THE ROLE OF CREDITS IN CHINESE COMMUNIST PURCHASES FROM THE INDUSTRIAL WEST AND JAPAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002500110001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 12, 2016
• Document Release Date: January 29, 2002
• Sequence Number: 1
• Publication Date: March 1, 1966
• Content Type: BRIEF

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BRIEF
THE ROLE OF CREDITS
IN CHINESE COMMUNIST PURCHASES
CIA /RR GB 66
March 1966
.FROM THE INDUSTRIAL WEST AND. XA.PAN-.
DIRECTORATE OF INTELLIGENCE
Office of Research and Reports
NO FOREIGN.DISSEM
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GROUP 1
Excluded from automatic
downgrading and
declassification
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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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THE ROLE OF CREDITS
IN CHINESE COMMUNIST PURCHASES
FROM THE INDUSTRIAL WEST AND JAPAN"'
Summary
Current negotiations to purchase a steel complex valued
between $140 million and $175 million from a West European
consortium represent the largest and most recent Chinese
Communist transaction to acquire industrial installations
from the Free World. If this contract is signed, the value
of Chinese purchases of industrial installations from the
Free World since 1963 will be almost twice the present total
of more than $180 million. None of these purchases has in-
volved long-term credit; like the one currently under negoti-
ation, most of them have been financed by medium-term (up
to five years) bank credit backed by government guarantee.
In addition to approximately $90 million of medium-term
industrial credits, against which China so far has drawn
$43 million, China has received from the West more than a
billion dollars in short-term (to 18 months) credit covering
the purchase of Western grain and miscellaneous other short-
term credits of around $170 million. All of the credits
together have financed almost one-third of China's imports
from the Free Worldduring the period 1961-65.
The credits received thus far, however, have done little
to relieve the pressure on China's hard currency payments.
The large volume of repayments due each year has reduced
net drawings to less than $35 million annually, and repayments
in 1966 should about equal, and may even exceed, new draw-
ings. Conclusion of contracts for the steel complex alone
would cause drawings against medium-term credits of perhaps
$20 million to $30 million annually over the 1967-70 period,
thereby helping China to sustain new drawings roughly on a
level with repayments for a few more years.
* The estimates and conclusions in this brief represent the
best judgment of this Office as of 22 March 1966.
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The fact that China's leaders thus far have not sought long-
term Western credits probably indicates their uncertainty over
China's long-run hard currency payments position -- particularly
over future grain import requirements -- and possibly a reluc-
tance to pay the higher interest charges associated with long-
term borrowing. Should they decide to seek some long-term
financing during the course of the current five-year plan
(1966-70), it seems likely that such credits will be forthcoming.
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Since the beginning of 1961 , when Communist China began diverting
its trade from the Communist to the Free World, the Chinese have
drawn down almost $1. 4 billion in short-term and medium-term credits
extended by Western industrial countries and Japan. Such credits, most
of which have involved government guarantees to commercial banks,
have financed a large share of Communist China's purchases from the
Free World (see Table 1).
Role of Short-Term and Medium-Term Credit
in Communist China's Imports from the Free World
1961-65
Commodity
Grain
Capital equipment
Fertilizer
Other
Total
Drawings Against
Credits
Imports from
Free World
1,167
1,955
43
300
147
375
1,915
1,3TY
4,545
Percent of Imports
Financed by Credit
30
Although by far the larger part of the credit was supplied by Canada
and Australia as short -term financing for China's heavy imports of wheat,
medium-term credits to purchase Free World capital equipment have
become increasingly important. Known extensions of such credit total at
least $90 million, against which the Chinese already have drawn $43 mil-
lion or more. Complete industrial installations account for the bulk of
these credits, which have been extended by at least seven Free World
industrial countries, * West Germany, the United Kingdom, and Japan
* Of the forty or more contracts for industrial installations known to
have been signed since 1963, at least 20 were concluded in 1965. Most
of these have involved credit.
