ECONOMIC RELATIONS BETWEEN COMMUNIST CHINA AND THE EUROPEAN SATELLITES 1950-58

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• Publication Date: August 1, 1959
• Content Type: REPORT

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ECONOMIC INTELLIGENCE REPORT
N? 112
ECONOMIC RELATIONS
BETWEEN COMMUNIST CHINA
AND THE EUROPEAN SATELLITES
1950 - 58
CIA/RR 59-29
August 1959
)
CENTRAL INTELLIGENCE AGENCY
OFFICE OF RESEARCH AND REPORTS
SECRET
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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
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ECONOMIC 'INTELLIGENCE REPORT
ECONOMIC RELATIONS BETWEEN COMMUNIST CHINA
AND THE EUROPEAN SATELLITES
1950-58
CM/BR 59-29
CENTRAL INTELLIGENCE AGENCY
Office or Research and Reports
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FOREWORD '
This report has been reviewed and approved by the Subcommittee on
International Trade and Finance of the Economic Intelligence Committee'
(EIC). The Subcommittee consists- of representatives of the Departments
of State; Commerce) Treasury) Navy) Any, and, the Air Force; the
Office of the Secretary' of Defense; the Federal Reserve Board; and CIA.
The Subcommittee considers that this report fills a priority deficiency
In economic intelligence research as identified by the EIC.
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Summary and Conclusions
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CONTENTS
Page
I. Introduction 4
II. Level and Balance of Trade 4
. A. Level of Trade, ,1950-58
B. Commercial and Settlement Transactions
5
9
1. Bilateral Clearing Accounts
2. Settlement Transactions
III.
Factors Influencing the Level and Balance of Trade
12
A.
Pricing Practices
12
B.
Long-Term Trade Agreements
13
C.
Economic .Support for Eastern Europe
14
IV.
Commodity Trade
15
A.
Chinese Communist Exports
15
B.
Chinese Communist Imports
17
V.
Technical Assistance from the European Satellites to
Communist China
21
A.
Complete Installations
21
A.
Technicians
24
C.
Technical and Scientific Cooperation
25
VI.
Reexports and Transshipments in Sino-Satellite Trade .
25
A.
Resale of Chinese Communist Exports
26
B.
Imports of Western Goods via the European
Satellites
27
VII.
Other Economic Relations
27
A.
Transportation
27
B.
Financial Cooperation
29
C.
The Role of Comtunist China in CEMA
30
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VIII. Prospects for Future Sino-Satellite Economic
Relations
Appendixes
Appendix A. Methodology for the Level and Balance of
Trade Between Communist China and the
European Satellites
Fage
31
33
Tables
1. Foreign Trade of Communist.China, 1950-58'
2. Trade of Communist China with the European Satellites,
by Country, 1956
3. Estimated Balances on Clearing Accounts Between
Communist China and the European Satellites,
.1951-57
4. Estimated Seaborne Exports from Communist China to
the European Satellites, 1956
5. imports into Communist China from East Germany, 1952
and 1956
6. .Increase in Installed Pbwer-Generating Capacity in
Communist China Supplied by the European Satellites,
1953-57
7. Implicit Foreign Exchange Rate for Trade Between
Communist China and the European Satellites,
1950-58
8. Derivation of Estimated Balances on Clearing Accounts
Between Communist China and the European Satellites,
1951-57
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8
10
20
23
314
36
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Lllustrat ions
Figure 1. Communist China: Geographic Distribution of
Foreign Trade, by Percentage and by Dollar
Value, 1950 and 1958
Figure 2. Communist China: Percentage Distribution of
Trade with the European Satellites, by
Country, 1956
3. Communist China: Estimated Seaborne Exports to?
the European Satellites, by Tonnage and by
Value, 1956
Figure 4. Communist China: Estimated .Pattern of Imports'
from the European Satellites, by Major Com-
modity Groups, 1952-58
Figure
Page
5
6
16
18
Figure 5. Communist China: Imports from East Germany,
1952 and 1956 19
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ECONOMIC RELATIONS BETWEEN COMMUNIST CHINA
AND THE EUROPEAN SATELLITES*
1950-58
Summary and Conclusions
. Since 1950) Eastern European countries with which Communist China.
historically has had virtually no economic contact have assumed con-
siderable importance in China's economic relations. This change has
taken place largely because of the ideological affinity between the
leaders of the European Satellites** and those of China. A rational
economic basis for trade between the relatively underdeveloped econ-
omy of China and the industrialized economies of Eastern Europe also
exists. The magnitude of such trade and the breadth of the economic
contacts, however, are clear indications of a calculated policy of
promoting Soviet Bloc unity by economic. means. Furthermore, the
unique position that China occupies in the Communist world, a posi-
tion much more independent of Moscow than is that of the Satellites,
has enabled China to give particular support to efforts for unifi-
cation within the Bloc.
The primary economic link between Communist China and the Satel-
lites is foreign trade, based on a mutually advantageous exchange of
Chinese raw materials and foodstuffs for Satellite industrial prod-
ucts. The level of Sino-Satellite trade rose from $20 million*** in
1950 to $655 million in 1958. The rate of growth of this trade
since 1952 has been about 13 percent annually, about the same as
that of China's total foreign trade, and the relative importance of
Sino-Satellite trade has consequently remained fairly stable at about
one-sixth of China's total foreign trade.
Through 1953, Communist China had a substantial export surplus in
trade and consequently accumulated credit balances of nearly $100 mil-
lion in its financial account with the Satellites. Beginning in 1954)
* The estimates and conclusions in this report represent the best
judgment of this Office as of 1 June 1959.
** The terns European Satellites and Satellites in this report refer
to the Communist-controlled countries of Eastern Europe, as follows:
East Germany, Czechoslovakia, Poland) Hungary, Rumania) Bulgaria, and
Albania.
*** Unless otherwise specified, all dollar values in this report are
in terns of current US dollars.
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China has had debit balances in the clearing accounts that have offset
the credit balances of previous years. For the period 1951-57 as a
whole, Sino-Satellite clearing accounts were approximately in balance.
Future imbalances are expected to be sthall.
Mutual trade provides both Communist China and the European Satel-
lites with the types of commodities that are required by their econo-
mies. The complementary basis of this trade is illustrated by the
fact that about 60 percent of Sino-Satellite trade has been between
China and East Germany and Czechoslovakia, the two most industrialized
Satellite countries. Complete industrial installations currently ac-
count for more than one-third of China's imports from the Satellites,
and their proportion is increasing yearly. During China's First Five
Year Plan (1953-57) the Satellites supplied the equipment for 64 proj-
ects that were under construction. By the end of 1957, 27 of the
projects were completed and at least in' partial operation. Some of the
more important completed plants supplied by the Satellites included
18 thermal electric power stations and a large telecommunications com-
plex.
Communist China's exports to the Satellites have been almost
wholly raw materials and foodstuffs. Vegetable oils, oilseeds, and
mineral and chemical products have been major specific export items.
China's exports have added notably to the available raw materials and
foodstuffs in the European Satellites, all of which have experienced
chronic shortages of these goods: The Satellites, however, have fre-
quently taken advantage of the ready market in Western Europe for
many Chinese products to resell Chinese exports in order to obtain
foreign exchange to purchase non-Communist goods. Satellite reexports
of Chinese products have been significant since the beginning of the
Sino-Satellite trade and in some years may have been as high as $50
million. There are indications, however, that Chinese exports of the
type usually reexported by the Satellites have been declining since
1957, and thus Satellite reexports may have diminishing Significance.
A number of additional economic relationships with the Satellites
link Communist China to the Soviet Bloc. For some time, China has been
a member of intra-Bloc economic organizations such as the adminis-
trative agency for the Bloc agreement on railroads. A joint Sino-
Polish shipping organization (Chipolbrok -- Chinese-Polish Shipbrokers,
Ltd.) was formed in 1951 to facilitate the movement of goods between
China and the Satellites. The majority of the vessels identified with
the company in 1956 and 1957 appear to have been contributed by the
Chinese, and China probably has earned a small amount of foreign exchange
through the company's operations.
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Communist China has established Western currency accounts in Satel-
lite banks. Originally, these were established to avoid the blocking of
Chinese accounts by Free World governments. Although China no longer
fears the seizure of funds held in Western banks, it has opened addi-
tional Western currency accounts and has broadened its use of the in-
ternational services of Satellite banks. The Bank of China also has
acted on a small scale as a short-term financier for some of the
European Satellites' imports of Western goods.
Although limiting its official position to observer status, Com-
munist China has actively participated in those activities of the -
Council for Mutual Economic Assistance (CEMA) which have coincided
with China's interests to such an extent that the Chinese have claimed
that their economic cooperation with member countries is as great as
that among the members themselvea. Those CEMA activities in which
China has not participated have involved projects of no direct concern
to the Chinese; such as the oil pipeline to be built between the USSR
and the European Satellites or problems connected with Eastern European
economic integration and specialization. Given the present state of
economic development in China, industrial specialization and integra-
tion with Eastern Europe is not a matter with which the Chinese can be
seriously involved.. Furthermore, in view of the size and natural en-
dowments of China, which make feasible its expressed intention of
achieving industrial self-sufficiency, China is not likely to partici-
pate in the industrial integration programs of CEMA in the foreseeable
future.
