterprise Ownership,
1952- 56. . . . . . . . . . . . . . . . . . . . . . . . . .
Charts
Following Page
Figure 1. Communist China: Government Organs
Responsible for Management of Industry,
November 1957 . . . . . . . . . . . . . . . 10
Figure 2. Communist China: A Typical Industrial
Ministry . . . . . . . . . . . . . . . . . . 10
Figure 3. Communist China: Organization of a
Petroleum Refinery . . . . . . . . . . . . . 16
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
CIA/RR 119 S-E-C-R-E-T
(ORR Project 41.1584)
INDUSTRIAL ORGANIZATION AND PLANNING IN COMMUNIST CHINA*
Summary and Conclusions
Industrial activity in Communist China is organized and directed
through a hierarchical structure closely patterned after that exist-
ing in the USSR before 1 July 1957. Some industry is directly man-
aged by 16 industrial ministries acting under the general direction
of the State Council, the Chinese equivalent of the Council of Min-
isters in the USSR. The number of such ministries has increased
with the development of the various industries, from 4 in 1950 to
the present 16, 7 of them having been created during 1955-56. A
substantial part of light industry is under the direct management of
the industry departments of the various local governments. Respon-
sibility for over-all industrial planning is centered in four com-
missions attached to the State Council, as follows: the Commission
for National Planning (long-range planning), the National Economic
Commission (current planning), the National Technological Commission,
and the Commission for National Construction. Planning commissions
are also attached to the local governments.
Other forms of business organization, however, exist in Com-
munist China at the present time and reflect the fact that the re-
gime is attempting to implement complete central planning. Those
private industrial enterprises which continue to operate are in-
directly controlled by the state through purchase contracts and raw
materials allocations. Industrial cooperatives have been organized
mainly in small handicraft fields. State enterprises control almost
all heavy industry and some light industry, and joint state-private
enterprises control much light industry. Plan figures indicate that
in 1956 state enterprises produced 63.8 percent of all industrial
output; joint state-private enterprises, 31.1 percent; industrial
cooperatives, 4.7 percent; and private businesses, 0.4 percent.
With respect to organization, management, and planning procedures,
the state enterprise in Communist China closely resembles its Soviet
counterpart. The annual enterprise plan, for example, which re-
gulates the activities of each state enterprise, is a carbon copy of
* The estimates and conclusions contained in this report represent
the best judgment of ORR as of 1 November 1957?
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
the technical-industrial-financial plan under which firms in the USSR
operate. Chinese firms or enterprises seem to experience the same
kinds of difficulties in plan formulation as do Soviet firms and to
react in a similar manner in coping with them.
The joint state-private enterprises represent the use of a method
of nationalizing private business which in nature, extent, and duration
is unique in the history of Communist takeover of capitalist economies.
During 1950-54, private companies were converted to joint ownership
firm by firm, but during 1955-56 the conversion program was greatly
accelerated by the inauguration of a concerted nationwide drive to form
such joint companies industry by industry and city by city. As a re-
sult, the share of joint enterprises in total industrial output in-
creased from 5 percent in 1952 to a planned 31.1 percent in 1956 while
the share of private industry dropped from 42 percent to 0.4 percent.
In spite of some difficulties in completely controlling the activities
of the joint companies, the Chinese Communists evidently consider them
a satisfactory device for obtaining control of private firms and for
utilizing the managerial skills of their owners, for the joint com-
panies are to be continued through 1962.
The establishment of full-scale central planning in Communist China
has been fraught with difficulties, many of which seem to arise from
the-inability to fix realistic production targets and to make feasible
investment allocations. The Chinese are continually attempting to im-
prove the efficiency of planning by making organizational changes con-
ducive to the formulation of more realistic plan targets. As the
various industrial sectors have developed, new ministries or other
organs have been established to manage them. The proliferation of
economic agencies, which began with the inception of comprehensive
central planning in 1953, culminated in May 1956 in the establishment
of 10 new ministries, 2 commissions, and 2 bureaus. At that time,
too, long-range planning was separated from short-range planning by
the establishment of the National Economic Commission, which was.made
responsible for current planning, and a separate agency for commodity
allocation was created. Likewise the responsibility for planning in
the critical field of technological development was centered in a
newly established National Technological Commission. By thus promoting
organizational specialization in the economic apparatus, the Chinese
hope to make the planning process more flexible and more realistic.
Some of the difficulties in planning seem to stem from excessive
centralization of administration and lack of clear delineation of
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
responsibilities between central and local planning organs. Prelimi-
nary steps are being taken to cope with these problems. In June 1956,
Chou En-lai announced that a plan for division of planning and managerial
authority between central and local government agencies was being drafted
and would be implemented to some extent in 1957. In a speech to the
Eighth Party Congress in September 1956 the Chairman of the Commission
for National Planning severely criticized the existing planning procedures,
maintaining that state plans were too rigid, that the plans contained too
much minute detail, that procedures for obtaining final approval of enter-
prise plans were overcentralized, and that the Commission had made no
real delegation of planning authority to lower levels. He also made a
number of specific recommendations for changes in planning procedures
oriented toward more flexibility and less centralization.
The few statements that have been made concerning plans for decentral-
ization of administration in Communist China do not make. clear what de-
gree of decentralization is being contemplated. It seems doubtful that
the amount of delegation of central planning authority to local levels
will be very great,, because the government is still in the process of
consolidating its control over all economic activities. Effective
decentralization cannot be carried out, moreover, unless trained personnel
are available at the local levels to carry out state policy, and in China
the shortage of such persons is acute. No major change in the admin-
istrative structure seems. to be contemplated.
In spite of the many difficulties involved in central planning in
Communist China, the government has made substantial progress toward
achieving its long-range goals of complete nationalization of economic
activity and rapid industrialization. Continuation of the attempts to
improve the administrative organization and to inject elements of flex-
ibility into central planning procedures should facilitate the attainment
of the production and productivity goals set for the period of the Second
Five Year Plan (1958-62).
- 3 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
I. Historical Development.
Over-all national economic planning in Communist China was formally
established in 1953, the first year of the First Five Year Plan (1953-57).
Before this time, some planning was done on a limited scale by the re-
gional governments, but the planning activities of the central government
were limited to the following: (1) the creation of a rudimentary planning
organization, (2) the convocation of planning conferences, and (3) the
preparation of targets for basic industry. /* The period 1950-52 was
considered a "reconstruction phase," and the objective of the government
during this period was the restoration of industrial production to the
levels attained in the prewar years by the Japanese in Manchuria and by
the Nationalist government in China.
In moving toward their goals of comprehensive economic planning and
industrialization of a primarily agricultural economy, the Chinese Com-
munists were able to start from the rudimentary industrial base and the
few regional plans developed by their predecessors on the mainland of
China. During the 1930's the Japanese had established some industry in
Manchuria by importing capital equipment and had engaged in comprehensive
planning for the area. In certain coastal "treaty ports" of China a
small light or consumer goods industry along with some electric power,
engineering, and transportation facilities had been developed in re-
sponse to increasing trade with the West. The National Resources
Commission of the Chinese Nationalist government, with the aid of US
technicians, had worked out various long-range plans for the development
of certain natural resources. Although few of these plans were im-
plemented, they have provided the Chinese Communists with valuable data
for use in formulating long-range economic plans.
A. Regional Planning.
During the period of reconstruction, 1950-52, much of the
planning undertaken in Communist China was regional in character or
was related to specific industries. J There was little national
planning as such. The various regional governments exercised consider-
able autonomy in political and legal affairs. This initial system of
regional administration in China was established as the Communist armies
were moving south and west from the north and was based more on military
than on economic or political considerations. The system consisted, at
the end of the period, of seven regions (or districts, or "greater areas"),
each of which, in turn, was composed of provinces. At first each region
-4+-
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
was administered by the military commanders who occupied the area.
Later a civil government was added. The latter was called the North-
east Peoples Government in Northeast China, the Inner Mongolian Auto-
nomous Government in Inner Mongolia, the Ministry of North China Affairs
in North China, and the Military and Administrative Committee in the re-
maining four regions of Central-South China, Southwest China, Northwest
China, and East China.*
Regional production planning, and indeed all planning for economic
development, was undertaken first in Northeast China, where the Communists
had consolidated their position after the close of World War II. Pro-
duction goals for existing industries in this area had been formulated as
early as 1948. Beginning in 1950, other regions announced annual economic
plans and specific production goals for the more important agricultural
and industrial products. Beginning in 1952, some long-range plans were
also announced: a 4-year plan for economic development of East China, a
5-year plan for irrigation development of Central-South China, and a
5-year agricultural development plan for the Northeast.
In 1952 the regional civil governments were stripped of much of
their authority, and in 195+ the regions were abolished as units of gov-
ernment administration. The provinces were made directly subordinate to
Peking, and the functions of a number of industry departments of the former
regional governments were taken over by the central government. Military
regions continue to exist as part of the military administration, but
their boundaries have been changed for military and strategic reasons.
B. National Planning.
Shortly after the Communists seized control of the mainland of
China in 19-9 the Peoples Republic of.China was established. The supreme
governing body, known as the Government Council, directed the activities
of a Peoples Revolutionary Military Council responsible for military
administration, a Procurator-General in charge of legal and judicial
administration, and a State Administrative Council responsible for the
executive administration of civil affairs. The State Administrative
Council had 4 coordinating committees, 1 of which, the Finance and Economic
Committee, established a planning bureau to compile statistics, accumulate
economic reference material, and study the basic principles and techniques
of planning with.the help of Soviet specialists.
