CHINESE ECONOMIC PROSPECTS AND WESTERN TECHNOLOGY: POSSIBILITIES AND CONSTRAINTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00100R000100050022-6
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 19, 2016
• Document Release Date: December 10, 2001
• Sequence Number: 22
• Publication Date: February 27, 1978
• Content Type: REPORT

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CONFIDENTIAL
Chinese Economic Prospects and Western Technology:
Possibilities and Constraints
O4Woe
:P1 F4-7 -
I. Introduction
1. New Chinese leaders clearly
(a) giving high priority to economic development, and
(b) showing renewed interest in Western technology for that
reason.
2. Important for relation to Chinese prospects and external
policy.
3. Hence want to discuss
(a) the underlying strengths and weaknesses of the Chinese
economy, and problems leaders face;
(b) how foreign technology relates to China's needs;
(c) the factors that constrain China's acquisition of
foreign technology,
(d) what are the implications for the US?
II. China's Economic Performance
Graphic I 1. Rate of Growth 1952-77
GNP -
Industrial and ('a) In the last 25 years, China achieved a very creditable
Agricultural Output
growth (6%) in GNP despite three serious upheavals The Great Leap Forward 1958-60, Cultural Revolution
1966-69, Struggle over Succession 1974-76.
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NMW
Graphic II
Grain output
plotted against
pop. growth
1952-76
Graphic
Graphic
(b) But a sharp difference in performance between industry
and agriculture: industry's gains were quite dramatic,
agriculture's barely adequate.
Food and Population
(a) Per Capita' grain production grew in the 1950s but is
now no better than in 1957.
(b) In 1962, after three successive bad harvests, the
leadership decided to give agriculture highest priority --
a ranking that has been sustained ever since.
(c) But agriculture needs industry to help raise yields --
mechani zation, fertilizer, irrigation.
(d) China has stressed more than any other LDC (unique
development of small-scale rural industry).
(e) After gains in the late 1960s and early 70s, China's
(f)
agriculture has now again faltered (no increase in grain
crop in last three years).
Continuing need. for grain imports, despite efforts.
3. Heavy Industry
(a) Substantial growth
Initial Sov, assistance (1952-60)
Major plants and rural industry.
(b) Steady reinvestment of 25-30% of GNP in industrial
facilities (much for agriculture).
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(c) Yet transport system inadequate and weaknesses in high
technology.
(d) And impact of Mao political upheavals serious:
especially impact on management and higher education.
Graphic III 4. Civil vs Military Priorities
Defense procure-
ment plotted (a) Faced with Soviet military threat, hard choices in civil-
against industrial
output military resource allocation.
(b) Mao downplayed.Military allocation was sharply curtailed
in 1972 and has remained at that level ever since.
(c) Even if the leadership decided now to modernize its
military more rapidly, it would have to invest heavily
in basic and intermediate industries upon which modern
military production rests. (Specialized steels, non-
ferrous metals, machine tools that can fabricate to higher
tolerances, etc.)
5. Living Standards
(a) The high rate of investment, (plus large expenditures
on national defense) how ept 1 iving standards from
improving much since 1957 90 percent increase
in per capita GNP.
(b) Rough index of consumption for the average Chinese is
suggested by trend lines for per capita production
of grain, cotton cloth, and industrial consumer goods:
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(Stocks and imports have smoothed the fluctuations in
grain and cotton cloth output.)
- Per capita production of nongrain foods such as
vegetables, pork, and poultry has grown at a fairly
steady, if slow, pace.
- On the other hand, despite percentage growth'in
production, industrial consumer goods remain in short
supply and have had only a small impact on personal
consumption. Highly sought after consumer durables
such as bicycles and sewing machines are rationed.
- (The lack of significant real progress in expanding
per capita supplies of basic commodities such as
grain and cotton cloth has been made more palatable
by formal rationing, whereby everyone is assured a
share of available supplies.)
(c) Despite small gains in per capita consumption of
commodities since 1957, consumer welfare has improved
since then in the areas of health and education. It
is much easier for the regime to expand education and
health services than to increase the production of
foodstuffs, cotton, and housing, ~4 avoids inflationary
pressuresof higher wages with commodity shortages.
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(d) Peking has reduced the income disparities between peasants
and urban workers by increasing the prices paid by the
state for agricultural goods;
- by lowering the prices that communes and brigades
have to pay for tractors and other machinery;
by holding down urban wages especially since 1957;
- by greatly increasing the education and health services
provided to rural areas.