Sino-Satellite economic relations have reflected Communist China's
policy of supporting Sino-Soviet Bloc unity as forcefully as its limited
resources and its other national goals would.permit. Following the up-
risings in East Germany, Poland, and Hungary, China provided these coun-
tries with advance deliveries and additional quantities of raw materials
and foodstuffs. In addition, China offered Hungary grants and credits
amounting to $57.5 million and agreed to pay Poland in Western currency
for some Polish exports to alleviate Pdland's critical shortage of
foreign exchange. Although this Chinese assistance has not been
large, it has entailed the subordination of other Chinese interests.
The economic relations between China and the European Satellites
have been mutually advantageous, and trade between the two areas prob-
ably will continue to expand; although the Satellite share in the total
trade of China probably will not increase. Both China and the Satel-
lites appear to be equally interested in the further development of
their relations and in the benefits to be derived; hence the permanence
in scope and scale of the relationships that have been established seems
assured.
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I. Introduction
In the decade since the Communist victory in the Chinese civil
war the foreign relations and economic policy of China have been
oriented primarily toward the Soviet Bloc. China's approach to
foreign relations has been dominated by the belief that its armed .
forces should be supported by a close political and economic alli-
ance with other Communist nations and that its role in world affairs
should be strengthened by rapid industrialization. China's en-
trance into the Korean War destroyed whatever chance existed that
It would receive assistance in industrializing from Western capi-
talist countries and at the same time strengthened the conviction
of the Communist Party hierarchy that its interest lay in expanding
economic relations with other Communist countries. China has
formed strong economic bonds with the USSR and the European Satel-
lites in order not only to buttress its own ideological ties with
the Communist orbit but also to strengthen those existing among
other members as well. Adoption of an economic policy in which
rapid industrialization and military preparedness have been given
the highest priority has led inexorably to initial reliance on Bloc
sources of supply for large amounts of military goods, capital equip-
ment, and other industrial items. Bloc markets in turn have become
the major foreign outlets for the products of China.
The wide variety of Sino-Satellite relationships in the fields of
foreign trade, transportation, finance, technology, planning, and
economic policy reflects the development of this interdependence.
This report is an analysis of the more important of these relation-
ships. It shows that in several instances and in a number of ways
Communist China has been willing to sacrifice its own economic in-
terests in dealing with the European Satellites in order to further
the strength and cohesiveness of the Sino-Soviet Bloc as a unit.
II. Level and Balance of Trade
The primary link between Communist China and Eastern Europe is
commodity trade based upon the exchange of Chinese raw materials and
foodstuffs for Satellite industrial products, an essentially comple-
mentary trade. With the consolidation of Communist power in Eastern
Europe and China, a dramatic increase in trade between China and the
Satellites has occurred, rising from a level of $20 million in 1950
to $655 million in 1958. The Satellites as a result have accounted
for about 17 percent of the total foreign trade of China in recent
years.
Both Communist China and the European Satellites have followed
policies of orienting their foreign trade toward the rest of the Sino-
Soviet Bloc. Although the expansion of Sino-Satellite trade has but-
tressed intra-Bloc political relations, it also has served as a highly
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satisfactory approach to key economic problems in both China and the.
European Satellites. The trade potential between the two areas was
considerably improved by the economic policies and particularly by
the investments in heavy industry which followed the installation of
Communist governments in the countries of Eastern Europe and in
China. Thus many of the import requirements for machinery and equip-
ment for the industrialization program of China have been supplied
by the Satellites. The Satellites, on the other hand, have been able
to sell to China industrial products which have been difficult to
dispose of in other markets. Goods which were relatively unmarket-
able within Eastern Europe because of the similarity in the develop-
ment programs of the Satellites or in Western countries because of
the high costs of production and the less advanced designs have been
marketed in China. The goods received in exchange from China have
supplied a significant proportion of Satellite import requirements
for consumer foodstuffs and industrial raw materials.
A. Level of Trade, 1950-58
The reorientation of Chinese trade toward the Soviet Bloc moved
rapidly during the first 2 years following the consolidation of Com-
munist power in China. The accompanying chart, Figure 1, shows the
geographic distribution of China's foreign trade in 1950 and 1958, By
EUROPEAN
SATELLITES
120 1.6%
EAR EASTERN
SATELLITES
$10 2%
1950
FAR EASTERN
SATELLITES
$180 5%
1958
27830 7.59
Figure 1. Communist China: Geographic distribution of foreign trade, by percentage and by dollar value, 1950 and 1958.
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1952i Chinese trade with the European Satellites had increased to
16 times the level of 1950 (see Table 1*). Since then, Sino-Satellite
trade has continued to grow but at a more modest pace, averaging about
13 percent per year between 1952 and 1957. The rate of growth of
Chinese trade with the European Satellites since 1952 has been nearly
the same as the rate of growth of China's total foreign trade. Hence
the relative importance of Sino-Satellite trade has remained compara-
tively stable, averaging about one-sixth of the total trade of China.
Communist China's trade with the individual countries of
Eastern Europe has been directed primarily toward the more mature in-
dustrial nations (see Table 2** and the accompanying chart, Figure 2,
for the estimated distribution of this trade in 1956). Thus East
ALBANIA 1%
BULGARIA 2%
27831 7-59
EAST
GERMANY
36%
411111111%11111%1111.
RUMANIA
6%
HUNGARY
12%
CZECHOSLOVAKIA
26%
Figure 2. Communist China: Percentage distribution of trade with
European Satellites, by country, 1956.
Germany and Czechoslovakia alone accounted for about 60 percent of Sino-
Satellite trade. The order of importance 6f the individual Satellites
remained stable between 1951 and 1957, with only minor changes. Czecho-
slovakia, for example, had a larger share of Sino-Satellite trade in
earlier years than in more recent years.
* Table 1 follows on p. 7.
** Table 2 follows on p. 8.
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Table 1
Foreign Trade of Communist China a/
1950-58
Million Current US $
Area
1950
1951
1952
1953
1954
1955
1956
1957
1958
With the Free World
865
920
580
750
625
800
1,090
1,135
1,415
With the Sino-Soviet
Bloc b/
USSR
320
750
965
1,170
1,275
1,705
1,460
1,290
1,520
EUropean Satellites
20
205
320
345
375
430
465
490
655
Far Eastern
Satellites
5
20
30.
50
90
125
120
. 145
180
Subtotal.
350
970
1,315
1,565
1,740
2,265
2,045
1,925
2,350
Total trade
1,215
1,890
1,895
2,315
2,365
3,065
3,135
3,060
3,765
a. Estimates are based on data available through May 1959. Dollar values in the table have been con-
verted from yuan values derived from Chinese Communist announcements. Conversion from yuan to dollars
was made at 2.46 yuan per dollar for non-Bloc trade and 4 yuan per dollar for Blod trade (see Appen-
dix A, Part 1). Statistics published by the European Satellites on their trade with China (nearly
complete data are available for 1953-56) show a somewhat higher level of total Sino-Satellite trade
than is shown in this table. There is no adequate explanation for the continual and rather stable
discrepancy in the same direction, but this difference has not been greater than 10 percent.
b. All data are rounded to the nearest number divisible by five. Totals are derived from unrounded
data and may not agree with the sum of their rounded components.
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Table 2
Trade of Communist China
with the European Satellites, by Country ill
1956
Country
Value (Million US $) Percent
East Germany 167 36
Czechoslovakia 121 26
Poland 79 17
Hungary. 56 . 12
Rumania 28 6
Bulgaria. 9 2 .
Albania 5 ? 1
Total
465 100
a. The percentages have been derived from the relation-
ship of figures .published by each Satellite on its trade-
with China to the sum of the published figures for all
the Satellites. .Sino-Albanian trade, for which no offi-
cial data are available, has been estimated to be $5,mil-
lion; or 1 percent of total Sino-Satellite trade. Be7
cause the Satellite figures on Sino-Satellite trade are .
somewhat higher than the Chinese yuan values converted to
dollars, the percentages have been applied to the 1956
dollar values shown in Table 1 (p. 7, above). Therefore
the values in Table 2 are slightly lower than the figures
published by the Satellites.
The growth of Sino-Satellite trade has been based on yearly
negotiations. Trade agreements were signed with the four major Satel-
lite countries -- Czechoslovakia, East Germany, Poland, and Hungary --
in 1950 and with Rumania and Bulgaria in 1952. Sino-Albanian trade
was. initiated in 1955 under a trade and long-term credit agreement.
A number of European Satellites have negotiated long-term trade agree-
ments with Communist China, beginning in 1956, when Czechoslovakia and
probably East Germany signed such pacts. In 1957-58, China negotiated
similar agreements with all the other European Satellites. The long-
term agreements provide a framework within which annual pacts are ne-
gotiated specifying types, volumes, and prices of goods to be traded.
