Political and Economic Briefing on the People's Republic of China for Secretary of the Interior

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80M01389R000400070001-7
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 19
• Document Creation Date: December 19, 2016
• Document Release Date: July 12, 2005
• Sequence Number: 1
• Publication Date: April 18, 1975
• Content Type: BRIEF

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Political and Economic Briefing
on the People's Republic of China
for
Secretary of the Interior
Rogers C.B. Morton
18 April 1975
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Political and Economic Briefing
on
the People's Republic of China
1. The Political Situation in the People's Republic of China
II. The Chinese Economy
III. China's Foreign Trade in 1974-75
IV. The I'RC Petroleum Situation
18 April 1975
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1. The Current Political Situation
in the People's Republic of China
Peking in recent months has devoted primary attention to putting its domestic
house in order, a precondition for Carrying out its Stated ,foal of building a
modernized China by the end of the Century. Repeated calls for unity and stability
suggest that China's leaders are trying to put behind them the personal and political
animosities that have plagued the leadership for the past nine years and have slowed
economic development. Political instability over the last several years has
contributed to an erosion of public confidence in China's leaders. 25X1
Major party and government meetings held last January emphasized the unity:
theme and, more importantly, laid the groundwork for a relatively orderly
succession to the current wing leadership. China's current leaders are essentially
the same group that has ruled the country since the Communists came to power
in 1949. As none of these people can be expected to survive for more than .10
years, a priority need is the grooming of younger leaders who are capable of
directing China's economic development program for the next 25 years.
The succession question took on greater urgency last summer with the
hospitalization of Premier Chou En-tai who is generally regarded as the architect
of China's current domestic and foreign policies and the leader of the moderate
coalition in the party. Chou remains in a rest home but seems still to be in overall
control of affairs of state. The supervision of day-to-day affairs, which was Chou's
primary task for more than 20 years, has now been turned over to 70-year-old
Teng Hsiao-ping. At the meetings in January, Teng was named first deputy premier
and is Chou's apparent successor.
Teng seems to be in general agreement with Chou En-lai's policies and is not
expected to make any major changes if and when he becomes premier. Teng has
a well-earned reputation as a strict disciplinarian and an able and experienced
administrator. At the meetings in January, Teng was named to top positions in
the party and the national military hierarchy, thereby giving him Important posts
in China's three major bureaucracies -- the party, government, and military.
At his age, however, 'Deng is an interim succcss.or at best. Behind him are
several competent officials in their 40s, 50s, and GOs who were also given important
jobs last January. The State. Council that was appointed in January consists
primarily of these and other officials of moderate persuasion. Several are known
proteges of Chou.
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The extreme left wing of the party, which is headed by Mao's wife, Chiang
Chill-, was all but excluded from the new goverlllllellt and has lost illfluellce in
party affairs as well. The powcr.of the military, which was the dominant political
force until a few years ago, has also been sharply reduced. Civilians have been
named to several top military posts, and many of the most influential Military
men in the provinces were transferred away frbm their power bases and sent to
new areas where they have been denied top party and government positions.I
As Peking builds toward the future, the position of China's top leader, Mao
Tse-tung, has cone increasingly into question. Mao has been out of Peking since
last summer, his longest absence from the capital since coming to power. Recently
he has stopped meeting foreign visitors, and there are signs that Chinese officials.
are beginning to take a critical view of many of Mao's former policies. Some people
seem to hold Mao responsible for the political instability of recent years. Although
Mao is on record as endorsing the unity and stability theme, his physical separation
from the rest of China's leaders. raises questions about his actual view of current
developments. Mao is kept fully informed of all major developments, but the
Chairman's prolonged absence from the capital suggests that he may not fully
endorse some recent decisions.
25X1
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11, The Chinese Economy
Premier Chou En-lai in his government work report to the National Peoples
Congress last January surveyed the mixed performance of the economy in 1974
and suggested that the leadership expects economic growth to .be gradual for some
time. Although Chou provided few statistics op either planning or performance,
we believe that the Chinese economy grew in 1974 by only 3`%%, -- down from
almost 10 % in 1973. Growth in industry slowed to 4i%, froin a respectable 12%
in 1973, and agricultural output barely matched the increase. in population
(about 2%).