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together have supplied some two-thirds of this total. None of the credits
made available thus far has exceeded five years, and a number of the
smaller ones have had two-year terms (see Table 2).
2. Current Negotiations for a West European Steel Plant
The largest and most recent transaction of this type is the just-
announced Chinese negotiation with a consortium of West European indus-
trial firms to purchase a steel complex valued at between $140 million
and $175 million. If this contract is signed, it will almost double the
present value (more than $180 million) of industrial installations purchased
by China. since 1963.
This complex, which currently is under negotiation with DEMA.G,
A. G. , the Ruhr corporation heading the consortium, consists chiefly of
two rolling mills and possibly a rail or pipe mill. The greater part of the
equipment is to be supplied by West German firms, which very recently
received their government's agreement to guarantee a five-year credit of
as much as $87.5 million to finance their share of the complex. It is
believed that French, Italian, Swiss, and British firms may be involved
in supplying the remainder. Although the West German firm Schloemann
A.. G. signed the first contract for a $17 million cold-strip rolling mill
last December, contracts for the remaining facilities may not be concluded
for several months,
3. The Impact of Credit
Credit has played an important role in financing Communist China's
imports from the industrial countries of the Free World, but all of the
credits received thus far have been relatively short-term. Grain credits
have been for 18 months or less, credits for capital equipment have been
from two to five years' duration, and fertilizer credits generally have
been on 12-month terms.
A.s a result, China has been faced with a large volume of repayments
due each year (see Table 3). Beginning in 1962, repayments on past
credits have almost equalled drawings against new credits, and net draw-
ings have amounted to less than $35 million annually. Indeed in 1966,
when a large repayment against 1964 grain credits falls due, payments
will probably exceed drawings.
4. Prospects
China has not sought long-term (more than five-year) credits from
the Free World but has financed a growing volume of imports from the
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industrial West and Japan through rising exports and medium-terra and
short-term credit. Although China's exports to hard currency areas
are expected to continue to grow over the 1966-70 period, it is also likely
that China's requirements for industrial goods will generate a rising
demand for .hard currency imports. This increased demand, together
with continuing large-scale grain imports, should absorb the expected.
increase in Chinese export earnings.
It is not known how much medium-term industrial credit China. will
assume over the next several years. The DEMAG steel contract, alone,
is expected to result in drawings probably on the order of $20 million to
$30 million a year during the 1967-70 period. If drawings against other
industrial credits amount to $30 million to $45 million annually -- that is,
at or up to 50 percent higher than the 1965 level of around $30 million --
then total drawings against medium-term industrial credit will be roughly
$50 million to $75 million a year. Unless the Chinese decide to seek
long-term or even further expanded medium-term credits, their net
credit position vis-a-vis the industrial West and Japan will then approxi-
mate that shown in Table 3. If they decide to continue expanding medium-
term industrial credit, they would postpone for only a few years the time
when repayment would surpass new drawings, and, after that, payments
would rise sharply. It is more likely that the Chinese would seek long-
term financing for a substantial increase in purchases of industrial
equipment from the West,
China's failure to seek long-term credits from the Free World :reflects
chiefly the uncertainty of the leadership over the long-run Chinese payments
position, and especially over future requirements for Western grain.,
Although a certain level of more or less revolving short-term and medium-
term debt can be managed, the leaders apparently have been unwilling to
assume a burden of long-term debt, for which China's repayment capability
remains in doubt. Furthermore, it is consistent with the Chinese Com-
munists' conservative banking practices, which have included prepayment
of certain debts even during a payments crisis, to avoid the higher interest
charges associated with long-term credits.
Should the Chinese reverse their position and seek long-term credits,
there is little doubt that such credits would be made available, Japanese
and West European competition for what is widely viewed as a potentially
lucrative market would lead quickly to long-term offerings, at least on a
scale consistent with China's capabilities to repay, Indeed, China may
well seek a modest volume of such credit, once its agricultural and export
prospects become clearer.