* The names of geographic areas used here are those of the Chinese
Communist Administrative Divisions before November 195+
- 5 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
In November 1952 a Commission for National Planning was
established by the Government Council in Peking for the purposes
of "strengthening the centralized nature" of planning and initiating
"large-scale economic construction." J The 17 members of the Com-
mission. were high-ranking Communists; 3 were known to be members of
the Politburo, and 10 others were members of the Central Committee of
the Communist Party. Important military and government leaders were
also members of the Commission. J The Chinese term used to refer to
the Chairman of the Commission for National Planning was Chu Hsi, in-
dicating the highest administrative level. Thus the membership and status
of the Commission indicated that it had broad authority for planning
in capital construction, industry, trade, military affairs, education,
and cultural and legal affairs.
In 1954 the Constitution of the Peoples Republic of China was
published, and a number of major changes were made in the central
government structure. The Government Council and the State Admini-
strative Council were combined to form a new State Council, the
Commission for National Planning was placed directly under the super-
vision of the State Council along with the ministries, and a new
Commission for Capital Construction was established. The Chairman
of the Commission for National Planning, Kao Kang, who had been accused
of attempting to build and maintain an independent empire, was relieved
of all his government positions, was dismissed from the Party, and re-
portedly committed suicide. A new chairman was appointed, and the mem-
bership of the Commission was enlarged. The newly appointed members
were relatively minor Party officials. The change in membership may
have been either an attempt to strengthen the technical competence of
the Commission or a device to prevent its being used as a vehicle of
personal power. The work regulations for the Commission for National
Planning (issued in October 1955) indicate that the Commission exercises
a staff function for the State Council in advising and recommending
plans and planning procedures.
The only other major change in planning organization was the
creation in May 1956 of a National Technological Commission and a
National Economic Commission. The latter was made responsible for
annual planning, with the responsibility for long-range planning re-
maining in the Commission for National Planning. The appointments to
membership on the National Economic Commission (not announced until
November 1956) included men with experience on the older Planning
Commission.
-6-
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
The Constitution of Communist China sets forth the purpose
of economic planning in the following terms (article 15):
The state employs economic planning to direct the
development and transformation of the national economy
in order constantly to increase productive forces and
to improve and strengthen the independence and security
of the state.
These principles are exemplified in the First Five Year Plan of Com-
munist China, which covers the period 1953-57. The final draft of
the plan was not completed until February 1955 and was not made
public until June 1955 at the session of the National Peoples Congress.
The plan provides for the gradual industrializing of the economy:
more specifically it sets production targets for agriculture and in-
dustry; allocates investment funds; establishes capital construction
goals for industry, transportation, and telecommunications; defines
measures for geological exploration and conservation of natural re-
sources; and fixes targets for domestic trade, foreign trade, labor
productivity, and worker training. Finally, the plan provides a
program for socializing industry, commerce, and agriculture.
The Chinese Communists have established balanced regional
economic development as a major goal of the industrialization
program, and initial plans for the geographical redistribution of
industry were included in the First Five Year Plan. These plans
designate two regions -- "coastal" and "interior" -- for purposes
of industrial investment allocation. Any province not on the coast
of China is considered to be in the interior. To balance the in-
dustrial bases established by foreign capital in the coastal region,
the plan specified that two-thirds of all major new industrial
construction projects and three-fifths of all new electric power
generating capacity were to be located in the interior. Later these
proportions were reduced somewhat. The Chinese Communists have
stated the intention to create at least 1 facility for each major
industry in each of the 2 regions by the end of the Second Five Year
Plan (1958-62). Smaller regions for purposes of economic development
are to be defined and established during the period of the Second
Five Year Plan.* After the completion of the basic geological
* There is already some information available which indicates the
possible composition of these regions, footnote continued on p. J
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
survey work scheduled for the First and Second Five Year Plan periods,
these regions are to be developed as "economic entities," with the
objective of promoting both regional self-sufficiency and national eco-
nomic interests. V
II. Industrial Organization.
Industrial activity in Communist China is organized and directed
through a,hierarchical structure resembling that of the USSR. The
Chinese have adopted the Soviet principle of "democratic centralism"
and have embodied it in a highly centralized state administration,
with strict subordination of lower to higher organs. The task of
each unit in the hierarchy is to execute within its area of competence
economic plans and directives established by higher levels and ulti-
mately by the Politburo (especially its Standing Committee) of the
Communist Party, which in China is the supreme policymaking body.
The State Council of the Peoples Republic of China -- the
counterpart of the Council of Ministers in the USSR -- is the highest
executive and administrative authority of the state. The Constitution
gives the Council specific responsibility for directing and coordi-
nating the activities of all ministries and commissions of the central
government as well as all organs of local government.* With respect
to economic affairs the Council exercises general supervision over
both the formulation and implementation of the national economic plan
and the state budget.
10 in number. Basically they are not much different from the old mili-
tary grouping, for they include the three autonomous regions of Tibet,
Inner Mongolia, and Sinkiang; Liaoning, Heilungkiang, and Kirin in the
Northeast; Hopei, Shansi, Shantung, and Honan in North China; Kiangsu,
Chekiang, and Anhwei in East China; Szechwan, Yunnan, and Kweichow in
the Southwest; Shensi, Kansu, and Tsinghai in the Northwest; and a
split of old Central-South China into Central China (composed of
Kiangsi, Hupei, and Hunan) and South China (composed of Fukien, Kwan-
gsi, and Kwangtung -- and Taiwan).
* The term local is used here and throughout this report (unless otherwise
defined) to mean the governments of the 22 provinces, the autonomous
regions, and the 3 centrally controlled municipalities of Communist
China.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
The State Council is composed of a premier, 12 vice-premiers,
a secretary-general, and the heads of all ministries and commissions.
Eight Staff Offices have been established directly under the premier
to assist him in directing and coordinating government policy. Three
of the Staff Offices are responsible for the administration of in-
dustrial affairs 8J: the Third Staff Office directs the activities
of ministers administering heavy industry and construction, the Fourth
Staff Office directs those in light industry, and the Eighth Staff Office
is concerned with the socialization of private industry. In addition to
the Staff Offices, which exercise primary responsibility under the State
Council for implementing the national economic plan, 41 ministries and
7 commissions are subordinate to the Council. Only 16 of these ministries
and 4 of the commissions, however, are directly involved in industrial
planning and in the management of specific segments of industry (see
Figure 1*).
B. Industrial Ministries.
The number of industrial ministries** in Communist China has
grown with the development of the economy from 5 in 1950 (the Min-
istries of Heavy Industry, Light Industry, the Food Industry, the Fuel
Industry, and the Textile Industry) to the present 16 (the Ministries
of the Metallurgical Industry, the Chemical Industry, the Construction
and Engineering Industry, the Building Materials Industry) First Machine
Building, Second Machine Building, Third Machine Building,*** Light In-
dustry, the Food Industry, the Textile Industry, the Timber Industry,
the Electric Power Industry, the Power Equipment Industry, the Petroleum
Industry, the Coal Industry, and City Construction). A similar pro-
liferation of ministries responsible for industrial administration
occurred in the USSR during 1939-53.
* Following p. 10.
** The Chinese. Communists have listed 14 industrial ministries for
investment purposes and 11 for purposes of production. This report
uses a broader definition of industry to include the manufacture of
producer and consumer goods, capital construction, and exploitation
of resources.
*** This ministry, responsible for locally operated joint public-
private and private machinery and power equipment industries, was
abolished in May 1956. In November 1956, however, a high-ranking
Communist was appointed Minister of the Third Ministry of Machine
Building, apparently with a new responsibility. 9/
-9-
S-E-C-R-E-T
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Each ministry is headed by a minister, several deputy ministers,
and a number of assistant ministers (see Figure 2*). Each ministry is
responsible for organizing the production effort of the industry under
its control and for directing the capital construction to be under-
taken in that industry as prescribed by the national economic plan.
Each of the industrial ministries administers and directs the activities
of all significant producing enterprises in the industry. The enter-
prises may be either wholly state enterprises (those owned and operated
by the state) or joint enterprises (those jointly owned by the state
and private interests and placed under the appropriate ministry for
control and administration).
With respect to internal organization the industrial ministries
in Communist China closely resemble the economic ministries in the USSR.
In China the internal organization of a ministry is not always uniform
but depends on the specific administrative needs of the industry con-
cerned. All ministries have established a series of staff offices
organized along functional lines. Most ministries have staff offices
(the precise responsibilities of some of which are not clear) for
design, capital construction, finance, business, planning, personnel,
labor-wage, and production techniques. Ministries that are concerned
with the exploitation of basic resources also have geology offices.
Each ministry supervises a number of control bureaus (the counter-
parts of the glavki, or main administrations, in the USSR), which
may be organized along geographical lines or along product lines.
Geographical control bureaus carried a regional designation (such as
Northeast, Northwest, East China, and so on) before the abolition of
the six regional governments in 1954. After 1954 the names of these
bureaus were changed to designate the specific locations or head-
quarters of the bureaus (such as Sian, Shenyang, or Shanghai), but in
many cases each bureau exercised the same authority as before.