Among the factors holding back industrial growth in 1974 were:
e the persistence of imbalances among the extractive, processing, and
finishing industries, highlighted by shortages of coal;
sporadic work stoppages, lowered worker morale, and reduced
productivity created by the anti-Confucius campaign; and
e the overburdening of the transportatiori system, particularly the railroads.
The sharpest decline occurred in steel output, which fell by 6% in 1974 to
about 24 million tons. On the positive side, the petroleum industry continued its
strong growth, with a 20% increase in crude output to the 65 million ton level
during the year, while the production of electric power, tractors, -chemical fibers,
and cement also showed increases.
Agricultural growth during 1974 was adversely affected by generally
unfavorable weather for winter wheat and for fall-harvested grains. Grain output
exceeded the 1973 level of 250 million tons, rising to about 255 million tons.
Nevertheless, grain production in 1974 was clearly less than the authorities hoped
for. Imports of grain, which were 7 million tons in 1974, will continue, with 5.4.
million tons already slated for delivery in 1975.
In foreign trade, total exports rose last year, with the rapid expansion of
earnings, from oil exports more than offsetting the impact of shrinking world
markets for traditional Chinese exports. Imports grew even faster as worldwide
inflation pushed up China's import costs. China's. hard currency trade deficit
increased from the 1973 level of S370 million to perhaps S I.3 billion in 1974,
in part from heavier use of medium-term credits to finance whole plant imports.
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Chou reaffirmed the development priorities of agriculture, light industry, and
heavy industry which have prevailed since late 1972 and reiterated Chinese interest
in expansion of trade relations with the non-Communist wVorld. The reduction of
economic ministries and commissions - from 40 to 25 and from 12 to 3,
respectively -, announced at the NPC. and Chou's statement that the PRC: is drawing
up a ten-year plan in addition to five-year and annual plans suggest that the degree
of centralized planning and management of the economy is to increase.
C11ou also singled out the period of the Fifth hive-Year Plan (1976-80) as
crucial to PRC attainment of economic "front rank" status in the world by the
end of the century. The basic problem remains that of lifting the long-term rate
of grain production above the rate of population growth. Solution of this problem
through expanding industrial inputs to agriculture including inputs of foreign
tecluloloay - is clearly implied in Chou's speech. In suns. Chou En-lai appears
to have charted a course of carefully planned but slow growth for the economy
over the next 15 %-cars. The leadership is in transition and.. Riven the PRC's past
experience with radical turns in economic policy, the present moderate approach
may be difficult to maintain.
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China: GNP- Industrial Production, and Agricultural Production
1949 50
74
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III. China's Foreign Trade in 1974-75
Highlights in 1974
China's foreign trade boom fell victim in 19.74 to the growing problems of
the world economy. Total trade increased by about 25%, to roughly S 1 2.5 billion,
well below the 67'% increase in 1973. Most of the increase is attributable to higher
prices, with little or no growth in volume. Worldwide inflation pushed up China's
import bill while the economic slowdown in the West cut demand for Chinese
exports, resulting in the largest. trade deficit in China's history - perhaps S I.3
billion with the non-Communist world, and despite a surplus with the Communist
world, about S 1 billion overall.
Despite these difficulties, China's balance of payments is not in crisis. Resenves
are well in excess of the trade deficit, the level of foreign debt is manageable,
and Peking's credit rating is excellent.
China began taking steps to relieve the financial squeeze last fall. Contracts
for agricultural products were deferred or canceled. Fertilizer deliveries were
postponed. Peking also increased its use of short- and medium-term credits.
Trading Partners
Trade with the non-Communist countries posted the largest gains, accounting
for almost 85'/c, of China's total trade. Imports from the developed .West shot up
to slightly above S5 billion from S3.4 billion in 1973, largely due to increased
purchases of agricultural products and machinery. China's deficit with the developed
countries was roughly S2.9 billion.
Sino-Japanese trade jumped 50%, to S3.3 billion. China's imports, boosted
by sizable deliveries of machinery and equipment, exceeded exports by more than
$800 million. China's exports of 4 million tons of crude oil worth about S380
million more than offset the decline in its traditional exports to Japan.
US-China trade totaled $935 million, a smaller increase than anticipated at
mid-year because China canceled contracts for US grain worth about $300 million.