6. In sum, resource scarcities in every direction
constrain China's freedom of action;
- underscore need for sustained,l orderly program for
development;
- enhance Chinese interest in foreign technology.
III. Experience with Foreign Technology
Graphic IV 1. Trends in Technology Acquisition
Imports of
machinery and equip- - The level and scope of China's import of foreign technology
ment, and complete
plants has fluctuated with the changing fortunes of the
revolution and the economy.
2. Impact of the Soviet Experience
(a) In the 1950s Chinese depended on the Soviet Union for
the largest and most comprehensive technology transfer
in modern industrial history.
(b) Severe economic disruptions from the abrupt Soviet
departure in 1960 have left their indelible imprint
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on Chinese attitudes toward foreign role in their
economy and foreign sources of technology.
(c) Ever since the Chinese leadership has guarded against
what they regard as -
- "excessive dependence" on any single foreign source,
- large foreign debts to finance imports,
"exploitation" of their national resources by
foreigners.
3. Technology Acquisition from the West
(a) A modest program of technology acquisition from the
West -- launched in the mid-1960s -- was cut short by
the upheavals of the Cultural Revolution.
(b) A second and larger phase begun in 1972 was disrupted
beginning in 1975 by a struggle over succession,
domestic economic problems, and the world-wide recession.
IV. Technology Acquisition Since Mao
1. Intentions
(a) The pragmatic post-Mao leadership, which is intent on
modernizing China, clearly wants to expand acquisition
of foreign technology.
(b) All indications -- statements of the leadership, number
and variety of trade missions, approaches to Western
firms -- point to a serious Chinese drive.
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(c) With the demise of Mao and the purge of the Gang of
Four, the current drive is likely to be more durable than
previous episodes.
(d) How much we can expect of this drive.
2. Constraints
At least three constraints limit the expansion of China's
technology import drive --
(a) Political/Ideological Constraints
Chinese leaders' stress on "self-reliance" is a
watchword to warn against three dangers:
- the danger of foreign dependence -- the leader-
ship's determination to avoid trade dependence on
any single source or financial dependence on
foreign lenders rooted in experience with Soviet
withdrawal and long history of humiliation by
unequal treaties.
- the danger of alien contamination from the
corrupting influences of bourgeois values.
- the danger of psychological dependence - the need
to develop the habit of workers and managers of
relying on their own ingenuity and resources
rather than looking to the outside for help.
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(b) Technical Constraints
- China's capacity to absorb foreign technology
is significantly limited.
- China's "learning by doing" approach to industrial
training has produced many middle-level factory
technicians but not highly trained technicians so
essential in setting up and operating a modern plant.
The ten-year neglect of higher education -- a legacy
of the Cultural Revolution -- has created a void in
supply of well educated engineers and of scientists
to succeed the Western-trained leaders of Chinese
research institutes, now in their late seventies
and eighties.
Hence China's current difficulty in putting into
operation many of the complex modern plants it has
purchased in recent years.
(1) Only a few of the large ammonia/urea plants
purchased in the early 1970s have come on
streamf. (US/Japan/France).
(2) The Spey jet engine plant purchased in 1975
is well behind schedule. (United Kingdom)
(3) A major expansion at the Wuhan steel plant scheduled
for completion early this year will not be completed
before the end of 1978. (Japan/West Germany)
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- The new regime is trying to rectify this deficiency,
by reviving national respect for higher education,
by more advanced foreign training for Chinese
students, and by new efforts to entice overseas
Chinese scientists to return to the homeland.
- Amelioration of the problem, however, is bound to
long time.
(c) Financial Constraints
- China's "ability to pay" is currently in a better
state than it has been for several years.
- China has repaid much of the modest level of short-
and medium-term debt incurred in 1972-75, thanks to two
successive trade surpluses in 1976 and 1977.
- China enjoys an excellent credit rating in Western
financial circles; Japan and Western Europe are
willing to extend it attractive terms in their trade.
However, several factors will inhibit China's
taking advantage of its relatively favorable financial
position.
- First and foremost, it LiS] unwilling to accept
government long-term credit, mainly to avoid
the risk of leverage. This constraint may be
mitigated, however, through the device of private
credits. Still, China's imports will depend
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mainly upon its current capacity to earn foreign
exchange.
China will not be able to expand its existing
export industries rapidly.
Many traditional exports depend directly on
the backward agricultural sector; and China
likely to need grain imports regularly.