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Communist China: Purchases of Industrial Installations
from the Free World
1963-66
Value
(Millions
Type of Plant or Equipment us $) Payment Terms
1963
Country of
Origin
Vinylon plant
Urea plant
20
25 percent down; 75 percent
credit over 5 years
Japan
cn
Ammonia plant
Petroleum refinery
7
25 percent down; 75 percent
credit over 5 years
Credit over 5 years
15 percent down; 85 percent
Netherlands
United Kingdom
Italy
t'7
'
Chemical fertilizer
lant
1
credit over 5 years
C)
p
s
(two plants)
5
90 percent down; 10 percent
credit over 3 years
Italy
Total 1963
1964
54
Alcohol plant
3
Credit over 3 years
France
Palm oil plant
2
N. A.
Netherlands
Acetylene generating equipment
Negi.
N. A.
Japan
Crude oil cracking and olefin
11
N. A.
West Germany
separation plant
Synthetic fiber plant
2
N. A.
West Germany
Polyethylene plant
13
25 percent down; 75 percent
United Kingdom
E
credit over 5 years
quipment for petroleum
exploration
Polypropylene plant
N. A.
United Kingdom
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Table 2
(Continued)
Type of Plant or Equipment
1964 (Continued)
Micrometer manufacturing
plant
Plant for the manufacture of
porous silica material
Total 1964
Value
(Millions
US $) Payment Terms
1 80 percent down; 20 percent
credit 18 months after
delivery
2 N. A.
43
Country of
Origin
1965
Plant for the manufacture of
oil pressure equipment
Banknote printing equipment
Acrylinitril plant
Iron-mining equipment
Copper-mining equipment
Plate-glass manufacturing
plant
`Truck manufacturing plant
Oxygen manufacturing plant
Condenser manufacturing
plant
Wire-drawing plant
Carbide electric furnace
Acrylic fiber plant
Synthetic fertilizer plant
KD-9 computer
Instrument plant
2 85 percent down; 15 percent
credit 1 year after
delivery
1 N. A.
5 N. A.
6 N. A.
to 8 N. A.
2 65 percent down; 35 percent
credit over 3 years
N. A. Credit for 3-1/2 years
3 20 percent down; 80 percent
credit for 5 years
2 N. A~
5 1 year deferred payment
1 85 percent down; 15 percent
credit in 1 year
8 Credits over 5 years
6 N~ A.
2 N. A.
1 N. A.
United Kingdom
West Germany
Sweden
Sweden
West Germany
France
West Germany
Japan
Japan
United Kingdom
Netherlands
United Kingdom
United Kingdom
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Table 2
(Continued)
Value
(Millions Country of
Type of Plant or Equipment US $) Payment Terms Origin
1965 (Continued)
Tube-expanding pipe plant
3
Cash
Italy
Bleaching plant
N. A.
N. A.
Finland
Straw cellulose factory
N. A.
N. A.
Finland
Steel plant
12
N. A.
Austria
Cold-strip steel rolling mill
17
Credit over 5 years
West Germany
Total 1965 82 to 8)-
1966
Plant to manufacture petrol 2 Cash Japan
engines
Steel complex 125 to 175 Negotiations underway; West Germany
West Germany will and other
guarantee credits up West European
to $86 million for a producers
period of 5 years
a. Including a $17 million cold-strip that rolling mill, for which a contract was
signed in 1965.
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Table 3
Communist China: Drawings and Repayments
Against Short-Term and Medium-Term Free World Credits
1961-70
Million US
Payments
Year
Drawings a1 Repayments
Interest
Advance
Tot
l
Net
V
a
Receipts S
1961
128
2
5
7
121
1962
256
214
10
224
32
1963
352
322
15
3
340
12
1964
388
362
20
5
387
1
1965
253
212
15
-6
221
32
1966
265 to 275
270
18
10
298
-23 to -33.