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(See III, B,* for a further' discussion of the development of long-term
trade agreements.) .
B. Commercial and Settlement Transactions
Most Sino-Satellite commodity transactions and payments for
services are financed through bilateral clearing accounts.** Both pay-
ments and receipts are entered by both trading partners into the ap-
propriate clearing accounts, and the difference between payments and
receipts is computed periodically. Differences that 'exist (net
balances) may be settled by transfers of gold or acceptable foreign
exchange, or they may be carried over for future settlement in com-
modities. When net balances are carried over, they are in effect
advances of credit, which, when unplanned or persistent, .may represent
potential sources of friction.
1. Bilateral Clearing Accounts
Annual trade balances between CommuniSt China and the Euro-
pean Satellites have been subject to rather wide swings since 1950.
Through 1953, Communist China accumulated. substantial credit balances
in its clearing accounts -- balances which resulted largely from the
failure of the Satellites to fulfill export contracts on schedule.
Since 1954, however, China has had debit balances with almost all of
the Satellites and an aggregate debit balance for each year. For the
period 1951-57 as a whole, however, Sino-SateIlite clearing accounts
were approximately in balance (see Table 3x?(x).
A high level of trade between China on the one hand and
Czechoslovakia, East Germany, Hungary, and. Poland on the other -- prob-
ably involving a Chinese import surplus -- was planned in trade agree-
ments for 1951. The Sino - East German trade agreement, for example,
called for China to import goods valued at $130 million and to export
* P. 13, below.
** Sino-Satellite clearing procedures distinguish between "commercial"
and "noncommercial': transactions. Payments on commercial accounts in-
clude both goods transactions and probably such noncommodity trans-
actions as the services of technicians, ship repairs, and possibly some
freight services. The noncommercial accounts appear to be used for re-
mitting funds to fellow nationals (such as personnel in embassies and
delegations) for services obtained within another country (such as rent,
food, and utilities). The principal items excluded from the Sino?
Satellite bilateral clearing processes appear to have been Satellite
purchases of Western goods for China and probably most -shipping trang-
actions.
*** Table 3 follows on p. 10.
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Table 3
Estimated Balances on Clearing Accounts
Between Communist China and the European Satellites
1951-57
Million US $
Year
Estimated
Clearing
Balance 2/
1951
8o
1952
lo
1953
10
1954
-50
1955
-5
1956
-20
1957
-30
Net total -9
a. A positive figure denotes an excess and a nega-
tive figure a deficiency of Chinese earnings (pri-
marily from exports and other monetary receipts).
over payments (primarily for imports and other
monetary remittances). The net balances are esti-
mates based largely upon reported trade. See Ap-
pendix A, Part 2, for sources and methodology. All
data are rounded to the nearest number divisible by
five.
goods valued at 4398 million, with the difference probably to be set-
tled by China in a convertible currency. 1/* Actual Sino - East
German trade; however, fell considerably below the targets, and China
developed an export surplus. China's exports to East Germany in 1951
were 562 million, somewhat below the planned goal, but its imports
from East Germany were only about 322 million, far less than the
planned level.** The imbalance would have been even larger if China
had not canceled several export contracts. 2/ China similarly had a
$4o million surplus in its clearing account with Czechoslovakia and
a similar but much smaller surplus with Hungary. The unexpected
for
see Appendix A, Part 2,
methodology concerning clearing balances.
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failure of the Satellites to meet their export commitments thus forced
China into a position of creditor on clearing accounts for about $80 mil-
lion in 1951.
Communist China continued to accumulate surpluses in its
clearing accounts with the Satellites through 1952 and 1953, although
the imbalances were much smaller than in 1951. Greatly increased
Czechoslovak exports were largely responsible for limiting the Sino-
Satellite imbalance to a total of $20 million for the 2-year period
1952-53. Although China had deficits in its trade with Czechoslovakia
probably amounting to about $30 million during the 2 years, its clearing
account surpluses with the other Satellites persisted. Thus the Sino -
East German imbalance increased by about $30 million in the 2-year
period 1952-53, and the Sino-Polish and Sino-Hungarian imbalances
amounted to about $10 million each during the same period: The in-
ability of the Satellites to meet their export commitments was clearly
a major restricting factor on the development of Sino-Satellite trade
during the first few years.
Satellite exports to Communist China, however, were rising
continuously and, inasmuch as Chinese exports to the Satellites were
relatively constant, China's surplus on clearing accounts declined
yearly. By 1954, China's imports from the Satellites considerably ex-
ceeded its exports to these countries, and consequently China had a
clearing account deficit estimated to be about $50 million. Debit bal-
ances, although of smaller magnitude, have continued since 1954.
The Sino-Satellite clearing balance in 1958 and subsequent
years is expected to be small. Planning under recent Sino-Satellite
trade agreements has aimed at balanced trade, as illustrated in the
Chinese efforts in 1957 to reduce imports to the level of exports. ImL
proved planning and contracting procedures, particularly under long-
term trade agreements, and increased ability of the Satellites to meet
export commitments indicate that imbalances on current account in the
future also will be small.
2. Settlement Transactions
Balances in Sino-Satellite clearing accounts are generally
carried over for settlement by the shipment of goods in subsequent
years rather than by net currency or gold flows as an imbalance develops.
. Thus the surpluses of Communist China during the first 3 years of for-
malized Sino-Satellite trade represented a cumulative credit to the
Satellites totaling nearly $100 million which the Chinese neither antici-
pated nor desired. On the contrary, it was probably planned in each year
that the accumulated clearing account surplus would be eliminated. The
fact that China's surplus in clearing accounts continued to accumulate
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appears to be indicative of a series of serious planning failures in
the: European Satellites:
,
Satellite exports were tot sufficiently large to begin
?repayment of clearing credits until 1954, although Chinese Communist
?
..exports remained at about the same level from 1952 through 1954. By
, Ithe end of 1957 the cumulative imbalances of the clearing accounts had
? been eliminated.
The development of the large clearing imbalances in the
first years. of Sino-Satellite trade suggests that limitations, such as
swing limits, were not applied. Settlement of clearing imbalances in
hard currency probably was provided for in the Sino-Satellite trade
agreements, but it has not been used, probably because of the shortage
of Western foreign exchange reserves in Satellite countries and the
preference of Bloc countries to settle imbalances with merchandise
shipments rather than with gold or transfers of foreign exchange.
Minor shipments of gold and precious metals have been treated in Sino-
Satellite trade as commodity transactions rather than as financial
settlements.
Payments on some Sino-Satellite transactions, however, have
involved transfers of Western currencies. Some of these transactions
have been within the framework of the clearing procedures and therefore
have been included in the estimate of the balance of the clearing ac-
counts. The major Western currency transactions, however, probably
have been outside of Sino-Satellite clearing procedures and have in-
volved the purchase of Western goods by Satellite firms for delivery to
China. It is estimated that 10 to 15 percent of the Western goods
entering China by way of the European Satellites during 1951-57 were
purchased by Satellite firms. Thus China probably transferred about
$410 million to $50 million in convertible currency to the Satellites in
payment for Western goods.
III. Factors Influencing the Level and Balance of Trade
A. Pricing Practices
The pricing procedures employed in Sino-Sateliite'trade have
generally involved negotiating individual prices, uaingwOrld market
'quotations during a. base period as the point of reference'. A typical
Chinese Communist agreement With a Satellite country, for example,
calls for the trading firms of the two countries to negotiate a ruble
price based on the average world market price in the principal market
.for each article, generally during the 12 months preceding the begin-
ning of negotiations for the trade agreement. In determining the aver-
age world market price for each commodity, quotations must be supported
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by specific types of representative documents, and apparently data
from trade journals may be used only for information purposes. Each
side probably submits price documentation favorable to itself, and
thus a crucial point in the negotiations probably consists of the
scrutiny and selection of agreed documentation. The agreed-on world
market price for the article is converted into rubles on the basis of
the appropriate exchange rate quoted by the Soviet State Bank for the
pertinent time period. Occasionally, deliveries are necessary before
final prices have been determined, and in such cases a provisional
price, such as the previous year's price, is agreed to for accounting
purposes until the final price is negotiated.
Neither party -- Communist China or the Satellites -- appeart,
to derive any special advantage from the negotiated prices of Sino-,
Satellite trade. Prices for individual commodities may seem out of
line, but the price distortions are not in one direction and are
claimed to balance out in the aggregate. For example, China pays ex-
cessive prices for one or several types of imported items, but it also
pays below-world-market prices for other types of imports or charges
above-world-market prices for some of its exports. 3J Satellite trade
representatives In China have acknowledged the keen awareness of market
conditions which the Chinese have shown in price negotiations.