Each product control bureau in a ministry directly supervises
all enterprises producing a given product or group of products. The
Ministry of Light Industry, for example, has control bureaus for the
drug, salt, paper, rubber, pharmaceutical, and tobacco and wine in-
dustries. In the machine building ministries, control bureaus are
referred to by number rather than by product. When the industry
segment under the supervision of a given control bureau expands suf-
ficiently, the bureau may be elevated to the status of a ministry.
Thus all the industrial ministries created within the past 2 years
(the Ministries of Building Materials, the Power Equipment Industry,
Following p. 10.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Figure 150X1
COMMUNIST CHINA'
Government Organs Responsibl for -Management of Industry
,r~ NOVEMBER 1957 /L7
LOCAL GOVERNMENT
STRUCTURE
LOCAL PEOPLES'
COUNCIL
Local Industry
Departments
`STATE COUNCIL
Central Industrial
and Commercial
Administration
Control Bureau*
CENTRAL GOVERNMENT
STRUCTURE
Construction and Engineering
Building Materials Industry
Coal Industry
Petroleum Industry
City Construction
First Machine Industry
Second Machine Industry
Third Machine Industry
Metallurgical Industry
Electric Power Industry
Power Equipment Industry
Chemical Industry
*The Central Industrial and Commercial Administration Control Bureau is responsible for directing
the socialization of private industry and commerce under the direction of the eighth Staff Office.
Textile Industry
Light Industry
Timber Industry
Food Industry
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79R01141A001000040001-4
COMMUNIST CHINA
A Typical Industrial Ministry*
CAPITAL
CONSTRUCTION
SALES AND
SUPPLY
PLANNING AND
STATISTICS
LABOR
WAGE
FINANCE AND
ACCOUNTING
*This chart represents a simplified presentation of the basic internal organization which is common to most industrial ministries.
The internal organizations of the various ministries differ in detail to a considerable degree, and no attempt is mode here to
include either detail or variation.
PRODUCTION
TECHNIQUES
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79R01141A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
the Metallurgical Industry, the Coal Industry, the Electric Power
Industry, the Petroleum Industry, and the Chemical Industry) formerly
existed as control bureaus in various ministries.
C. Industrial Enterprises.
The forms of business organization existing in Communist China
at the present time reflect the fact that the regime is attempting to
implement complete central planning in the economy. The private in-
dustry which still exists is indirectly controlled by the state through
government contracts and raw materials allocations. In addition to
private firms, there are in China three other forms of business
organization, as follows: (1) state enterprises, (2) joint state-
private enterprises, and (3) cooperatives.*
The change in the relative significance of the different
types of enterprises during 1952-56 is shown in the table.
Percentage Distribution of Total Industrial Output
in Communist China, by Type of Enterprise Ownership J
1952-56
1956
1952
1953
1951+
1955
(Planned)
State enterprises
50
54
59
63
63.8
Cooperatives
3
3.5
3.8
5
11.7
Joint state-private
enterprises
5
5.7
12.3
16
31.1
Private enterprises
42
36.8
21+.9
16
0.1+
a. 7. Excluding handicrafts.
* Industrial cooperatives exist mainly in handicraft industries.
Little is known about their organization and methods of operation.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
In addition to a breakdown of total industrial output by type
of enterprise organization, it is also possible to distinguish between
the two kinds of state control, national and local.
industrial enterprises under local administration
(which would include both local and joint enterprises) account for
45.9 percent of the total industrial output. ll
1. State Enterprises.
State-owned enterprises in Communist China fall into
two categories: "national enterprises," controlled directly through
the industrial ministries of the central government in Peking, and
"local enterprises," controlled through various industrial departments
of the local governments. National enterprises comprise that part of
the industrial economy whose production activities, sources of supply,
and market are significant to the national economy, whereas local in-
dustrial enterprises engage in the manufacture and processing of indi-
genous resources intended largely for local consumption. The latter
include textile and timber mills, small mines, tool factories, and
agricultural processing facilities. In 1956, local industry represented
about 45.9 percent of total industrial output. L2J The term local in-
dustry as used here includes all industry under local administration
both local state-operated and joint state-private). Local state-
operated enterprises contributed 14.5 percent of total industrial out-
put in 1952 and, according to the First Five Year Plan, will be expected
to contribute 20.3 percent in 1957. The figure of 45.9 percent, there-
fore, would seem to include the production value of nearly all private
industrial enterprises converted either to joint state-private or local
state-operated enterprises since 195+ and would represent an expansion
of the role of local industry as envisaged by the First Five Year Plan.
According to the organic law setting up local peoples congresses, the
industry departments of the local governments perform the same type of
planning and administrative functions for local enterprises that in-
dustrial ministries perform for national enterprises. L3J
a. Nature of the Enterprise.
As in the USSR, the state-owned enterprise in Com-
munist China operates under a predetermined production plan which
sets output targets and fixes input limits. 14+ Within the limits
of this plan and the regulations of supervising organs, an enterprise
is a legal and independent entity. It is responsible for all its
operations, for fulfillment of its plan within the designated time
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
period, for prompt payment of its obligations, and for timely com-
pletion of all its contracts. The enterprise is allocated materials
by the ministry or other state supply organs in accordance with the
limits established by the plan. Its product is sold through state
trading organs or in accordance with prearranged contracts with
customers at prices determined by the ministry.
An industrial enterprise is described by the Chinese
Communists as an independent economic accounting unit engaged in the
production of industrial products. An enterprise is required to
minimize production cost, fulfill a prescribed production plan, remit
the profit (if any) from its activities to the state, and economize
in the use of scarce raw materials.
Overfulfillment of the production plan and reduction
of product costs are the marks of a successful enterprise. "Encourage-
ment funds" (similar to the "enterprise funds" in the USSR) are estab-
lished in those enterprises which have realized their production
quotas. 15 From 2.5 to 5 percent of the planned profits of an enter-
prise can go into this fund. Enterprises in mining and nonferrous
metallurgy which achieve above-plan profits are permitted to retain
up to 20 percent of such profits; plants in the electrical and machine
building industries, up to 15 percent; and those in light industry and
public utilities, up to 12 percent. The encouragement funds may be
used only for designated purposes: welfare measures for workers, cash
awards to individuals, and investment for the improvement of expansion
of production.
All financial transactions of the enterprise must clear
through the local offices of the Peoples Bank of China.* State enter-
prises must deposit all cash receipts, with the exception of small
petty cash funds, in the appropriate branch of the Peoples Bank at the
close of each business day. Once deposited, the money can be with-
drawn only for designated purposes such as payment of salaries and
The Peoples Bank of China exerts a large measure of control over
enterprise activities through supervision of the enterprise's financial
transactions and audits of enterprise accounts. The Bank is authorized
to refuse to pay any item which it judges not to be in accord with the
terms of business contracts and enterprise plans. In granting loans the
Bank is required to insure that the loan proceeds are used for the pur-
poses designated and that the loan is repaid promptly. The Bank may
refuse credit to an enterprise whose financial status it deems unsatis-
factory. 16
- 13 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
travel expenses. All commercial transactions within the state sector
must take place through immediate interaccount transfers / because
the enterprises are forbidden to extend credit to one another.
The enterprise may obtain budgetary allocations and state loans for
working capital or capital investment only for the purposes and in the
amounts specified by its financial plan, and only through the banking
system.
The enterprise uses cost accounting methods, independent
auditing procedures, and periodic statistical reporting systems governed
by nationally prescribed forms. The'enterprise is required to submit
periodic reports on production and sales, wages and working hours, pro-
duction cost, consumption of raw materials, and equipment utilization. 19
Monthly and quarterly reports must be submitted on the 10th day of the
following month and annual reports by 15 February of the succeeding year.
b. Enterprise Organization.
An enterprise in Communist China is administered by a
director and a number of assistant directors who must adhere to the
enterprise plan and the regulations of superior organs.* The director
of the plant is responsible for all phases of plant operations. The
director's deputy or first assistant, the chief engineer, supervises
the detailed implementation of all production plans. No consistent
pattern is characteristic of the internal organization of industrial
enterprises at present. The staff departments which seem to be re-
latively common, however, are as follows: planning (to coordinate
enterprise planning and prepare drafts of plans for submission to
higher organs); technical planning (to work out norms and quotas for
labor, materials, and equipment); production techniques (to institute
.and popularize new production methods); personnel; accounting; finance;
business; capital construction; security; and labor-wage. The line
organization in the plant necessarily differs with the nature of the
* According to Chinese Communist doctrine, managerial responsibility
and authority in state enterprises are supposed to be fixed in accord-
ance with the principles of "the responsibility system of industrial
management" -- a concept identical to the doctrine of "one-man manage-
ment" used in the USSR. LO/ This doctrine merely asserts that each
level in the chain of command is held responsible for all actions within
its competence and that each is supposed to be given authority commen-
surate with such responsibility. How well the Chinese are able to apply
this doctrine in actual practice is not known.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
production process, and wide diversities therefore prevail. For
purposes of illustration, the internal organization of a petroleum
refinery is shown in Figure 3.* 21
In the early days of Communist takeover of private
firms the enterprise director was advised by a plant control committee
consisting of the assistant directors, the chief engineer, the chiefs
of the workshops, the secretary of the plant Communist Party committee,
the chief of the enterprise labor union, and the head of its Youth
League. These committees at that time exercised genuine responsibility
in policy matters ranging from production planning to general adminis-
tration. 22 As the authority of the Communists was consolidated in the
individual industrial enterprises, however, Party members were appointed
to administrative positions, thus stripping the control committees of
any real managerial power. If they were continued at all, they performed
only an advisory function by coordinating workers' suggestions for in-
creasing production and promoting plant efficiency. At the present time,
such committees are used to assist in the transformation of private
enterprises into joint state-private enterprises.