The Chinese failure to invest in minerals and
metals extraction and processing has forced
it to import many of the commodities that it
should have been able to export.
The prospects for exports of petroleum --
China's great black hope -- now appear limited.
- Expanding output from China's oil fields will
take time.
- Rapidly growing domestic demand will absorb
most of the available oil supply.
- Hence oil exports during the next five years
unlikely to rise much above the amounts now
[beingnegotiateddin a long-term Sino-Japanese
trade agreement (300 thousand barrels per day).
In sum, these several factors will constrain the
flows of advanced technology into the PRC.
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V. Chinese Priorities for Advanced Technology and Equipment
The Chinese are negotiating for a wide range of Western equipment
and advanced technology, which could easily top the billion dollar
mark in 1978, and continue at a steady pace subject to Peking's foreign
exchange and technology absorption limitations.
1. In the civilian sector:
(a) The Chinese seem particularly interested in acquiring
complete plants to produce steel, fertilizer, petro-
chemicals, locomotives, trucks, nonferrous metals,
electric power, and electronic components.
(b) The Chinese also have shown interest in acquiring mining
equipment, sophisticated electronic equipment,
machinery for the petroleum industry, and possibly
technology for nuclear power plants and uranium enrich-
ment and reprocessing facilities.
2. In the military sector,a renewed Chinese interest in various
types of Western military equipment and production technology.
(a) Two separate Chinese delegations recently visited West
European countries, where they toured military production
facilities, examined equipment, and were given lectures
on modern military systems. (No contracts were signed
for hardware or production technology.)
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(b) China's primary interest appears to be in defensive
weapon systems, particularly air surveillance radar
and communications equipment to relay data at high speed.
(c) Purchases of military hardware will;\be minimal, mainly
prototype equipment that can be adapted by the Chinese
and applied to their current capabilities.
VI. Primary Sources
The main suppliers will be Japan and Western Europe, with the
United States a distant third.
1. Japan is China's largest trading partner and its single most
important source of advanced technology and equipment.
Japan's lead reflects its long experience in dealing with the
Chinese, favorable financing, low transport costs, and low
prices.
a. The Chinese and Japanese have negotiated an eight year
agreement that reportedly calls for the Chinese to
purchase up to $10 billion worth of Japanese industrial
plants and related equipment, in exchange for oil and
coal.
b. Included in the package is a $3 billion steel mill
with an annual capacity of six million tons.
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2. Western Europe
(a) On recent visit to the United Kingdom and France,
Foreign Trade Minister Li Chiang was shown a variety of
civilian and military production facilities and discussed
trade plans with Prime Ministers Callaghan and Barre.
(b) Western Europe offers advanced civilian technologies
and equipment comparable to that available in the US
and Japan and is also flexible in arranging financial
i terms.
(c) Western Europecan meet Chinese needs in specialized
fields such as nuclear power plants, petrochemical
plants, and computer controlled machine tools.
(d) The PRC also sees Western Europe as the best source of
military equipment and technology, such as the Spey
engine contract signed with Rolls Royce in 1975.
Peking is likely to continue limiting purchases from the
United States when alternative supplies are available.
(a) US firms have been contacted in fields such as packaging,
magnetic tape manufacture, color TV, computers, and
high technology electronics.
(b) The US continues to be the source for sophisticated
equipment and technology used in oil exploration and
development.
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3. The United States will be the source of last resort-.-,
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VII.
(c) No serious inquiries are known to have been made for
American military hardware, although the Chinese have
expressed interest in a US process used to coat jet
engines.
(d) Even with full normalization, US technology sales, while
benefiting from the removal of Chinese policy
constraints would still face stiff competition from
long-established suppliers in Japan and Western Europe.
Implications
Graphic V 1.
Total Chinese
Imports-US share
Graphic VI
China trade
Graphic VII
Imports of
plants and
equipment-US share
(b) Hence likely to be constrained by that need from assertive
foreign policy toward West.
The US role in the China trade will be
V '
modest.
(a) The only years in which US exports to China were
significant were the agricultural distress years of
1
973 and 1974.
rk- VV
(b) As regards technology imports, the US has accounted fort'
(c)
only i' of total Chinese imports of machinery and
equipment and less than 8% of complete plant purchases.
Even with normalization, this pattern would not be
significantly altered.
2. The situation and needs of PRC have some wider implications.
(a) For its development over coming years, China will need
imports of grain and of technology.
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