B. Long-,Term Trade Agreements
A major kactor that has restricted the development of Sino-:
Satellite trade has been the failure of the Satellites to meet their
export .Commitments. The Satellites have been consistently late in
meeting contractual delivery dates and also were unable to export the
full amount of their yearly quotas between 1951 and 1953. This failure
in turn has resulted partly from Communist China's slowness in drafting
its long-ter:6e iMport'requirements. Moreover, the Chinese have changed
specifications'oU'a number of orders, prolonging manufacturing period&
beyond the scheduled delivery dates:
As early as 1950 and 1951, some Satellites wanted long-term
trade agreements in order better to incorporate Chinese Communist re-
quirements into their production plans, but, until 1956, Chinese re-
quirements were probably provided only on an annual basis. In late
1955, China and the Satellite countries began discussing long-range
requirements, and in mid-1956 the first long-term trade agreements were
signed with Czechoslovakia and probably with Eat Germany. V The un-
rest in the Satellites and the Chinese review of their development
program probably caused the postponement of long-term trade agreements
with the remaining Satellites until late 1957 and early 1958. 2/
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The long-term agreements should largely overcome the past prob-
lems of incorporating Chinese Communist orders into Satellite produc-
tion plans on short notice. These agreements should also permit the
Investment in Satellite production facilities necessary to handle
Chinese orders in an orderly fashion. The long-term trade agreements
constitute a strong link between the economies of China and the Euro-
pean Satellites, and as such re:present a major step toward consoli-
dating China's relations with the Communist Bloc.
C. Economic Support for Eastern Europe
Communist China on several occasions has provided emergency
economic support to the European Satellites, in particular to those ex-
periencing economic problems associated with domestic political diffi-
culties. .The Chinese aid programs to the Communist countries of Asia .
and the Chinese participation in the Bloc economic programs in the
underdeveloped nations of the Free World are well known and outside the
sCope of this report. Chinese assistance to the European Satellites is
less well known, partly because of its small scale and partly because
It frequently has been given in forms other than identifiable grants or
credits.
All three instances of major unrest in the Satellites prompted
Communist China to offer economic assistance to help alleviate the eco-
nomic difficulties that had played an important role in the developing
crises. After the June 1953 riots in East Germany, China agreed to
ship additional foodstuffs worth about $13 million, although the Chi-
nese clearing credit to East Germany amounted to more than $60 million.
at the time. y The Chinese agreed after the Polish uprising in 1956
to pay for Polish iron and steel products in Western currency in order
to alleviate the shortage of foreign exchange in Poland, a policy which
was probably continued in 1957. // While China was providing Rpland*
with Western exchange, the Chinese were limiting their purchases of
Western goods because of a shortage of such currencies. Thus the help
China gave to Poland entailed some sacrifice of its own economic inter-
ests. Furthermore, the unusual 50-percent increase envisaged for 1958
in Sino-Polish trade contracts involved acceptance by China of several
Pblish exports, which it previously had been reluctant to purchase,
and provision to Poland of a larger volume of Chinese raw materials and
foodstuffs.
Chinese Communist aid to Hungary after the revolt in 1956 was
the largest extended to a European Satellite. China provided an initial
$7.5 million gift early in November 1956. In January 1957 the Chinese
announced the offer of a $50 million long-term credit to Hungary, con-
sisting of $25 million in commodities and $25 million in Western ex-
change. ?/ The foreign exchange credit of $25 million was formalized
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In an agreement in May 1957. 2/ This credit, too, was made at a time
when China was limiting its imports from Western countries because of
a shortage Of foreign exchange. China also responded to Hungarian re-
quests to assist industrial recovery by providing additional goods and
by making deliveries ahead of schedule.
Credits and grants have been a basic part of Communist China's
relations with Albania since the first economic agreements were signed
in October 1954. The value of these credits and grants is not known
but is believed to be small More recently, however, China has granted
a $14 million long-term loan for the period 1961-65i Albania will use
the loan to purchase from China equipment for a cotton mill, a flax
mill, and a glassworks and for other Chinese commodities. Albania is
to repay the loan with commodities between 1981 and 1990.
In indirect ways the Chinese Communists have aided many Satel-
lite countries in coping with shortages of Western currencies. China
has imported Asian rubber, principally from Ceylon, and has reexported
part. of it to several Satellite countries. China probably followed a
similar policy with respect to Canadian wheat and Egyptian cotton.
China used Western currencies (although sometimes in a limited form,
as in the Sino-Ceylonese rubber-rice agreement) to obtain the goods
and probably received clearing rubles from the Satellites for the re-
exports. This Chinese practice contrasts sharply with the Satellite
policy which requires China to remit the necessary Western exchange
when the Satellite countries purchase Western goods for China. More-
over, Communist China has continued to permit the Satellites to resell
its products in Western Europe, although the Satellite marketing pro-
cedures have made it more difficult for China to market its own prod-
ucts in the area.
IV. Commodity Trade
A. Chinese Communist EXports
Agricultural products dominate the exports of Communist China,
amounting to about 75 percent of total exports in value, and minerals
and metal products constitute most of the remainder. The composition
of Chinese exports to the European Satellites approximates this pat-
tern.
Seaborne cargo data appear to provide nearly complete informa-
tion concerning the volume of Chinese Communist exports to the Satel-
lites. Table 4* presents tonnage estimates and the accompanying chart,
Figure 3,** presents estimates by tonnage and by value for Chinese
* Table 4 follows on p. 17.
** Figure 3 follows on p. 16.
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TONNAGE
OTHER
AGRICULTURAL
PRODUCTS
15%
VEGETABLE
OIL AND
OILSEEDS
2.5%
27832 7-59
MINERAL
AND CHEMICAL
PRODUCTS
60% '
VALUE
MINERAL
AND CHEMICAL
PRODUCTS
20%
VEGETABLE
OIL AND
OILSEEDS
30%
OTHER
AGRICULTURAL
PRODUCTS
50%
Figure 3. Communist China: Estimated seaborne exports to the European Satellites, by tonnage and by value, 1956.
exports to the Satellites in 1956 for important commodities. Chemical
and mineral products -- predominantly iron ore -- amounted to about
three-fifths of the total tonnage, but their value is believed to be
about one-fifth of the total value of Chinese exports to the Satellites.
Oilseeds and vegetable oils constituted about one-fourth of the tonnage,
with soybean exports the most important. The value of these oilseeds
and vegetable oils probably amounted to about one-third of the total
value of Chinese exports to the Satellites. The remaining 15 percent
of the tonnage was made up of a wide range of other agricultural com-
modities such as meats, bristles, hog-casings, feathers, and eggs.
Because of the very high unit price of these commodities, it is be-
lieved that they constituted nearly one-half of the value of Chinese
exports to Eastern Europe.
Communist China's exports to the European Satellites appear to
include some reexported Free World goods such as cotton, wheat, and rub-
ber. The latter, however, is the only commodity that has been consist-
ently reexported. A significant portion of Chinese exports to the Satel-
lites is resold by the Satellites, primarily to Western Europe, to
alleviate the chronic shortage of Western currencies held by the European
Satellites (see VI*).
* P. 25, below.
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Table 1.
Estimated Seaborne' Exports
from Communist China to the European Satellites 21
1956
Thousand Metric Tons
Commodities
Estimated,
Volume 12/
Iron ore
483
Pig iron .
50
Other minerals and chemicals
32
Soybeans
225
Peanuts
78
Vegetable oils and other oilseeds
35
Meat
33
Rice
36
Other agricultural Products
76
Unidentified 2/
262
Total 1,310
b. Tonnage is estimated from cargo data and probably
includes nearly all reexports.
c. The bulk of the unidentified cargo probably was
Iron ore. For the estimates in the text (see p. 16),
200,000 tons of the unidentified cargo were assumed to
be iron ore.
A recent interesting development is the emerging Chinese Com-
munist capability to export industrial goods. Under its 1958 trade
agreements, China has contracted to supply to Eastern Europe a number
of industrial commodities that formerly had been imported in sizable
quantities from the. European Satellites. The new Chinese exports in-
clude tires, electronic parts, machine tools, textile machinery) and
other industrial products. Exports of these new commodities, however)
are still small in value, and agricultural products may be expected to
.continue to dominate Chinese exports to the Satellites for several
years.
B. Chinese Communist Imports
? Chinese Communist imports from the European Satellites have
been predominantly industrial prOducts, in particular machinery and
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equipment. Reports indicate that imports from the Satellites have
consisted of about 75 percent investment goods, 13 percent raw mate-
rials, and 12 percent consumer goods. Approximately 70 percent of
the investment goods, or more than one-half of total imports, have
consisted of machinery and equipment) such as machine tools, motors,
vehicles) and construction equipment. 11/ The composition of imports
appears to have remained essentially unchanged in recent years, with
perhaps a slight decline in imports of consumer goods and raw mate-
rials and a corresponding increase in investment goods as Satellite
exports of complete installations* have assumed greater importance.
The pattern of Chinese imports from the Satellites during 1952-58 is
shown in the accompanying chart, Figure 4.
Figure4.CommunktChina:Estimated patternofimportsfromithe
EuropeanSateMites,bylmajorcommoditywcwps,1952-58.
The principal consumer goods imported by Communist China from
the Satellites have been kerosine, pharmaceuticals, sugar, and textiles.