Wheat, corn, cotton, soybeans, and other agricultural products composed about
80;0 of total US exports of S820 million (see the table). US machinery and
equipment exports rose as delivery began on equipment for the ammonia plants
purchased in 1 973 and the second half of the S150 million Boeing contract was
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US-China "T'radeI
US exports 63 690
820
Agricultural products 61 578
656
Of which:
Wheat 35 278
234
Corn 24 132
96
Soybeans .... 43
140
Colton .... 101
186
Vegetable oils 2 19
8
Machinery and equipment 2 69
107
Of which:
Aircraft, including
engines, parts, and
accessories .... 63
76
Steel scrap .... 24
12
Other .... 19.
31
US imports 32 64
115
Food, beverages, and tobacco 4 7
16
Bristles and other crude
animal materials 8 8
10
Textile fibers 4 6
5
Nonferrous metals 2 8
11
Chemicals (including
fireworks) 2 8
18
Cotton fabrics 2 7
26
Antiques and works of art 3 6
8
Other ?7 14
21
I
completed. Growing purchases of cotton textiles helped boost
US
imports
of
Chinese goods to Si 15 million, up from S64 million in 1973.
US-China trade encountered several problems last year. Chinese complaints
over the quality of US grain caused delays in wheat shipments and the cancellation
of soybean contracts. US controls on scrap steel exports prevented delivery on
several contracts. On the import side, shipments of Chinese shrimp were rejected
by the Food and Drug Administration, and the Chinese at the Fall Canton Fair
were more vocal about the lack of most-favored-nation status for their exports.
Commodity Flows
Purchases of agricultural products, machinery, and transport equipment were
largely responsible for the growth of China's total imports. China contracted for
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2
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almost 10 million tons of cram in 1974. but shipping delays and contract
cancellations dropped actual deliveries to 7 million toils, down from 7.7 million
in 1973. I ligher grain prices. however, pushed the cost up to over S i billion.
Imports of soyhcan~" and cotton were up substantially from 1973. Machinery and
equipment imports rose sharply as large-scale deliveries began on the 52.5 billion
worth of whole plants and other equipment ordered in 1973.
Peking signed contracts for S900 million worth of whole plants in 1974 --
down fro.in the record S l."_' billion level in 1973. Rapid inflation and tight world
credit markets. plus Chinas need for a breathing spell to absorb the large amount
of technology already purchased. were the major reasons for the slowdown in
purchases. Contracts worth S550 million for the Wu-han steel rolling complex
composed much of the purchases, with the balance going. for additional synthetic
fiber, fertilizer, and electric power plants. In contrast to the whole-plant program,
new orders for machinery and transport equipment in 1974 ww.-ere off sharply from
the record level of 1973.
China's exports rose by roughly Si billion in 1974: petroleum accounted for
almost half of the increase. Sales of crude oil and petroleum products. to Japan,
the Philippines. Hong Kong. and Thailand amounted to about 4.5 million tons
worth S440 million. Rice exports benefited from high prices, but other traditional
Chinese exports, particularly silk and cotton textiles, faced declining demand.
Outlook for 1975
China's trade this year will be tempered by Peking's attempts to reduce its
trade deficit. Export growth will be small, reflecting poor sales of traditional
products at the 1974 Canton fairs and recession-weakened demand in the West.
An expected doubling of petroleum exports may do little more than offset the
decline in other exports.
Imports of machinery and equipment will be substantial as large-scale deliveries
continue on 1973 and 1974 contracts. The successful 1974 harvest and declining
textile exports \\ ll permit cutbacks in grain and cotton imports. Other, less essential
imports will be curtailed and the pace of new plant contracts may slow further.
The S700 million surplus enjoyed by the United States in its trade with China
in 1974 will be cut sharply in 1975. US exports to the PRC could fall to one-third
last years level, while US imports will continue to rise. China's current low interest
in US agricultural products stems from an adequate domestic crop last year, a
determination to ease a tight foreign exchange situation, and dissatisfaction with
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the quality of US wheat, corn, and soybeans. Peking canceled contracts for almost
1.0 million tons of US wheat in early 1975, thereby eliminating the United States
as a supplier at least for the time heitig. As for cotton, contracts called for delivery
in 1975 of 500.000 bales worth about $100 million. Chinese interest in US cotton
has diminished, however; one contract for 200,000 bales has already been canceled
and additional cancellations may occur.