Perhaps the most candid admission of Party control over
the management and administration of state enterprises was made by Li
Hsueh-feng, the Director of the Department of Industrial and Communi-
cations Work of the Central Committee of the Party, in a speech at the
Eighth National Party Congress in September 1956 calling for increased
Party supervision over industrial management activity. Several sub-
sequent press items have reflected the same theme. The terminology
used in the current campaign is "assuming responsibility under Party
leadership" in order to combine the "individual responsibility" of the
manager with "collective leadership" of the local Party committee. The
local Party committee controlled state enterprises during the resto-
ration period (1949-52), according to Li Hsueh-feng, in order to effect
management reform. During 1953-56, however, the doctrine of one-man
management was instituted to increase production and to establish a
system of responsibility. By September 1956, in many cases the factory
managers had assumed all management responsibility, and the Party role
had degenerated to "general supervision" and "propagandizing." The
present drive to increase Party authority in state enterprises counter-
balances the one-man management principle by requiring that "all major
questions of enterprises, including management" should be decided under
the leadership of the Party committee. In effect this confines the
manager's responsibility to implementing those joint decisions. 23
* Following p. 16.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Another indication of recent decisions to weaken the
power of factory managers is the experiments in "worker management"
being conducted in five locally operated state enterprises. A "man-
agement committee" elected by the workers and consisting of laborers,
Party, Youth League, and labor union representatives was established
in each enterprise, with authority to elect the manager and assistant
manager of the enterprise and to review his decisions, plans, and re-
ports. These committees have been instituted only on a trial basis 24+
and to lead the mass labor organizations and undoubtedly will be
closely controlled by Party authorities.*
The role of the trade union in industrial enterprise
management is limited to planning welfare activities for its members
and assisting the director in disposition of the plant's welfare fund.
Quarterly or annual collective agreements between the trade union and
the state enterprises make the union coresponsible with management for
fulfillment of the tasks fixed in the enterprise plan. In addition,
the union agrees to popularize all "advanced experiences," (that is,
new production techniques) to strengthen labor discipline, to train
and educate workers, and to implement safety measures. 26 Again at
the Eighth Party Congress the Chairman of the All-China Federation of
Trade Unions urged the increased participation of workers and trade
unions in management functions, such as fixing wage scales and work-
ing norms, "taking charge of labor insurance and supervising safety,"
and holding workers' conferences to hear management reports. 27
2. Joint State-Private Enterprises.
The Chinese Communists have adopted a method of social-
izing private capital -- the establishment of joint state-private
enterprises -- which is unique in the history of Communist take-
over of private enterprise. This form of business organization
represents an intermediary step between private ownership and state
ownership and is referred to as "state capitalism" by the Chinese.
The formation of joint enterprises has been used since
1950 as a device to secure control of industrial, transportation,
and commercial interests of private businessmen. The Party has
announced its intention to continue these enterprises through the
period of the Second Five Year Plan. 28
* These management committees, although closely controlled by the
Party, resemble the workers councils established in Poland in recent
months. L 5J organizations do not exist in the USSR, al-
though they have been used as a managerial device in Yugoslavia since
1950.
- 16 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79RO1141AO01000040001-4
Figure 3 50X1
COMMUNIST CHINA
Organization of a Petroleum Refinery*
DEPUTY DIRECTOR
IN CHARGE OF
BASIC CONSTRUCTION
DEPARTMENT
DEPUTY DIRECTOR
IN CHARGE OF PRODUCTION
DEPARTMENT
Technical Planning
Production Techniques
H
*There is considerable variation in the internal organization of industrial enterprises.
Even the staff organizations vary in enterprises, within a given industry.
DEPUTY DIRECTOR
IN CHARGE OF ADMINISTRATION
DEPARTMENT
H
H
Economic Planning
and Statistics
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79RO1141AO01000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
National government control over private enterprises and
plans for their conversion to "state capitalism" emanate from the
Eighth Staff Office of the State Council and from the Central Industrial
and Commercial Administrative Control Bureau, a specialized agency of
the State Council. A mass organization, the All-China Federation of
Industry and Commerce Association, is responsible for "educating" private
capitalists in the values of socialist transformation.
As noted previously, the share of private industry in total
industrial output has declined sharply (from 42 percent in 1952 to 0.4
percent planned in 1956), and the share of joint enterprises has in-
creased concomitantly (from 5 percent in 1952 to a planned 31 percent
in 1956). During 1950-54, private businesses were converted to joint
state-private ownership firm by firm, the plants selected being those
which the government wished to control directly, either because of
their size or the nature of their products. In the second half of
1955 a drive to socialize private industry and commerce by whole in-
dustries and trades was inaugurated, and in January 1956 the drive was
intensified by launching the conversion program city by city. 2_9,
The formation of a joint company is governed by the "Pro-
visional Regulations Governing Public-Private Jointly Operated Indus-
trial Enterprises." 30 According to these regulations, the property
of a private business applying for joint ownership is assigned a value
which is arrived at by agreement between the public authorities, the
private owners, and the trade unions. This assessed value represents
the private investment in the new joint company. The state also in-
vests in the new company, but in a proportion which is not clearly
defined and which apparently depends on the financial circumstances
of the enterprise when it was taken over and on the state's intent
with respect to its future. In the language of Li Wei-han, Chairman
of the Eighth Staff Office of the State Council, the portion which
the state invests in a joint state-private company is "that which is
necessary to form a certain ratio between public and private shares,"
or again, in equally vague terminology, "the amount is determined
according to the plans of the state and concrete conditions of the
enterprise." 31 "the Bank of
Communications and the industrial departments in the various provinces
and local governments issue capital funds and working capital to the
joint enterprises in accordance with quotas set by the Commission for
National Planning." Such actions would serve to increase the state's
share in the capital assets of the joint company. Thus the state's
control over the newly formed joint company is exercised not by virtue
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
of "the amount of the state's investment, but by the character of state
power." 32 The state government (national or local) appoints the
management of the new company and places that company under the admini-
strative jurisdiction of the appropriate organ of the peoples government
(local industry departments or central industrial ministries, depending
on the nature or importance of the firm's activities). The private
capitalist then becomes merely a shareholder in a joint enterprise which
is operated by the government.
The Chinese Communists have announced that newly converted
joint enterprises will be administered by "special companies." Al-
though comparatively little is known about either the function or the
authority of these special companies, a recent article has described
their development in Shanghai. 33 The author states that there is no
official regulation governing the operation or the function of such
companies, which are still in the experimental stage. The special com-
panies in China are similar to the Soviet trusts used in industrial
administration as intermediary control units between the enterprise and
the ministry. The special companies in China have been established to
carry out the "socialist transformation" of private industry and are
used for the administration of industries under local control (in the
USSR, trusts often are used to manage groups of national enterprises).
In China the special companies are described as an intermediate link
between the local industry bureaus and the newly converted joint enter-
prises. The special companies organize the production of one trade or
industry and are in this sense "specialized." They act as the executive
arm of the local industry bureaus in carrying out policy directives and
are empowered to process orders, provide raw materials, arrange pro-
duction tasks, set plan targets, and audit the accounts of the factories
under their administration. The local industry bureaus fix prices and
set targets for all local industry. The special companies, using the
targets established by the industry departments, direct the factories
to draw up annual plans, and, from these, plans for the specific in-
dustry are drawn up by the special companies. The article describes
the special companies as "business units with administrative powers"
and recommends that in due course the industrial bureaus transfer part
of their policymaking power to the special companies.
Before the national drive to socialize all industry and
commerce in 1955 the profits of joint enterprises (after taxes) were
divided among reserve funds, bonuses, and dividends. One-fourth of
the annual profits could be used for dividends and for bonuses to
managerial personnel. Reserve funds were used under the direction of
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
the government organ administering the enterprise and in accordance
with state investment plans. The rate of dividend allowed private
investors in joint enterprises has steadily declined. In 1954 the
rate was as high as 15 percent in the Northeast. During 1955 the
government limited the dividend rates of the private shareholders to
fixed percentages of their original investment in the joint companies,
these rates ranging from 6 to 8 percent and varying with the industry,
the areas and the rate of return earned by the former private company.
In 1956 the dividend rate was fixed by State Council decree at 5 per-
cent for most native investors. An 8-percent return is permitted over-
seas Chinese who invest in state-operated trust companies. 34
When converted to joint ownership (and therefore govern-
ment operation), the enterprise becomes an integral part of the planned
economy. If the enterprise is made subordinate to one of the industrial
ministries of the central government, its plan becomes a part of the plan
of the responsible ministry. If the enterprise is placed under the
control of the industrial department of a local government unit,* its
plan becomes a part of the local unit's plan. The regulations govern-
ing the establishment of joint companies provide that the "competent
organs of government ... shall direct the production, operation,
finance, labor, capital construction, safety, and health" activities
of these enterprises. 35/
A large joint enterprise may establish a board of
directors as a "consultative and deliberating organ" representing
both public and private interests. The personnel representing the
government are appointed by the organ administering the enterprise,
and the private representatives are elected by the shareholders.