Imports of raw materials have consisted largely of petroleum products,
chemicals, dyes) fertilizers) and newsprint. Imports of investment
goods have included many types of machinery and equipment and various
ferrous and nonferrous metal products. Since 1955, complete installa-
tions have probably accounted for more than 30 percent of total imports
from the Satellites and imports of transportation and agricultural .
equipment for at least another 20 percent.
* For a definition .of the term complete installations, see the footnote,
p. 21, below.
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Detailed commodity statistics for Chinese Communist imports
from East Germany (see Table 5* and the accompanying chart, Figure 5)
OTHER
INDUSTRIAL PRODUCTS
AND RAW MATERIALS
8%
27834 7.59
COMPLETE INDUSTRIAL
INSTALLATIONS
2'L
sis.N.........
OTHER MACHNERY
AND EQUIPMENT
80%
1952
OTHER
INDUSTRIAL
RODUCTS AND
RAW
MATERIALS
12;
OTHER
MACHINERY AND
EQUIPMENT
28%
TRANSPORT
MACHINERY
32%
COMPLETE
INDUSTRIAL
INSTALLATIONS
28%
1956
Figure 5. Communist China Imports from East Germany, 1952 and 1956.
indicate that electrical goods as well as precision machinery and
optical equipment were the leading imports from East Germany in 1952.
In contrast, transport equipment and complete installations were the
most important commodity groups in 1956. The decline in importance
between 1952, and 1956 of such categories as machinery and electrical
equipment, however, primarily reflected the aggregation and export of
these products as part of complete installations. East German exports
of complete installations to China have been gaining in importance,
amounting to 42 percent of East Germany's exports to China in 1957 and
58 percent of planned exports in 1958. 12/
The commodity composition of Chinese Communist imports from
the remaining European Satellites differs somewhat from the pattern of
imports from East Germany. Complete installations have been the lead-
ing commodity group in Czechoslovakia's exports to China in recent
years, comprising nearly 50 percent of the total. The planned
composition of Polish exports to China for 1957 was 44 percent for
transportation equipment (primarily oceangoing vessels)) 20 percent for
complete installations, and 17 percent for iron and steel products. ly
* Table 5 follows on p. 20. -
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Table 5
Imports into Communist China from East Germany
1952 and 1956
1952 1956
Commodity Group
Percent
of Total 2/
Value
(Million
Current
US $) 12/
Percent
of Total.!!
Value
(Million
Current
US $) /2/
Machinery and equipment
General machinery
14
1h2
8
7.6
Transportation machinery
10
3.0
32
30.4
Chemical industry
equipment
8
2.4
3
2.8
Machine tools and metal
goods
13
3.9
4
3.8
Electrical goods
24
7.2
6
5.7
Precision machinery and
optical equipment
21
6.3
7
6.6
Complete industrial
installations
2
0.6
28
26.6
Subtotal
92
27.6
88
83.5
Other industrial products
and raw materials
Minerals and chemicals
4
1.2
9
8.6
Light industrial products
4
1.2
2
1.9
Products of the printing
Industry
0
0
1
1.0
Subtotal
8
?
2.4
12
--
11.5
Total
100
30.0
100
95.0
b. Computed by applying the percentage given here to the value of East
German exports to Communist China as shown in Appendix A, Table 8
(p. 36, below).
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About 25 percent of Hungarian exports to China between 1953 and 1957
were vehicles, but deliveries of complete installations and electronic
equipment have been significant also. ly Rumanian exports have been
mainly petroleum products and equipment, although complete installa-
tions appear to be increasing in importance. important Bulgarian ex-
ports to China have been tractors, fertilizers, pharmaceuticals, and
nonferrous metals. Albanian exports have been mainly textiles.
Satellite exports have contributed to the development of the
Chinese Communist military establishment,
Very probably
a portion of the Chinese imports of such commodities as vehieles.and
communications equipment has been for military organizations.
In any
event, Satellite exports of military end items to Communist China are
believed to be small and. probably are included in the Satellite trade
data.
V. Technical Assistance from the European Satellites to Communist
China
Industrialization requires an abundance of technical equipment and
skills, and the extreme shortage of producer goods and of engineers
and technicians in Communist China, accordingly, has led it to rely on
foreign sources for these things. China Ma recognized that the Euro-
pean Satellites possess a pool of engineering skills and can be relied
upon as a source of industrial equipment. China began to draw on the
Satellites' technical capabilities as early as 1950 and since that
time has continuously utilized Satellite specialists and has imported
an increasing voluVe of plant and equipment produced by the Satellites.
Most frequently, in recent years China has imported technical services
and industrial equipment combined into complete installations. Satel-
lite technical assistance has also served as a method of training --
in particular on-the-job training -- of Chinese specialists. Thus
China has improved its own technical capabilities and has already re-
duced in some measure its dependence upon foreign technical services.
A. Complete Installations*
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Communist China showed considerable interest in importing com-
plete installations from the European Satellites as early as 1950, but
* The term complete installations is a commodity category which is..em-
ployed in Sino-Soviet Bloc foreign trade reporting and which covers the
Import and export of technical services and equipment combined in a single
unit. Complete installations vary from gootnote continued on p. 22]
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few plants were imported before 1954. The early development of this
type of import was inhibited by the lack of Chinese long-range plans
and by the Satellite failures to meet their export commitments. By
1953, however, China had formulated its plans for development clearly
enough to expand its requests for complete installations. Then, dur-
ing 1954, most of the Satellites established firms specifically to ,
handle the export of complete installations, a move which considerably
improved the contracting procedures. By 1955 the deliveries of equip-
ment for complete installations had become a significant element in
China's imports from the Satellites. In 1956 and 1957, such Imports
comprised at least 30 percent of total imports from the Satellites, a
proportion that is expected to rise in 1958 and subsequent years.
During the Chinese Communist First Five Year Plan (1953-57) the
Satellites supplied equipment for 64 complete installations. By the end
of 1957, 27 projects were completed and at least in partial operation. Id/
The USSR, in comparison; had provided 57 completed projects by the end
of 1957. Many of the Soviet projects, however, were probably larger
and more costly than the Satellite projects. About 67 percent, or 18,
of the completed Satellite plants were electric power stations, lieV
and they accounted for about 18 percent of the increase of power-
generating capacity installed by China during the First Five Year Plan
(see Table 6*). China has contracted to import large numbers of elec-
tric powerplants from the Satellites during its Second Five Year Plan.
Czechoslovakia's exports of complete installations to Communist
China have been predominantly electric powerplants but have included a
fertilizer plant as well as a number of other smaller installations.
East Germany's most important project has been a radio parts combine
consisting of some 25 plants, nearly all of which have been completed.
Among the other East German projects are an abrasive plant, two syn-
thetic fiber plants, two glass plants, a precisionsmasuring instru-
ments plant, and a number of cement plants and electric power stations.
Pbliah projects include two sugar refineries, one large sugar combine
near Canton, and two coal processing plants. Hungary's main projects
have been small electric power stations. Rumanian projects have also
been largely electric power stations, although a number of cement plants
have been contracted for China's Second Five Year Plan. Bulgaria has
agreed to supply small electric power stations and ore flotation plants.
small units such as air-conditioning equipment designed for specific use
In a textile mill to very large units such as an industrial complex con-
sisting of many separate plants. The common ingredient in complete in-
stallations is the technical services involved in design, manUfacture,
and installation of equipment as a complete unit.
* Table 6 follows on p. 23.
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Table 6
Increase in Installed Power-Generating Capacity
In Communist China
Supplied by the European Satellites 21
1953-57
Country Megawatts Percent
Czechoslovakia 231 10
East Germany 108 5
Rumania 21 1
Hungary 39 2
Total 399 18.
Communist China's pusthases of complete installations have been
on current account and have involved no extension of long-term credits
by the Satellites. The trade agreements generally can for a quota for
estimated deliveries of technical services and equipment for the
year. .?2/ The Satellites appear to forward monthly invoices for de-
signing costs and Invoices for equipment at the time of each ship-
ment. Ea/ China pays the technicians' salaries to the responsible
Satellite firm, probably monthly, and pays a per diem allowance directly
to the technician. China pays in the required Western currency for dub-
units or parts for the installations that have to be purchased from
Western countries, apparently in adVance of each purchase. 22/ 50X1
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European Satellite firms have Shown great interest in selling
complete installations to Communist China, and some competition for
these contracts has been evident.
the- initial planning and delivery schedules previously had been arranged
during the course of more than a year of negotiations with East Ger-
many. 2V Thus, although Western suppliers have been largely eliminated 50X1
from the Chinese market, competition among Bloc countries has permitted
China to select from among Bloc suppliers several types of complete in-
stallations.
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B. Technicians
, Some specialists from the European Satellites have been sent
to Communist China to assemble and service machinery and equipment
imported under regular commercial contracts from Satellite countries.
In other cases, instructors have been sent to explain the operation
of complicated or unusual equipment. Satellite personnel have been
employed, for the most part, directly in production. There is no
evidence, for example, that Satellite experts have filled advisory
posts in ministries, as Soviet experts have done.