1967
275 to 300
275
20
-10
285
-10 to 15
1968
275 to 300
240 to 245
22
0
262 to 267
8 to 38
1969
275 to 300
255 to 260
cl
1970
275 to 300
265 to 27S
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Coord.:
a. Drawings from 19 through 1970 are based on the assumption of annua
drawings of $225 million to finance grain imports, which have been assumed
to amount to somewhat more than the 400 million level of such imports in
1965, and the remaining drawings to finance industrial installations and
miscellaneous machinery, including drawings against DEMAG steel complex
credit currently under negotiation.
b. Advance payments are made at the time of signing contracts. A negative
amount in this column indicates that deliveries against advance payments
(which were made in earlier years) are greater than new advance payments.
c. A negative sign indicates "net payments".
Analysts:
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Z8 March 1966
MEMORANDUM FOR: Chief, Dissemination Control Branch, DD/CR
FROM Chief, Publications Staff, ORR
SUBJECT . Transmittal of Material, CIA/RR CB 66-7,
The Role of Credits in Chinese Communi
Purchases From the Industrial West and
Japan
1, It is requested that the attached copies of subject report
be forwarded to the recipients indicated on the attached covering memo-
randa. A list of the addressees is attached for your records.
2. It is further requested that this transmittal be handled as
expeditiously as possible.
25X1A
Attachments :
Copies #9 - #17 of CB 66-7
TIO C07, '.. EJED
?hsseminatton rettu:+,'.;' :'y
memorandum has been COMPla ed?
oy.
Date:
Extlnded "
Y"ea
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 CENTRAL INTELLIGENCE AGENCY
WASHINGTON, D.C. 20505
2 8 MAR 1965
Attachment
CIA/RR CB 66.,7 (Subject Report)
25X1A
Direc or?
Research and Reports
25X1A
25X1A
Approved For Release 2002/)L:ia-RDf A 0001-1
SUBJECT The Role of Credits in Chinese Communist
Purchases from the Industrial West and
Japan
1. The attached report, summarizing the role of credit in
Communist China's trade with hard currency areas, provides some
perspective on current negotiations for the purchase of a Western
steel complex.
2. The report concludes that credit has played an important
role in financing Communist China's imports from industrial countries
of the Free World. Nonetheless, it has done little to relieve the
pressure on China's hard currency payments:. Over the next five
years requirements for industrial goods will generate a rising
demand for hard currency imports. This increasing demand, together
with continuing large-.scale grain imports, should absorb the ex-
pected increase in China's export earnings. The Chinese have not
yet sought long-term credits from the Free World, but if long-
term financing wore requested it seems likely that such credits
would be forthcoming.
,~,.... t; EL 0'i:i mast
tl~t r t wd
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#/0
WIA
Distribution List for CB 66-7, The Role of Credits in Chinese
Communist Purchases from the Industrial West and Japan
Mr. Chester L. Cooper
White House Staff
Executive Office Building
Washington, D. C.
Mr. Francis M. Bator
Deputy Special Assistant to the President
for National Security Affairs
The White House
Washington, D. C.
Mr. Robert W. Barnett
Deputy Assistant Secretary for
Far Eastern Economic Affairs
Bureau of Far Eastern Affairs
Department of State
Washington, D. C.
The Honorable Walt W. Rostow
Chairman and Counselor
Policy Planning Council
Department of State
Washington, D. C.
The Honorable Thomas L. Hughes
Director
Bureau of Intelligence and Research
Department of State
Washington, D. C.
Mr. Walter G. Stoneman
Deputy Assistant Administrator
Bureau for Far East
Agency for International Development
Department of State
Washington, D. C.
The Honorable John T. McNaughton
Assistant Secretary
International Security Affairs
Department of Defense
Washington, D. C.
Room 374A
Room 361; EOB
Room 7261
Room 6531
Room 6212
Room 4 E $13, Pentagon
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f/7
#1f
25X1A
Lt. General Joseph F. Carroll
Director
Defense Intelligence Agency
Department of Defense
Washington, D. C.
Room 3 E 322, Pentagon
Lt. General Marshall S. Carter, USA
Director
National: Security Agency
Fort George G. Meade, Maryland Room 2 W 110
Room 3 D 0001+, Hq
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