The board may concern itself with establishing and revising the in-
ternal regulations of the enterprise, reviewing annual reports on
production operations and financial accounts, and recommending
investment and capital construction programs. All decisions of this
board, however, must be approved by the government organ administering
the enterprise. 36 Otherwise the methods of management and operation
of joint enterprises do not differ greatly from those applied to state-
owned enterprises. The joint enterprises, however, are continually
urged to strive to achieve the standards maintained in state-owned
plants with respect to management, production operations and techniques,
wages, and employee benefits.
* The term local in this connection can refer to all local units:
provinces, municipalities, hsiens (villages), and chus (city wards).
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
III. Planning Organization.
A. Policymaking Machinery.
The supreme policymaking authority in Communist China is the
Central Committee of the Communist Party and within it the standing
committee of the Politburo. These organs determine the over-all stra-
tegic and economic objectives which are to be used as the basis for
economic planning. More specifically, the determination of invest-
ment emphasis to be given to the various sectors of the economy, the
division of the national income between investment and consumption,
and the target rates for the increase in production are reflections
of Party decisions. The public announcements of both the First and
the Second Five Year Plans indicate clearly that long-range plan
formulation in China, as in the USSR, proceeds as follows: the Party
Central Committee originates the broad outlines of the plan, the
State Council through its subordinate planning commissions and mini-
sterial planning departments draws up the plan in detail, and a Party
conference or congress approves it for submission to the State Council
for formal acceptance and to the National Peoples Congress for formal
ratification. 37 Annual plans follow this procedure in general but
may be approved by the Central Committee of the Party and by the State
Council.
The leading role of the Party hierarchy is reflected in the
staffing of the central government organs concerned both with planning
and with administration. Four state commissions have over-all respon-
sibility for industrial planning, and members of the Party Politburo
are chairmen of the two bodies with the most comprehensive authority,
the Commission for National Planning and the National Economic Com-
mission. The chairmen of the two other planning bodies (the Commission
for National Construction and the National Technological Commission)
are members of the Central Committee of the Party. The heads of 6 of
the 16 industrial ministries are members of the Central Committee of
the Party,* 4 other industrial ministers are members of the Party,
and 4 are not Party members. The four ministers without Party
* The heads of the First, Second, and Third Ministries of Machine
Building and the Ministries of Coal, Electric Power, and the Power
Equipment Industry are all members of the Central Committee of the
Chinese Communist Party.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
affiliation are responsible for the administration of light industry.*
All industrial ministries, however, work through the staff offices of
the State Council. All staff office directors are Central Committee
members, as are almost all of their deputies.
B. Executive-Administrative Machinery.
1. Central Government.
The State Council of Communist China has established four
commissions to direct and supervise the economic planning process, as
follows: the Commission for National Planning, the National Economic
Commission, the National Technological Commission, and the Commission
for National Construction. With respect to industrial planning,
the work regulations of the Commission for National Planning stip-
ulate that the State Council has final authority to settle disputes
between ministries, commissions, and staff offices. The planning
commissions formulate over-all plans but have no direct control over
implementation. The Commission for National Planning is responsible
for directing and coordinating two separate planning processes -- one
carried out by the industrial ministries of the central government
and their subordinate enterprises and the other operating through the
industry departments of local governments and their subordinate enter-
prises. 38
a. Commission for National Planning and National
Economic Commission.
The Commission for National Planning of Communist
China is responsible for preparing comprehensive long-range plans (5
years or longer) for the development of the economy. The membership
of the Commission is composed of a director, 7 deputy directors, and
12 members. The National Economic Commission is responsible for
formulating annual plans and has a director, 9 deputy directors, and
10 members. The separation of responsibility for long-range planning
and short-range planning was made in May 1956, but the membership of
the National Economic Commission was not announced until 6 months
* The Ministers of the Textile Industry, the Food Industry, the
Timber Industry, and Light Industry are not members of the Party.
The Party status of the Minister of City Construction is unknown.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
later.* Very little is known, therefore, about the internal organi-
zation of the new Commission. The members appointed to the Commission
were, however, some of the most experienced personnel of the Commission
for National Planning. The internal structure of the Commission for
National Planning consisted of some 20 departments before 1956. Six
of these departments were responsible for various industrial sectors of
the economy: heavy industry, light industry, machine industry, defense
industry, and fuel industry. There were also separate departments for
agriculture, forestry, and water conservancy; communications and trans-
portation; commerce; foreign trade; and culture, education, and health.
Staff departments existed for labor and wages, costs and price, finance
and currency, and commodity distribution. A Technical Cooperation
Bureau, which was responsible for planning the program of technical aid
from the USSR and the European Satellites, was identified within the
Commission for National Planning as late as 195+, but it may now have
been transferred to the Ministry of Foreign Trade. How the internal
structure of the Commission for National Planning was affected by the
creation of the National Economic Commission and the increase in the
number of industrial ministries in May 1956 is not known.
The provisional work regulations for the Commission
for National Planning provide for both plan formulation and plan
review. 39 According to these regulations (announced in October 1955),
the Commission was assigned responsibility for drafting comprehensive
5-year and annual plans based on the plans submitted by the ministries
and commissions of the State Council and by local governments. The
Commission was also made responsible for the examination of the detailed
5-year and annual plans for individual central ministries and local
governments, the annual state budget drafted by the Ministry of Finance,
the credit and cash plans prepared by the state banks, and for submission
of recommendations on these plans to the State Council for final action.
Presumably those functions which relate to annual planning are now the
province of the National Economic Commission.
In the USSR in 1955 the responsibility for annual planning was
taken from the State Planning Commission (Gosplan) and vested in a
new State Economic Commission. In April 1957, however, it was
announced that the State Economic Commission was to be abolished;
that its functions were to be transferred to regional economic councils
soon to be established; and that the coordination of all plans, both
annual and long range, was to be once again the responsibility of the
State Planning Commission.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Responsibility for planning commodity allocation and
stockpiling of state commodity reserves was also assigned to a special
internal department of the Commission for National Planning. In 1956,
however, a special agency, the Commodity Distribution Bureau, was
established directly under the State Council and was staffed by former
members of the Commission for National Planning. Whether this new
Bureau has taken over all responsibility for planning commodity all-
ocation and stockpiling or whether it merely allocates materials
according to a predetermined pattern is unknown.
b. National Technological Commission.
The National Technological Commission in Communist
China, established in May 1956, is responsible for long-range plan-
ning for the improvement of industrial technology and for promoting
technological improvement consistently throughout all industries.
The Second Five Year Plan established the following objectives for
technological development: (1) with respect to the modernization of
equipment and production techniques, priority is to be given to the
machine building, metallurgical, chemical, electric power, petroleum,
coal, and radio industries; (2) construction is to be mechanized
gradually; (3) in the field of transport and postal and telecommuni-
cations services the Commission is to introduce technological im-
provements only as the "industrial development, financial capacity,
and natural resources" of the nation permit; and (4) technical im-
provement in agriculture is given the lowest priority and is to
consist of expanding water conservancy and irrigation work, trial
production of farming implements, increased production of fertilizers,
and advanced farming techniques (tractors are to be introduced only
on state-owned farms). 40
c. Commission for National Construction.
The Commission for National Construction in Communist
China was established in 1954 presumably to coordinate the construction
plans and activities of all industrial ministries and of the Ministry
of Construction and Engineering. The industrial ministries themselves
are responsible for the planning and construction of a large proportion
of the new plants that are to come under their control as producing
enterprises. The Ministry of Construction and Engineering, originally
established to engage in civil construction (installations and buildings
not used to house manufacturing facilities), has subsequently taken on
additional assignments for industrial construction. Forty percent of
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
the Ministry's 1956 construction plan was devoted to factory building,
and more than one-half of the 156 Soviet aid projects are being con-
structed by the Ministry of Construction and Engineering. J 41/ Each
industrial ministry still implements a large part of its own capital
investment program.
The membership of the Commission includes a chairman,
5 vice-chairmen, and 5 additional members. Po I-po, Chairman of the
Commission for National Construction until May 1956, is now Chairman
of the new National Economic Commission and is concurrently Director
of the Third Staff Office of the State Council (responsible for heavy
industry). The new Chairman of the Commission for National Con-
struction, Wang Hao-shou, is also Minister of the Metallurgical Industry.
The concurrent responsibilities of these two individuals indicate the
close integration of planning, construction, and production activities
in the field of heavy industry.