Communist China also has imported the services of many tech-
nicians through the purchase of complete installations. These tech-
nical services have been included in the cost of the complete units.
The majority of the technical services have been performed in the
various Satellite design bureaus where designs, blueprints, and other
necessary technical data have been drawn up. Satellite specialists
usually have been sent to China early in the designing stage of a
project to obtain planning data 'and toward the end of a project to
supervise the assembly, installation, and test operation of the proj-
ect.
Training of Chinese Communist technicians has been provided
by the Satellites, thus increasing China's pool of technical capa-
bilities. Much of the training has been on-the-job training in China,
but Chinese specialists have been sent to the Satellite countries to
learn particular skills. As a result, Chinese technicians have been.
assigned to certain subordinate positions or functions formerly filled
by Satellite specialists. Freedom from reliance on foreign techni-
cians, however, appears to be still many years in the future.
The pay scale of foreign specialists in Communist China is high
In comparison with the scale of Chinese workers, a phenomenon common to
most underdeveloped countries. The per diem alone of foreign techni-
cians is nearly twice the salary of comparable Chinese workers. The
total payment (salary plus per diem) to a foreign engineer is probably
10 to 15 times that of his Chinese counterpart. China probably pays
the per diem directly to the Satellite technician and his salary to
his home company on the basis of monthly invoices. China must also
pay a number of additional charges for specialists, including the
specialist's transportation, housing, and insurance and a fee amount-
ing to 50 percent of the specialist's salary to defray the adminis-
trative expenses of his home firm. The services of foreign techni-
cians in China are costly and, although China has employed many
Satellite technicians, the Chinese keep this number to a minimum by
requiring the Satellite exporter to justify the need of each tech-
nician's work in China.
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C. Technical and Scientific Cooperation
Communist China also has obtained important technical assistance
through the operation of intra-Bloc Scientific and Technical Cooperation
Agreements. ?IV Under the agreements that China has signed with the
Satellites it has obtained considerable technical data on industrial
processes and on the use of various types of equipment, and it has re-
ceived factory blueprints and designs for equipment. Chinese special-
ists have been trained in Satellite plants in general operations, in
particular production processes, in utilizing special equipment, and in
other technical and scientific endeavors.
Although Communist China has only limited ability to provide
scientific and technical data, it has supplied some assistance to other
Soviet Bloc countries) primarily in the agricultural field. It also
has supplied technical data for the design of surgical instruments, for
tung oil manufacture, for Chinese lacquer formulas) and for the cultiva-
tion and processing of herbs.
The countries of the Sino-Soviet Bloc usually claim that the
Scientific and Technical Cooperation program involves no costs, but it
seems probable that incidental costs such as reproduction. costs for
documents and traveling expenses are paid by the receiving country. It
is believed that Communist China probably pays the traveling expenses
and perhaps a per diem for Satellite technicians who come to the country
for short periods under the Scientific and Technical Cooperation Agree-
ments as well as perhaps also the salaries of those staying for several
months. Conversely, Chinese technicians probably receive similar bene-
fits when providing services to the Satellite countries, but China
probably pays the expenses of Chinese sent to study industrial processes
In Satellite countries.
VI. Reexports and Transshipments in Sino-Satellite Trade
A significant portion of Sino-Satellite trade involves transactions
with third countries, but only the following two types of transactions
have been important: those involving Satellite resales of Chinese Com-
munist exports and those involving Chinese imports of Western goods via
the European Satellites. Satellite reexports to China of goods produced
in the Bloc appear to have been small. China has reexported some Satel-
lite commodities, but the volume also appears to have been small. China
has reexported small quantities of Western products, primarily rubber,
to the European Satellites under the trade agreements.
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A. Resale of Chinese Communist Exports
Considerable quantities of the exports of Communist China to
the European Satellites have been reexported) largely to countries
of Western Europe, enabling the Satellites to supplement their scant
holdings of Western currencies.* This practice began with the ini-
tial development of Sino-Satellite trade and has involved a signifi-
cant portion of Chinese exports to the Satellites. Thus it is
probable that, until 1957, Satellite resales of Chinese products were
above $30 million and possibly were as high as $50 million yearly.
Since'1957, resales appear to have been of less importance than in
previous years. Hungary's resales amounted to nearly $20 million
annually during 1954-56 and represented between 50 and 70 percent of
China's exports to Hungary. 25/ East Germany's resales amounted to
about $35 million in 1951
In subsequent years, China exported directly to West Germany, and it
seems certain that East German resales were sharply reduced after
1951.
For the remainder of the Satellites, there have been many re-
sale )transactions but no indications of over-all volume. In the ?
Czechoslovak-French trade agreement for 1955-56, for example) the com-
modity list of Czechoslovak exports included the category "reexports
of Chinese products," but the amount was less than $1 million. 21/
Other Czechoslovak trade agreements have included such obviously Chi-
nese products as tung oil as well as other commodities probably of
Chinese origin such as antimony, tea, oilseeds) furs, and casings.
Austria received Chinese products worth about $1 million through trade
agreements with several of the Satellites in 1953. !y other Western
countries, particularly West Germany, reportedly have received larger
quantities of goods reexported from China.
The practice of reexporting goods from Communist China, par-
ticularly when sales are made at prices lower than those set by the
Chinese, has had an unsettling effect upon the normal marketing of
China's exports. Western European merchants of Chinese goods, many
with a long tradition of handling Chinese products, have found Satel-
lite offers at lower prices particularly disruptive. !2/ China has
been aware of the Satellite marketing practices and of the disruptive
* European Satellite resales of Chinese Communist exports introduce
a bias into Western trade statistics because most Western countries
record imports on the basis of the country of origin wherever possible.
This bias may reach significant proportions) as in West German statis-
tics on trade with East Germany in 1951) when West Germany recorded
.approximately $35 million of East German reexports as imports from
China. .
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effect on China's direct exports to Western Europe. China's reasons
for allowing such sizable resales are uncertain, but the .effect of
past Chinese practice has been to permit the Satellites to adjust the
volume of their resales to their immediate requirements for Western
currency.
B. Imports of Western Goods via the European Satellites
Communist China has received significant quantities of Western
goods via the European Satellites. Most of such goods have been pur-
chased by Satellite firms acting as agents for Chinese firma or have
been merely transshipped through Satellite ports. In both of these
types of transactions, the goods and the associated payments probably
do not enter the Sino-Satellite trade figures or the bilateral clear-
ing accounts. There also has been a small volume of Free World goods
reexported by the Satellites to China?under the bilateral trade and
accounting procedures, but these transactions were significant only in
1951. Evasion of Free World controls on strategic exports to Communist
China has not been the only factor affecting the movement of Western
goodS to China via the European Satellites, and consequentlY the re-
laxation of controls ih 1957 has not eliminated this pattern of trade.
Purchases by Satellite firms acting as agents probably have
consisted largely of controlled goods. The largest series of known
transactions of this nature occurred in 1956, when Satellite enc es
purchased Western co..-r
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By far the greatest volume of Western goods has reached China
through transshipments, primarily through -the Pblish ports of
Gdynia/Gdansk. Many shipments have been carried by the Polish shuttle
service from Western European ports to Poland and transshipped to the
oceangoing vessels loading for China.
WeStern
strategic controls have served as a stimulus to these transshipments,
but some of these goods would move to Dolish ports for transshipment
under normal commercial practice. Moreover, the Chinese have been
able to exercise greater control over loading by having a large pro-
portion of their sea cargo assembled in the Gdynia/Gdansk area.
VII. Other Economic Relations
A. Transportation
Because of the great distance separating Communist China from
the European Satellites, transportation is an important factor in
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Sino-Satellite trade. China has entered into various relationships
with Soviet Bloc countries to facilitate the movement of goods. Be-
cause lower ocean freight costs have caused the major portion of Sino-
Satellite trade to be moved by sea, the more important of these
bilateral relationships are in the field of ocean shipping.
Communist China's most important shipping associate is Poland/
with which it has formeda joint company, Chinese-Polish Shipbrokers,
Ltd. (Chipolbrok). The company was formed in 1951 with the head
office in Tientsin and a large branch office in Gdynia. The manage-
ment consists of both Chinese, associated with the Ministry of Com-
munications, and Fbles, associated with the Ministry of Navigation
and the Polish Ocean Lines. The several million dollars in annual
earnings of Chipolbrok may be shared equally, as the early announce-
ments concerning the company indicated equal partnership. A large
part of the earnings are probably in Western currency, as Chipolbrok
requires a large percentage of the freight charges to be paid in
Western exchange.
. : ?
? .'Cbipolbrok functions as a ship and freight broker rather than
as a shipowner. Ownership of the vessels under Chipolbrok control has
been concealed because of the Free World embargo and bunkering controls
and, in paiticular, because of the threat of seizure of vessels by
Nationalist China. A tabulation of POlish-flag vessels at the end of
1956, however, included seven Polish-owned vessels which were not con-
troLled by Polish organizations and nine foreign-owned vessels. The
size of the vessels and the length of their voyages indicated that
these vessels were employed on the Far East run and therefore were
probably the Polish and Chinese contributions, respectively, to Chi-
polbrok. 11/ Four more vessels apparently were added to the China-
owned fleet during 1957, but no additions from Poland have yet been
identified.* The cohtribution of Poland to the company probably also
includes technical services such as training Chinese seamen.