In contrast to farm products, US industrial exports should continue to rise
in 1975. Although new orders for US machinery totaled only S15 million in 1974,
deliveries under 1973 contracts -- notably equipment for the eight Kellogg ammonia
plants - will peak in 1975. With export controls off, US sales of steel scrap could
rebound to the 1973 level or higher. Gains are likely for such US manufactured
goods as paper, aluminum, fertilizer, and other chemicals.
The steady rise in US imports of Chinese goods is likely to continue - from
$115 million in 1974 to S125-S150 million in 1975. Chinese interest in the US
market is growing at a moderate pace. Dramatic changes in products or marketing
arrangements are not to be expected this year.
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IV. The PRC Petroleum Situation
Fifteen years ago, the People's Republic of China relied on the USSR for
more than half of the oil it consumed. Today,. China is the world's 13th. largest
oil producer and has emerged as a potentially large oil exporter. This paper briefly
reviews the development of China's petroleum industry and the recent gyrowth of
its oil exports and assesses the prospects for future exports.
Energy Supply Position
The. PRC produced an estimated 460 million tons (SF E basis)* of primary
energy in 1974. In the late 1950s, China relied on coal for 95;% of its primary;
energy. Since then the primary energy mix has undergone considerable change.
As shown below, the role of coal has declined, while both oil and natural gas
have risen in importance.
Percent of Primary Energy Produced
Coal
95
64
Hydro
2
2
Natural gas
1
18
Oil
. 2
17
Currently energy supplies are tight: coal production has not kept up with
demand. Although the rapid growth of petroleum production gives Peking the
option of substituting oil for coal, the government has taken only limited steps
in this direction, at least partly because of China's Mtge reserves of coal. More
important, Peking appears to believe that increasing oil supplies are better used
to expand the petrochemical industry and to earn much-needed foreign exchange.
Crude Oil Output, Reserves, and Exploration
. China achieved self-sufficiency in crude. oil production in the mid-1960s and
in 1974 was the world's 13th largest producer, behind Indonesia. Crude oil output
grew at a rate of 22% per year during 1965-74 and reached 65 million tons (1.3
million barrels per day) in 1974 (see the table).
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Thousand
Million Barrels
Metric Tons per Day
1950 0.2
1955 0.9
1960 5.3
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
10.8
14.0
14.0
15.0
20.3
28.5
36.7
43.0
54.5
65.0
216
280
280
300
406
570
734
860
1,090
1,300
25X1
There are no authoritative estimates of oil reserves in the PRC. Proved reserves
are thought to bL at least I billion tons. Considering that large areas have not
been surveyed, potential reserves probably are much larger. The main thrust of
the Chinese exploration and development effort is still on land.
Offshore exploration has only recently begun and has been concentrated in
the shallow Po Ilai Gulf. The Po IIai deposits, which are adjacent to and probably
part of the oil basin underlying the important onshore Ta-kang and Sheng-li fields,
should be n to produce significant quantities of oil in the next few years. Activity
in the deeper water of the Yellow. East China, and South China seas has been
limited to geological surve}'s and preliminary drilling. During the last year, however,
China has purchased about Si 50 million worth of rim and supply ships for offshore
exploration. Aside from the development of the Po 1Iai, which should proceed
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apace, other offshore exploration and development will be deliberate.. PRC activity
here appears to be based more on t]ie fear that foreign rivals will stake out prior
claims on the continental shelf;, rather than on a need for additional oil.
Oil Refining and Transportation
The PRC has given high priority to refinery construction since the mid-] 960s.
Current refinery capacity is probably in excess of 50 million tons, and additional
capacity is under construction. The progress in construction and the absence of
Chinese interest in importing refinery equipment suggests that China is able to
construct sufficient refining capacity for its own needs.
Transportation facilities have been pressed to keel) pace with the growth of
crude oil production. Until recently most of China's oil was carried by rail. Now,
tankers and newly constructed pipelines are carrying rapidly growing quantities
of oil.
Almost half of the domestic tanker fleet, which now totals about 600,000
DWT, has been acquired or built since 1971. About one-fifth of the crude produced
is moved in domestic tankers (all smaller than 50,000 DWT), mainly. from Dairen,
Tsingtao, and Chin-huang-tao, to refineries in Shanghai and Nanking.
In 1974, the PRC completed two major pipelines, running from the Ta-ch.'ing
field in Manchuria to new oil-loading facilities at the port of Ch'in-huang-tao and
from the Sheng-li field in Shantung Province to the port of Tsingtao. These pipelines
are mainly to facilitate the export of oil, which previously moved to port by railroad
tank cars.