2. Local Government.
Acting under the direction of the State Council, local
governments (including provincial minicipalities and hsiens) in Com-
munist China are responsible in the industrial field for drafting
and executing their own economic plans and budgets, administering
local industry and commerce, and directing the socialization of pri-
vately owned enterprises in their respective areas. / The plan-
ning function is carried out by local planning commissions attached
to the local peoples councils, and these commissions are subject to
direct administrative control of the local peoples councils, but the
final plans of local organs must conform to the provisions of the
national economic plan. ~3
The functions of local planning commissions as defined
by the organic law which establishes them are as follows: to for-
mulate over-all plans for long-range and annual submission to the
local peoples councils, to examine the draft plans of departments
under the jurisdiction of the local peoples councils, to oversee the
execution of local plans, to conduct long-range studies of local eco-
nomic problems, and to "assist in the fulfillment or execution of
the plans of national enterprises located in their respective areas." 4-4
Local planning commissions are authorized to propose the following
kinds of plans for all industrial enterprises under the direct control
of local governments: culture, education, and health; labor, wages,
and cadre training; production; capital construction; and financial
plans.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
The planning commission of a local government is headed
by a director and several deputies. The membership of the commission
may range from 5 to 9, and the following internal departments may be
established if needed, each for its own type of plan: consolidated;
long-range; industrial (production); agricultural (including water con-
servancy, forestry, and marine products); capital construction; labor-
wage; culture-education-health; financial (including monetary costs and
prices); materials allocation; and transportation. In addition, the
local planning commission may establish a commercial division with
responsibility for examining the commercial plans of the following
organizations: marketing cooperatives, agricultural departments,
retail and wholesale trade departments, local food departments, and
local industrial departments.
Almost all local governments now engage in annual plan-
ning, and some are also working on long-range plans. All provinces and
major cities have 5-year plans which run concurrently with the national
5-year plan.
Lack of a clear division of authority between the central
government and the local governments has often confused the Western
observer and created problems for the Chinese Communist regime itself.
In June 1956, Chou En-lai announced the intention to devise a plan for
division of authority between central and local organs in specific
fields, two of which were planning and "business enterprise." 4J
This plan is currently being drafted and is to be implemented pro-
visionally in 1957. The few public statements made on the subject
since the original June 1956 announcement do not indicate that the
Chinese envisage any major change in the present industrial admini-
strative structure or contemplate any general decentralization of
decision-making authority in this area. Rather, they seem to seek
merely a clarification of existing principles of organization and a
transfer of some minor details of administration and decision-making
from the central government to local government organs.
IV. Planning Process.
In a free market economy, coordination of production and con-
sumption is achieved through the mechanism of the market. In
centrally planned economies this coordination is accomplished through
a comprehensive national economic plan, which fixes production goals
for a given period, allocates resources, and distributes the national
product in accordance with the objectives of the planners. Communist
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
China applies these principles to that part of the economy under
direct government control and administration. Although a self-
styled "free market" covering one-fourth of the total retail trade
continues to operate as a coordinating mechanism, the government re-
tains strong indirect controls.
The process of plan formulation in Communist China at each level
of the planning hierarchy is based largely on the planning procedures
used in the USSR before July 1957. In establishing central planning
the Chinese have leaned heavily on the Soviet example and more speci-
fically on the advice and assistance of Soviet technicians sent to
China. Special Soviet advisers are attached to the Commission for
National Planning, and a special Office of Foreign Experts has been
established under the State Council with the responsibility for assist-
ing the various industrial ministries in the formulation and implemen-
tation of economic plans. Likewise, many Soviet technicians have been
assigned to individual industrial enterprises to familiarize Chinese
managers and workers with Soviet methods.
A. National Government Commissions.
The Commission for National Planning and the National Economic
Commission in Communist China compile an aggregate plan for the plan
period, which is based on the plans submitted by government ministries
and local governments. As the central planning authority, the Com-
missions through their directives to lower organs engage in what the
Communists call "planning from above." This planning necessarily is
based on the plans submitted by the lower levels ("planning from below"),
for the Commissions must devise plans which will give formal expression
to the policies of the regime in terms susceptible of practical real-
ization.
The national economic plan of the Peoples Republic of China
consists of the following components: (1) a plan for industrial pro-
duction*; (2) a plan for agricultural production**; (3) a plan for
transportation and communications; (1) a plan for capital construction***;
* The First Five Year Plan includes targets for some 50 industrial
products in 15 major industries. 47
** The First Five Year Plan establishes goals for 5 grain crops and 6
industrial crops.
**X The First Five Year Plan allocates approximately 41 percent of
total investment for capital construction footnote continued on p. 277
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
(5) a plan for the supply of "technological materials"; (6) a wage
plan; (7) a commodity distribution plan; (8) a cultural, educational,
and health plan; (9) a plan for public utilities; (10) a production
cost plan; (11) a price plan; and (12) a financial plan. 50
The national economic plan is drawn up by the national planning
commissions under the close direction of the Central Committee of the
Communist Party. The process has been described by one source as
consisting of three stages. 51 During the first stage the planning
commissions submit to the Central Committee preliminary estimates of
production possibilities based on present Chinese Communist capabilities
and on comparisons with Soviet experience, and the Party then estab-
lishes production targets for the major industries, such as steel and
coal. During the second stage these targets are sent to the ministries
concerned for comment and subsequent forwarding to the national planning
commissions. In the third stage the planning commissions "balance" the
production targets (called control figures) for the various industries,
the balancing process being an attempt to draw up an over-all economic
plan which is internally consistent.
After commodity balances are worked out for the major production
targets, the various parts of the national economic plan (as drafted
by the local planning commissions and the central ministries) are
coordinated with one another through a system of over-all "balances."
The 10 balances reportedly considered most important by Chinese Com-
munist planners are as follows: (1) production and consumption, (2)
consumption and accumulation, (3) investment and utilization of capital
equipment, (4) supply and stockpiling of materials, (5) supply and re-
quirements for manpower, (6) production versus requirements in industry
and agriculture, (7) transport capacity and the output of industry and
agriculture, (8) commodity output and the capacity of commercial channels
to distribute the output, (9) commodity output and consumer purchasing
power, and (10) the "balance between the areas." 52
In annual planning the first stage is usually completed in October,
the second stage in November, and the third stage by December 15.
When the draft national economic plan as formulated by this process
is approved by the Central Committee of the Party, the draft plan be-
comes the final plan and is sent through government channels to the
to industry; 12 percent to transportation and communications; 8 per-
cent to agriculture, conservation, and forestry; 3 percent to commerce,
banking, and commodity stockpiling; and 18 percent to culture, education,
and health. 1i9/
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
State Council for approval and implementation. The final annual plan
becomes a government order. Long-range plans (5- and 15-year), on the
other hand, are looked upon as guides rather than rigid targets and
as such are continually revised in the light of annual accomplishments
and changes in conditions.
B. Ministries.
Each industrial ministry in Communist China is responsible for
preparing annual and long-range plans for the development of the in-
dustry for which it is responsible. The ministerial plan is the com-
posite of the plans of all enterprises under the ministry's control
and is based on production targets established by the Party and coordi-
nated through the planning commissions. The ministry, in turn, dis-
tributes the tasks among its subordinate enterprises in the form of
directives to guide their preparation of detailed plans. In the
assignment of production tasks and investment funds to an individual
enterprise the ministry is aided by information concerning enterprise
capacity and previous performance made available to it in periodic
reports submitted by the enterprises.
The ministry is also responsible for reviewing the plans
drafted by the enterprises on the basis of the planning directives
sent to them and may, if necessary, make changes in these draft plans.
The process of preparing the annual production plan for the ministry
begins in August of the preceding year, after receipt of the semi-
annual production reports from the enterprises. A rough draft of the
plan is supposed to be completed by October for submission to higher
organs. 53
The ministry is responsible for planning the procurement of
equipment and supplies necessary to accomplish assigned production
tasks. It prepares all orders (due by the end of July) for the pro-
curement of needed equipment which must be imported from abroad.
Orders for the purchase of domestically produced equipment are sup-
posed to be placed by mid-October. 54
Each ministry usually holds annual conferences on capital con-
struction with plant and ministry officials in order to prepare the
annual capital construction plan for the ministry. As part of the pre-
paration of the plan the ministry allocates investment funds to specific
enterprises, determines the organizations which will design the projects,
and sets dates for the delivery of blueprints and for the beginning of
the actual construction. 55
- 28 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Each ministry involved in the exploitation of natural re-
sources also has its own geology plan. Responsibility for geological
prospecting work is divided between the Ministry of Geology and the
industrial ministries. The Ministry of Geology is responsible for
those geological surveys which are general in nature, cover large
areas of virgin territory, and require from 10 to 20 years for com-
pletion. All prospecting which is expected to result in production
within the current Five Year Plan is conducted by the industrial
ministries. These ministries prepare geological plans and implement
them with their own teams and equipment. The Ministry of Geology
extends facilities and services to the industrial ministries and re-
quires weekly, monthly, and survey summary reports of the geological
activity of these ministries. 56
C. Local Governments.
The planning procedure on the local level in Communist China
is similar to the planning process on the national level. Local
Party authorities, in implementing the control figures which the state
sets for local areas, issue general directives to the planning com-
missions and industrial departments attached to the local peoples
councils. Detailed draft plans are prepared by the industrial depart-
ments, are "balanced" by the planning commission, and are submitted
to the local peoples council for approval. Local draft plans are then
submitted to the State Council for approval and to the Commission for
National Planning for incorporation in the national economic plan.
Beginning in 1957 and in certain areas of planning (such as grain, live-
stock, and silk production), aggregate control figures are established
at the central government level, and the local governments establish
specific production targets within that framework. 5y/ Once approved,
the plan constitutes a central government order, and changes are made
only with prior approval of the State Council. The local plans-which
have been published thus far do not seem to follow any prescribed format.