Other Polish-flag vessels as well as some chartered vessels,
apart from the vessels assigned to Chipolbrok, are employed by the
Polish Ocean Lines on the run to Communist China. Polish Ocean Lines
employs Chipolbrok as the agent for these vessels when they are op-
erating in Asian waters.
Czechoslovakia also operates a shipping line to ports in Com-
munist China. Among the vessels of Czechoslovak registry are two
which are probably owned by China. The use of Chinese-owned vessels
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suggests that China and Czechoslovakia may have an unpublicized joint
shipping arrangement similar to Chipolbrok.
East Germany inaugurated a shipping line to Communist China in
1957 to supplement its charter arrangements. To date, the line has ?
operated a very small fleet consisting primarily of East German-built
ships.
The Czechoslovak- and Polish-flag vessels carry a large propor-
tion of the seaborne cargo between Communist China and the European
Satellites. In 1956, for example, Czechoslovak-flag and Polish-flag
vessels are estimated to have carried more than 70 percent of the .
Satellite seaborne exports to China (including part of the Western
goods transshipped at Gdynia) and about 25 percent of the tonnage from
China to Eastern Europe. 2/ It has been necessary, however, to
charter additional cargo space, and the Chinese and Satellite freight- '
forwarding and chartering companies have exchanged information and
have coordinated plans informally while engaged in these shipping
activities.
In rail transport, Communist China participates in the Bloc-
wide agreements covering international freight and passenger traffic.
The purpose of these agreements is to facilitate the movement of goods
and passengers across national boundaries. Several measures have been
established to this effect, such afi a uniform rate schedule for goods
transiting third countries. A central organization administers the
agreements and acts as a clearing house for disseminating information.
Communist China's adherence to these Bloc-wide agreements was probably
motivated by the desire for simplification by the use of standardized
procedures. Its participation probably has not appreciably affected
the volume of rail shipments between China and the European Satellites.
Nearly all of the Sino-Satellite rail shipments appear to be Chinese
imports of Satellite goods, and the general criterion for selecting
rail transport probably is based upon the required time of arrival of
the goods in China. China has frequently selected the more expensive
rail transport rather than ocean transport because the items were
required at an early date. Adherence to the pacts is a convenience
for China) although some economic. benefits are probably derived from
the uniform transit rates.
B. Financial Cooperation
Communist China has developed diverse financial relationships
with the state banks of various European Satellites in addition to the
bilateral relationships necessary for financing Sino-Satellite foreign
trade. These financial relationships are further examples of the broad
participation of China in Soviet Bloc economic activities and illustrate
the comprehensive cooperation which links China to the Bloc.
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The Chinese State Bank has acted on a small scale as a short-
term financier for some of the Satellites' imports of Western goods,
thus tempering the problems of the Satellites in dealing with Western
Europe with inadequate .currency reserves. The arrangements appear to
have been in the nature of revolving lines of credit in convertible
Western currency on which a maximum volume of trade bills could be -
drawn. China has placed at least $10 million at the disposal of the
Satellites for short-term financing of imports from Western countries.
The Chinese State Bank also has established Western currency
accounts in several Satellite banks for handling trading operations in
Western Europe. 33/ The original motivation was probably the Chinese
fear of sequestration of funds held in Western banks after Chinese
troops entered the Korean War. More recent reports, however, indicate
that China has enlarged the number of Satellite banks in which Chineae
funds are deposited and also has called upon Satellite banks to an in-
creasing extent for other international banking services.
The nationalized insurance companyin China has participated,
in reinsurance treaties of other Bloc countries, probably on the basis
of reciprocity. All known reinsurance treaties in which China has
participated have involved Western currency liabilities, apparently
the only type of risk that the Bloc insurance companies regard as call-
ing for reinsurance coverage. Most of the reinsurance treaties in
which China has participated appear to have covered marine risks.
C. The Role of Communist China in CEMA
The Council for Mutual Economic Assistance (CEMA) was estab-
lished in 1949 as the mechanism for Soviet Bloc-wide coordination of
economic activity and mutual economic aid. The extent of CEMA's activi-
ties has increased since its inception, but it has suffered from chronic
inability to make its decisions binding upon member countries. Thus
CEMA's effectiveness to date has rested primarily upon the hortatory in-
fluence it can exert within the Bloc.
Although Communist China's role in CEMA has been limited to that
.of observer, the Chinese have asserted that their economic Cooperation
with member countries has been as great as the cooperation among the
members themselves.3211 China probably has been as active as full mem-
bers regarding CEMA decisions when these decisions have been in harmony
with Chinese interests, which is the same approach to CEMA recommendations
as that employed by the member countries. The Chinese have been active
in such CERA activities as promoting long-term trade agreements and
technical and scientific exchanges. They have signed long-term trade
agreements and Scientific and Technical Cooperation Agreements with
nearly all members of CEMA. They have participated aggressively in dis-
cussions regarding pricing problems in intra-Bloc trade. .Thus, in those
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CEMA matters affecting China's international trade with Communist
nations and its internal development, China has cooperated as thorollgbly
as have the full CEMA members.
Many questions before CEMA, however, have involved detailed dis-
cussions of particular industries and have been of primary concern to
the industrialized countries of Eastern Europe. 'Accordingly, China and
the other Bloc countries in Asia probably have believed that they had
little to gain from active participation. China, for example, had
little direct interest in the technical discussions regarding the pe-
troleum Pipeline to be laid from the USSR to the European Satellites
and so has not taken part in these sessions. Also, China has not par-
ticipated in the decisions regarding industrial integration. Although
China may ultimately benefit from the gains in efficiency resulting
from economic integration within the Soviet Bloc area, active partici-
pation in industrial specialization and eponomic integration is not a
matter with which the Chinese can be seriously involved, given the pres-
ent state of economic development in China. It is unlikely, moreover,
that China in the foreseeable future will become very much involved in
the integratiOn plans of CEMA. With its vast and varied internal re-
sources, China will derive far more advantage from pursuing a policy
leading to self-sufficiency on a broad barna, a policy which the Chinese
have expressly avowed they intend to follow.
Limited participation as an observer in the CEMA organization
is probably sufficient for Communist China- to protect its economic in-
terests and at the same time to display sympathy for the general prin-
ciple of intra-Bloc cooperation without becoming involved in specific
and undesirable commitments regarding economic integration. So far,
CEMA's efforts have been largely directed to areas of interest to China
and, as a consequence) China has been as active as the full members.
If in the future the integration decisions are more closely adhered to
by the full members, China may participate in this sphere of activity in
order to protect its immediate economic interests. Their apparent in-
tention to develop their economy on a basis encompassing virtually all
fields of industry) however, suggests that the Chinese will remain appre-
hensive about active participation in the integration decisions of CEMA
and about full membership.
VIII. Prospects for Future Sino-Satellite Economic Relations
The mutual advantages of Sino-Satellite trade indicate 'a continued
expansion of this trade during the next few years. A major part of
this expansion will undoubtedly consist of greater Satellite exports
of machinery and equipment, largely in the form of complete plants, to
further the increased tempo of Communist China's industrialization.
Pacts covering future trade With several Satellites bave been signed,
generally calling for increased trade. Thus a continually rising
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level of trade between China and the European Satellites is virtually
assured.
The relative importance of Sino-Satellite trade in the future, how-
ever, is uncertain. The Chinese Communist practice of favoring trade
with the Satellites in order to consolidate Bloc relations and to pre-
serve an economic confederation of ideologically united nations may
well Stimulate the future development of Sino-Satellite trade at a
faster rate than the growth of China's total foreign trade. On the
other hand, economic factors may play a more important role in deter-
mining the relative position of Sino-Satellite trade. The development
of Chinese export capabilities in some types of industrial goods such
as iron and steel products, textiles, and other light industrial goods
points to an expansion of China's trade with Asian and African coun'.-
tries. The relaxation of trade controls suggests that China's trade
with developed Free World countries may also become increasingly im-
portant. Sino-Soviet trade is expected to maintain its relative
position in China's fature trade, and Chinese export surpluses will be
necessary to cover Chinese credits and grants as well as debt service.
Some aspects of Sino-Satellite trade also suggest that it will not
rise as rapidly as Communist China's trade with other regions. The
difficulties encountered by.the Chinese :with late, defective, and in-
complete deliveries from the Satellites have appeared important enough
to restrict future orders, particularly since the relaxation of the
trade control program provides the alternative of Western suppliers. '
Moreover, the recent attempts by the Chinese to include more industrial
products in their exports to the Satellites at the expense of the pre-
ferred raw materials and foodstuffs have probably made Chinese exports
less desirable te the Satellites. Thus the growing problems arising
from the type and .volume of Chinese export resources appear to restrict
the possibilities for future trade with the European Satellites and
suggest perhaps a slight decline in the relative importance of Sino-
Satellite trade to China.