Petroleum Consumption
Consumption of petroleum products by sector cannot be estimated with any
precision, but it is clear that the sharply increased supply of petroleum is causing
important changes in almost every sector of the economy. The increased use of
petroleum in transportation and industry has characterized China's economic growth
in recent years. The agricultural sector and the infant petrochemical industry
particularly have benefited from plentiful oil. The leadership maintains strict control
over the allocation of petroleum. Supplies are channeled to priority users, and
recurrent campaigns are mounted for the conservation of petroleum.
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Petroleum Exports: 1974 and 1975
Peking began to export crude oil in 1973 with the sale of I million tons
of crude oil (20,000 b/d) to Japan. Prior to this, exports had been limited to
small quantities of petroleum products for political allies such as Albania. North
Korea, and North Vietnam. Four million tons?(80,000 b/d) Of crude Oil. worth
about S400 million, were sold to Japan in 1974.` Another 250,000 tons of crude
were to be shipped to the Philippines in the final quarter of 1974. China also
exported small quantities of petroleum products to Ilong Kong (200.000 tons)
and Thailand (50,000 tons). Crude oil exports to Japan this year should reach
8 million tons (160,000 b/d), worth about 5700 million. The Philippines may
receive 750,000 tons of crude oil in 1975. Hong Kong and Thailand will continue
to receive small quantities of products.
Crude oil is a welcome addition to China's exports. Large imports of wheat-
and an aggressive program of whole-plant purchases, beginning in 1972, have forced
Peking to seek new means of financing its trade. In the next few years, exports
of petroleum will provide. more than S 1 billion in hard currency annually, thus
contributing measurably to China's ability to pay for its rapidly expanding imports.
Political Uses of Oil Exports
The agreements to ship diesel fuel to Thailand and to sell crude oil to the
Philippines are part of PRC attempts to normalize relations with these states.
Prospects of expanded shipments of crude oil to Japan were apparently used as
leverage in the negotiations for the Sino-Japanese civil aviation agreement concluded
in April 1974. Soon afterwards, Pekin- told the Japanese that they were ready
to expand oil exports up to 10 million tons (2-00,000 b/d) in 1974 and to
50 million tons (1 million b/d) in 1980. Subsequently, several Japanese delegations
have been to Pekin- to discuss a lonb term oil agreement. The offer also appears
to have been used to counter Soviet influence in Japan. China in effect offered
the Japanese twice as much oil as they would have received from the Tyumen
project (25 million tons a year).
Prospects for Oil Exports
A goal of 50 million tons of crude oil for export in 1980 appears feasible.
Reserves are large enough. If production continues to grow at 22% - the rate
achieved during 1965-74 - the PRC could export 50 million tons in 1980 and
* l'RC oil imports are nominal. Some crude is imported from Albania and the Middle Last, and special
products are imported from several other countries.
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still (lave ample supplies of oil for mochernizijw the economy. Presumably most,
or all, of any crude oil exports would go to Japan. If an agreement with Japan
is eventually concluded, the export of 50 million tons of oil in 1980 would provide
Japan with 1 of its projected consumption and, at current prices, would earn
China more than S4 billion.
if the PRC encounters unexpected clifficulties in achieving the output of crude
oil necessary to meet increased domestic and export requirements. it conceivably
might Change its attitude toward foreign participation in the development of its
petroleum industry. China presently rejects joint ventures, direct foreign investment,
and product sharing. Nevertheless, other arrangements cannot be ruled out.
Exploitation of the deeper waters off the Chinese coast is likely to require foreign,
and particularly US, technology.
Approved For Release 2005/07/20 : CIA-RDP80MO1389R000400070001-7
5
 Approved For Release 2005/07/20 : CIA-RDP80MO1389R000400070001-7
Energy Comparisons, 1973
Primary Energy* Electric Power
Consumption Output
(Million Metric Tons of (Billion Kilowatt Hours)
2,500
Hard Coal Output
(Million Metric Tons)
United States Japan
USSR
China
- United Kingdom
West Germany
Approved For Release 2005/07/20 : CIA-RDP80MO1389R000400070001-7
 25X1 Approved For Release 2005/07/20 : CIA-RDP80MO1389R000400070001-7
Approved For Release 2005/07/20 : CIA-RDP80MO1389R000400070001-7