They usually include the following: production targets for agriculture
and local industry; capital investment allocations to local industry,
agriculture, water conservancy, transportation, communications, culture,
education, and health; plans for the development of local communications
and transportation facilities; plans for domestic commerce; and measures
for the development of culture, education, and health. Specific goals
for the socialization of that part of agriculture, industry, and com-
merce remaining in private hands are also set.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
D. Enterprises.
As indicated above, the information available concerning enter-
prise planning procedures in Communist China pertains to nationally
owned and operated industrial enterprises -- that is, those enterprises
subordinate to the industrial ministries. The extent to which the
same procedures are applied also in locally operated enterprises and
joint state-private enterprises in unknown. It is clear, however, that
the methods of administering national enterprises are intended to be
the model for all other types of industrial undertakings. The appli-
cation of these methods in any given instance probably depends on the
availability of reliable and trained personnel.
1. Composition of the Plan.
The annual enterprise plan in Communist China is known as
the "technical, engineering, financial plan" and is patterned after
the enterprise tekhpromfinplan used in Soviet industrial enterprises.
The number of components of the enterprise plan depends on the com-
plexity of the production operation and the nature of the industry.
All enterprise plans, however, contain subplans for production, labor,
materials, and finance. 58
The principal components of an enterprise plan are as
follows 59
a. The production plan, which sets production targets,
indicates how the firm's products are to be marketed, and sets standards
for quality of products. Production tasks are itemized in considerable
detail by major product category and are expressed both in physical units
and in monetary values.* The marketing plan designates how much of the
firm's output is to be delivered to the government on contract or through
state trading organizations and how much is to be sold on the open market.
The plan determines prices and sets monthly and quarterly delivery dates,
violation of which may entail payment of fines.
b. The labor plan, which fixes the total number of
workers, the total wage fund, the planned rate of increase in labor
productivity. and the tasks for worker training.
The current year's production plan does not include the output expected
from expanded plant capacity unless such capacity becomes available during
the first 6 months of the year, nor does it include such output if the new
facilities involve production techniques with which the plant is unfamiliar.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
c. The equipment plan, which includes data concerning
the planned rates of utilization of existing plant capacities and also
the planned addition of new equipment and sets tasks for repair of
capital equipment.
d. The materials supply plan, which indicates require-
ments for new materials and other goods needed to accomplish planned
production tasks and sets forth material consumption norms for each
unit of product. It shows the amount of reserves on hand and the amount
of goods that must be purchased. With respect to the latter it gives
the name of the supplier, the means of transportation, the methods of
inspection for quality, and the provision for storage.
e. The technical plan, which sets forth planned im-
provements in technology and work methods and may also include plans
for the manufacture of new products and for research projects to be
conducted at the enterprise.
f. The cost plan, which estimates production costs for
each unit of product and sets tasks for cost reduction.
g. The financial plan, which is a summation in monetary
terms of the entire planned activities of the enterprise. It sets forth
total income (from sales) and expenditures for each month and quarter
and indicates the amount of credit (to be obtained through short-term
bank loans) needed to provide working capital when outgo is expected to
exceed income. The financial plan also indicates depreciation rates
and funds and the amounts of planned profit or loss.
In addition to the regular enterprise plan a detailed "capital
construction plan" must be prepared for each major construction project
which the enterprise is to undertake during the plan period. Such plans
are required for the following kinds of projects: (a) all industrial
installations, (b) workers' quarters not designed by the ministry, (c)
nonproductive units with more than 1,000 square meters of floor space,
(di) permanent bridges 15 meters long, (e) power transmission lines or
major repair to existing plants, (f) any project costing more than 15
billion yuan,* (g) any project costing more than 1 billion yuan* built
by private contracting firms, and (h) all changes in construction plans
which will increase total construction costs by 10 percent or more. 60/
* These figures represent old yuan values before the currency
reform of 1955. The new currency issued at that time would reduce
these values to 150,000 yuan and 10,000 yuan, respectively.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
The plan for capital construction (whether undertaken by
units of the enterprise itself or contracted to outside firms) must
provide standards for durability and safety of the structures in
conformity with the building codes of the ministry and the local govern-
ment of the area. Details with respect to the kind, cost, and sources
of supply of requisite materials are also included in the plan. Lij
2. Formulation of the Plan.
Based on Party directives with regard to production targets
and resource allocations for the industry concerned, the appropriate
ministry prepares in August or September initial plan proposals for each
subordinate enterprise in Communist China. These proposals are based
on the past performance of the plant and on information available to the
ministry concerning enterprise production capacities. In determining
planned assignments for a given enterprise the ministry also uses stan-
dard norms (for material consumption, machine utilization, fuel and
electricity consumption) and output of workers on given jobs).*
Upon receipt of the plan proposals from the ministry, the
enterprise prepares its own draft of the plan in detail. In its draft
plan the enterprise attempts to establish production targets that it
thinks can be readily met.
enterprise planners
recommend output quotas that are 2 to 3 percent below those that could be
fulfilled. 2211 These tactics are used deliberately to insure that the
plan can be fulfilled, for persistent failures in this respect would have
serious repercussions on the reputations of all managerial personnel of
the enterprise.
The enterprise draft plan need not necessarily conform to
the ministry proposals, for the enterprise has the right to submit
counterproposals, and indeed it must do so for its own self-interest
if it believes it cannot fulfill the commitments outlined in the min-
istry proposals. When the draft plan is received by the ministry, it is
examined for conformance with the ministry's original proposals and for
consistency with the plans submitted by other enterprises in the industry.
* Norms are determined for an entire industry by the ministry and are
supposed to be based on the most advanced techniques available. At the
enterprise level, work norms are set so that
the average worker can exceed them by at least 15 percent. L 2J change
in a norm cannot be scheduled into production until the previous norm has
been in effect for 1 year.
50X1
50X1
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Disagreements between the enterprise and the ministry with
respect to plan targets have to be resolved at this stage. The resolution
of such disagreements may be accomplished in one of several ways. The
ministry may call a conference of plant managers for a discussion of the
plans for the industry and individual enterprises and for an agreement on
final assignments. The ministry may simply return the draft plan to the
enterprise and extend additional time for reconsideration, or the min-
istry may send its own investigators to the plant to appraise the feasi-
bility of the ministry's planned assignments. An instance of the use
of the latter method occurred in 1955 in connection with the attempts to
formulate the basic construction plan of the Mukden Machine Tool Plant,
subordinate to the First Ministry of Machine Building. The enterprise plan
as submitted to the Ministry contained targets approximately 50 percent
below those originally requested by the Ministry. The assistant plant
director and the director of the planning section were sent to Peking to
request a lowering of the Ministry quota on the grounds that delivery of
equipment was behind schedule, that planning and designing difficulties
had been encountered, and that personnel were not available for instal-
lation. The Ministry promptly sent investigators to the plant, with the
result that the request was denied. The plant management was criticized.
for "conservatism," and the quota proposed by the Ministry was fixed as a
legal requirement on the enterprise.
When the draft enterprise plan has been, agreed upon (or the
ministry's will imposed on the enterprise), the plans of all the enter-
prises are compiled in a composite plan for the ministry as a whole.
This plan is forwarded to the planning commissions of the central govern-
ment for examination and balancing with other ministerial plans. Any
disagreement between the ministries or with the Commission for National
Planning at this point must be submitted to the State Council for decision.
Such approval makes the plans of all enterprises, as incorporated into
the ministerial plans, legally binding on the enterprises.
The annual enterprise plan is broken down into quarterly and
monthly plans. The plan for the first quarter is fixed at the time that
the annual plan is approved. The remaining quarterly and monthly plans
are fixed later to make allowance for unexpected developments and to in-
sure the fulfillment of the annual plan. 6/ When approved by the min-
istry, the enterprise plan is used by the technical planning department
of the enterprise to prepare a detailed operational plan. This plan
establishes weekly and daily production tasks for each shop, each shift,
each worker, and each piece of equipment in the plant.
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
V. Some. Problems of Industrial Organization and Planning and Attempted
Solutions.
The process of establishing a mechanism for economic control and
for over-all central planning in Communist China has been carried out
within an institutional framework that is unique in Communist take-
overs of economies which formerly were essentially capitalistic. Before
1955, Chinese leaders elected to establish central planning while still
permitting a substantial sector of private industry to exist. In view
of the underdeveloped state of the Chinese economy, these decisions
undoubtedly were dictated more by necessity than by desire. Never-
theless, the leaders determined simultaneously to proceed full speed
with a program for rapid industrialization of the economy. The im-
plementation of these decisions has presented difficult problems which
are still in process of solution.
One of the major problems in establishing effective central planning
for industry as a whole has stemmed from the existence up to 1955 of a
substantial private sector accounting for one-fourth of total industrial
output. The government found it increasingly difficult to implement
centrally determined plans through a miscellany of indirect controls
such as government purchase contracts, taxation, and credit extension.
In order to establish more direct control, the government in late 1955
ordered a rapid acceleration of its program to eliminate the private
sector in industry. Whereas the First Five Year Plan aimed at reducing
private industry's share of total industrial output to 12 percent by the
end of 1957, the private share is estimated to have fallen to 0.4 percent
by 1956.