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APPENDIX A
METHODOLCGY FOR THE LEVEL AND BALANCE OF TRADE
BETWEEN COMMUNIST CHINA AND THE EUROPEAN SATELLITES
1. Estimates of the Level of Trade
Data recently published by the Chinese Communists provide a reliable
series of statistics Tor the annual yuan values of China's total foreign
trade and for a breakdown by the following geographical areas: the
USSR, the European Satellites, the Asian Satellites, and non-Communist
countries. Comparison of these yuan values with other foreign trade
data published by other countries and in other currencies suggests that
China has been using a system of multiple exchange ratios. Thus the
implicit cross rates between yuan and dollars for the various segments
of China's foreign trade have been derived from trade data, as follows:
2.46 yuan per dollar for Sino-Western trade, 4 yuan per dollar for
Sino-Soviet trade, approximately 3.7 yuan per dollar for Sino - European
Satellite trade, and probably 4 -yuan per dollar for Sino - Asian Satel-
lite trade.*
The relevant data on Sino-Satellite trade are shown in Table 71**
but a comparison can be made only for 1953-56, when relatively complete
Satellite trade figures were available. Although the average implicit
exchange rate for this period, which can be computed from available
evidence, is 3.70 yuan per dollar, it is probable that Communist China
actually uses a dual conversion system, with one set of internally con-
sistent rates for Bloc trade and one for non-Bloc trade. Thus the
Chinese probably convert Sino-Satellite trade into yuan values at the
equivalent of 4 yuan per dollar, the same conversion factor as that
found in Sino-Soviet trade, and the apparent ratio determined by com-
paring the Satellite data (in dollars) with the Chinese data (in yuan)
may be lower because of differences in Satellite and Chinese recording
techniques. Available information regarding methods of recording and
valuing foreign trade in China is inadequate, however, to explain the
discrepancy between the derived rates for Sino-Satellite trade and those
for trade between China and other Bloc countries. Thus the estimated
The yuan values
a preliminary approach to Chinese exchange ratios. 50)(1
\have been slightly refined in the present
report. Additional
altered the derived
above source.
** Table 7 follows
information used in this report also considerably
Sino-Satellite exchange ratio from that found in the
on p. 34.
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Table 7
Implicit Foreign Exchange Rate for Trade
Between Communist China and the European Satellites
1950-58
1958
1950
1951
1952
1953
1954
1955
1956
1957
(Preliminary)
European Satellite data
(million US $) 2/,
East Germany
N.A.
N.A.
N.A.
113
165
184
181
194
238
Czechoslovakia
N.A.
N.A.
N.A.
116
120
118 .i
131
147
200
Poland
8
49
55
57
67
66
85
82
108
Hungary
0 -
45
*48
63
58
66
59
58
91
Bulgaria
Negligible
Negligible
3
. 10
8
9
10
N.A.
N.A.
Rumania
Negligible
N.A.
N.A.
10
15 b./
20 bi
28
N.A.
N.A.
Albania 12/
0 ,
0
0
0
0
4
6
N.A.
N.A.
Total
N.A.
N.A.
N.A.
369
433
467
500
N.A.
N.A.
Chinese Communist data
(million yuan) 2/
83
814
1,283
1)376
1,496
1,728
1,869
1,960
2,615
Derived ratio of ex-
change (yuan per dollar)
N.A.
N.A.
N.A.
3.73
3.45
3.70
3-.74
N.A.
N.A.
Estimated Sino-Satellite
trade (million US $ di)
20
205
. 320
345
375
430
465
490
655
a. Data are from European Satellite statistical publications and have been converted from Bloc currencies at
the official exchange rates for current US dollars. Totals were derived frbm unrounded data and may not agree
with the mmn of their rounded components.
b. Estimated.
c. Data are with minor refinements for 1954 and 1955 based on recent Chinese publications. 50X1
d. Converted at 4 yuan per dollar and rounded to the nearest number divisible by five.
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dollar values for Sino-Satellite trade shown in the text have been de-
rived for 1950-58 by converting the Chinese yuan values into dollars
at the average conversion rate of 4 yuan per dollar.
2. Estimates of the Balances on Clearing Accounts
.The balances of the Sino-Satellite clearing accounts presented in
Table 3* are estimates of the approximate net total of the end-of-year
ithhalances in the individual Sino-Satellite clearing accounts. The
basic data employed have been the published trade data of the Satel-
lite countries .supplemented by available information on some financial
transactions. The quantitative date employed in the estimates are shown
in Table 8.**
The use of trade data as a basis for estimating Sino-Satellite
clearing balances is believed to be justified by the reasoning below.
Commodity trade is the dominant element in the clearing accounts and
?
is the part of the accounts where significant imbalances are most
likely to occur. Service items are the minor part of the Sino-Satellite
clearings and are probably approximately in balance each year. The
payments associated with Satellite personnel in China (such as delega-
tions, students, and embassies) are probably about the same as the pay-
ments associated with Chinese personnel in Satellite countries. Imbal-
ances in the flow of such payments are minor in magnitude and are
insignificant when compared with payments for commodity trade.
Payment of transportation costs is the major remaining service item.
which might be included in clearing transactions but not in trade sta-
tistics. It is doubtful, however, whether many of the transportation
chargeS are included in the Sino-Satellite clearing procedures. All
known goods in Sino-Satellite trade are sold either f.o.b. the border
or a nearby port, and thus, for railroad shipmenternearly all trans-
portation payments would be settled with the USSR as the country pro-
viding most of the transportation services.
Payments for ocean shipping are more involved. Most of the trans-
portation charges for Chinese Communist exports are probably paid by
the Satellite countries to either Poland or the Western country sup-
plying the charter ships or freight services from China. A large pro-
portion of Satellite exports is carried to China in Polish vessels,
but, considering the joint Chinese-Polish shipping company, in which
profits are probably shared equally, it seems unlikely that China has a
significant net indebtedness -- on the contrary, China probably realizes
a small net income from shipping services because of this company. China
.also uses ships of several Western countries to transport Satellite goods
to China, but payments for these services would not enter Sino-Satellite
clearing.
* P. 10, above.
41* Table 8 follows on p. 36.
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Table 8
Derivation of Estimated Balances on Clearing Accounts
Between Communist China and the European Satellites
1951-57
Million Current US $
East
Germany 222/
Czechs.-
elevate N.A.
Poland 26
Hungary 21
Bulgaria
H
eale -
gibl
Rumania grUIT
e
Albania 0
Net total g
a. payments are the monetary flows associated primarily with Chinese imports. and receipts are the monetary flows associated primarily with Chinese exports. Payment information has been used wherever available, but
. primarily reliance has been on commodity trade data. The figures are amport-export data from Satellite statistical publications, unless a specific source is cited. Figures in Bloc currencies are converted to dollars
at the official exchange rates.
b.
c. 3g. These figures are fromdata on bank payments rather than on wmmoditytrade.
d. 12/
e. assumed to be the rate of repayment for the Czechoslovak debit balance in 1591.
I, h2/. There are two series of Polish trade figures for trade with China villas differ only for the years 1952 and 1995. This series appears to be the more accurate.
g. The sum of $10 million has been added to the 1956 Polish trade statistics because of Chinese payments of Western currency for Polish iron and steel. Lea/ Such payments are estimated to have been $7 million to
$8 million in 1957.
h. A balance is assured because of the Chinese policy of maintaining balanced trade.
i. Trade is assumed to balance. Balances shove are estimated Chinese deliveries to Albania under the long-term credit agreement.
..j. Totals are rounded to the nearest figure divisible by 5.
1951
Pay-
1952
Be-
ceipts W
Wel-
ance
Pay-
mexia a
'155/
30
N
5
0
1953
Be-
cateL
682/
BA.
27
33
5
0
:
Bel-
euace
Pay-
rents LIpttiLL!iL
1954
Be-
Bel-
once
Pay-
rents 5/
1955
Be-
,cali2Le
Pal-
wee
Pay-
meear/
95
65
50
31
5
17
ILL
1256
Re-
ceipts sJ
Sal-
ance
Pay-
rents
1957
Re-
ceipte El
lative
ante
-9
1
-5
.
0
o5/
7g
-2
2i. S.
Hal-
622/
23
25
Wa il-
gible
"gli-
glble
0
40
404/
-3
4
Meal-
gible
711;
0
W
302/
21/1
21
1
0 ?
355/
34 //
22
2
0
5
-155/
13
6
1
0
10
--
23
-155/
-3
3
0
0
10
__
98
LA.
37
3127-437
h
0
67
LA.
30
4
0
-31
-102/
-7
0
0
-50
71
58
301/
5
87
61
361/
n
4
-10
3
6
-8
-1
65/
ly
-
86
66
'1-55/
28 ..
5
u.
.9
1
-5
-3
0
-6
29
106
130
45
30
4
89
67
'155/
27
4
LA.
LA.
-17
-13
o
-5
0
NA.
4 y
-32
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