As noted previously, the Chinese Communists have chosen to achieve
complete state ownership of the means of production through the in-
termediary step of the formation of joint state-private companies
rather than through outright nationalization. To insure strict control
over such joint enterprises, the government has formulated uniform rules
for their formation and operation and has standardized the methods of
compensating the former private owners. The Chinese Communists evidently
consider the joint company a satisfactory means for controlling the
activities of former private enterprises and utilizing the managerial
skills of the former owners, for the joint companies are to be continued
through 1967. In ordering the speeding up of the conversion program in
1955-56, however, the government evidently overestimated its ability to
carry out a program of such magnitude and to integrate the thousands of
new enterprises into the state sector, and in February 1956 the State
-34-
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Council was forced to issue a moratorium on the consolidation and
reorganization of the newly formed joint enterprises. 6/ Furthermore,
although joint enterprises should operate within the purview of state
plans, it was announced in September 1956 that enterprises producing
consumer goods (presumably including consumer goods which are to be
traded on the free market) could formulate their own production plans
and market some of their own products. 67 Problems in the admini-
stration of these thousands of newly converted enterprises are still
being worked out. Most of them have been placed under "special
companies" organized by industry under local government control.
Some of the most serious difficulties in the conduct of central
planning in Communist China are attributable to lack of experience,
an acute shortage of trained personnel, and the paucity of accurate
statistical data on which to base plan targets. Shortcomings in the
planning process stemming from these conditions-are reflected in the
necessity for frequent changes in production targets and in investment
allocations. The Chairman of the Commission for National Planning
admitted that the 1956 construction plan was ill conceived and was
based on "inaccurate estimates of the availability of building materials"
(particularly steel, cement, and timber). 6/ Chou En-lai, at the
Eighth Party Congress, emphasized the need to "perfect the system of
material reserves" and cited the error made during 1955 of exporting
certain construction materials thought at the time to be surplus but
whose export contributed to the shortage of such materials in 1956. 69/
Mistakes in production planning were made which resulted in
serious waste of scarce economic resources. The most publicized
example of inefficient production planning during 1956 was the cele-
brated case of the "hanging" plows, so called because they were
usually to be found hanging on the walls of the farm buildings in-
stead of in use in the fields. 1_1 As a result of a government
priority directive, plants were converted and materials allocated to
produce 3 million double-bladed, two-wheeled plows during 1956 (5 times
the number produced in 1955). Although 1.5 million plows had been
produced by mid-1956, only half of them could be sold, and'only three-
fourths of these sold. were usable. In July the government suspended
production of the plows, ordered the plants reconverted, and redis-
tributed the allocated raw materials.
Besides changes in the production goals for individual commodities,
the Chinese Communists have also made a number of alterations in the
allocation of investment funds. 71 Thus investment allocations between
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
the coastal and interior regions have been revised in favor of the
coastal region; the investment ratio between heavy and light industry
has been changed from 8 to 1 to 7 to 1; and greater emphasis has been
given to the construction of small and medium-size plants, at the ex-
pense of large plants, in the metallurgical and machine industries.
These changes probably reflect mistakes in setting the original invest-
ment goals and an inability to predict and plan economic progress accu-
rately. The Chinese are attempting to overcome the difficulties attri-
butable to lack of experienced planners and administrators through the
use of Soviet advisers and through the adoption of a program for training
economists and other technicians.
The current drive to "increase production and practice economy"
announced in the fall of 1956 was attributed to inadequate balancing
of economic plans by the officials of the National Economic Commission.
Chairman Po I-po in February 1957 stated that although industrial con-
struction projects were completed on time, the inadequacy of auxiliary
service functions such as transportation had prevented the industrial
units from starting production; that the 1956 investment plan for basic
construction had caused serious shortages of material resources and state
enterprises had overstocked raw materials; and that the wage increases
and agricultural loans granted in 1956 / had so increased the total pur-
chasing power that consumer goods became scarce and a tense market
situation developed.
The Chinese Communists have attempted to improve the efficiency
of planning by making organizational changes conducive to promoting
the formulation of more realistic plan targets. As the various in-
dustrial sectors have developed, new ministries or specialized bureaus
have been established to administer them. The proliferation of economic
agencies, which began with the inception of over-all planning in 1953,
culminated in May 1956 with the creation of 10 new ministries, 2 com-
missions, and 2 bureaus. At that time, too, long-range planning was
divorced from short-range planning through the establishment of the
National Economic Commission, which was assigned the responsibility
for current planning. In an attempt to ameliorate the problem of
commodity supply and distribution, experienced men from the Commission
for National Planning were assigned in November 1956 to a newly organ-
ized agency of the State Council, a Commodity Supplies Bureau, and
even more recently the National Economic Commission has ordered local
governments to establish organs responsible for storing "surplus sup-
plies." Likewise, the responsibility for planning in the critical
field of technological development was centered in a newly established
- 36 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
National Technological Commission. By thus promoting organizational
specialization in the economic apparatus the Chinese hope to make the
planning process more flexible and more realistic. By freeing the
Commission for National Planning from current planning responsibilities
they also intend that the Commission shall engage in basic economic
studies of the resources and production potential of various sectors
of the economy. In a speech to the Eighth Party Congress in September
1956 the Chairman of the Commission, Li Fu-ch'un, maintained that the
lack of such studies acted as a serious deterrent to effective plan-
ning. 13!
Inspite of the comparative youth of central planning in Communist
China, some of the difficulties in planning seem to stem from excessive
centralization of decision-making. In the speech noted above, Li Fu-ch'un
stated that experience had shown that state plans had been too rigid, that
specific targets had been spelled out in minute detail, that the procedure
for giving final approval to annual plans was "too much centralized," and
that no real delegation of authority in matters of planning had been made
to local organs. Such a high degree of centralized control allegedly has
curtailed the "creative initiative" of individual enterprises and local
governments and has prevented their exercise of necessary flexibility in
adjusting plans to changes in conditions. To alleviate these shortcomings,
Li Fu-ch'un called for a "modification in the system and methods of plan,
ning" oriented toward less centralization. He stated that the Commission
for National Planning and the National Economic Commission should estab-
lish all "important targets" (undefined) as determined by the State
Council, which targets would be incorporated in the state.economic plan,
approved by the State Council, and passed on to the appropriate subor-
dinate agencies. Targets that are "local or departmental" (in this con-
text departmental probably refers to ministerial) in nature should be set
by local planning commissions and/or "departments" and reported to the
State Council "for record" and for incorporation into over-all national
plans. Examples of this type of target under local control may be the
recent announcements that local governments may adjust over-all targets
for grain and livestock according to local conditions. All other targets
should be formulated by the various "primary levels" (presumably the
producing enterprises or local governments). Li Fu-ch'un also called
for a relaxation in the rigidity of state targets by permitting some
targets to be set within prescribed limits rather than as specific goals*
and by revising the procedure through which subordinate organs (both local
* In long-range planning, many of the proposed targets for the Second
Five Year Plan have been given as a range Lfootnote continued on p. 39
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
and national) can change certain other targets set by the State Council.
He would have still a third category of state targets for "reference
use" by those industrial enterprises (producing certain consumer goods)
which fix their on production plans.
In view of the vague terms in which these recommendations are couched,
it is difficult to determine the degree of flexibility contemplated for
planning procedures, but it seems doubtful that the extent of delegation
of central planning authority to local levels will be very great. The
number of products listed in the product register of the national economic
plan* has actually increased by 110 in 1957. Effective decentralization
cannot be carried out unless trained personnel are available at the local
levels to carry out state policy, the shortage of such personnel being
acute. The recommendations made by Li Fu-ch'un are specifically designed
to cut back on the workload of statistical accounting and to concentrate
personnel on the more "significant" targets. In any event, there is as
yet no evidence that Li Fu-ch'un's recommendations are being implemented.
In spite of the many difficulties in establishing central planning in
Communist China, the government has made substantial progress toward its
long-range goals of complete nationalization of economic activity and
of rapid industrialization. In 1952, private enterprise accounted for
nearly all of agricultural production, one-third of industrial output,
and one-half of total domestic trade. J By 1956, 90 percent of all
farm households had been collectivized, 95 percent of industrial output
came from state enterprises or joint enterprises, and the state con-
trolled all of wholesale trade and about three-fourths of all retail
trade. 76 Although gross national product is increasing at an average
annual rate of about 8 percent during the First Five Year Plan, the
corresponding rate for industrial production is 18 percent, and the rate
for heavy industry is more than 20 percent. 77 The Chinese have set
ambitious production and productivity goals for the period of the Second
Five Year Plan. Continuation of their attempts to improve the admini-
strative organization and to inject elements of flexibility into central
planning procedures should facilitate the attainment of these goals.
rather-than a specific figure. This practice was instituted earlier,
in 1956, in some of the European Satellites (Poland, Czechoslovakia,
and East Germany).
* A listing of "major products having an important bearing on national
construction and the people's livelihood." L4J
- 38 -
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
Iq
Next 6 Page(s) In Document Denied
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17 :
CIA-RDP79RO1141 A001000040001-4
 Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79RO1141AO01000040001-4
SECRET
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2013/06/17: CIA-RDP79RO1141AO01000040001-4