COMMUNIST CHINA: RECENT TRENDS IN EARINGS FROM HONG KONG

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030155-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: October 24, 2011
• Sequence Number: 155
• Publication Date: October 1, 1970
• Content Type: IM

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DIRECTORATE. OF
INTELLIGENCE
Intelligence Memorandum
Conimunist China: Recent Trends In Earnings
From Hong Kong
ER IM 70-154
October 1970
Copy No.
5.
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its teansmission or revelation of its contents to. or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1970
Communist China: Recent Trends In Earnings
From Hong Kong
Introduction
In the past decade, hard currency earnings in
Hong Kong have enabled Communist China to finance
sizable purchases of industrial goods and grain
from the Industrial West.* China's imports from
the Industrial West, particularly Japan, are up
substantially thus far in 1970 and should reach a
record levF:. for the year. The enormous trade
deficit with the Industrial West is liiely to in-
crease stall further. As a result, foreign exchange
earnings from Hong Kong will continue to be of major
importance to China's pattern of foreign trade and
economic development.
This memorandum examines the magnitude and com-
position of China's hard currency earnings from
Hong Kong since 1964. Three major components are
discussed: trade earnings, remittances from over-
seas Chinese, and remitted profits from businesses
owned by the Chinese Communists in Hong Kong. An
overview of these earnings is then presented to
depict the importance of ,tZong Kong to China for
financing current and futuw ;imports from the
Industrial West.
* The term Industrial West refers to Western
Europe, Japan, North America, and Australia.
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the office of Economic Research.
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25X1
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Trade Earnings
1. Whereas Hong Kong is China's largest :xport
market, Chinese, imports from Hong Kong are small.
The result is an annual trade surplus of more than
$400 million. About 25% of Chinese exports to
Hong Kong are reexported to third countries. Tax-
tiles and clothing make up about one-half of that
reexports. Foodstuffs and traditional Chinese
medicines are also important reexports, but Hong
Kong retains most of these Chinese exports for
local consumption.
2. The entrep6t function of Hong Kong provides
a convenient method for marketing Chinese goods,
especially in Southeast Asia. Indonesia, Singapore,
and Japan are the largest recipients, absorbing
about one-half of the total. Through reexports
from Hong Kong,. such countries as Taiwan, South
Vietnam, and South Africa import a few.million
dollars worth of Chinese goods each year, primarily
traditional medicines and specialty items; the
political difficulties of trading with these coun-
tries are thereby circumvented.
3. China's export surplus grew rapidly through
1966 but dropped sharply in 1967-68 when the Cultural
Revolution disrupted the Mainland economy and dis-
turbed China - Hong Kong political relations. The
fall in Chinese exports in 1967-68 seems to have
been caused by: (a) supply problems within China,
perhaps associated more with difficulties in the
planning and distribution system than at the source
of production; and (b) China's apparent withholding
.of,some goods from the Hong Kong market and diverting
some of the reexport business to Singapore in the
aftermath of the 1967 disturbances in Hong Kong.
The figures for China - Hong Xorg trade, 1964-70,
are given in Table 1.
4. Expansion of exports to Hong Kong was re-
newed in 1968 and has continued in 1970. Trade
figures for the first seven months of 1970 show
Chinese exports to Hong Kong of.$249 million, an
increase of about 5% over the same period in 1969.
If this rate of increase holds for the entire year,
China's exports to Hong Kong would reach $465 mil-
lion, still.short of the 1966 peak. This lag in
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Communist China: Trade with Hong Kong
Million US $
1964
1965
1966
1967
1968
1969
Preliminary
1970
China's imports
10
12
12
8
7
6
10
Imports from
Hong Kong
2
3
3
1
1
1
4
Hong Kong reexports
from third countries
8
9
9
7
6
5
6
CO
n
China's exports
345
406
485
397
401
445
465
cn
Retained by Hong Kong
260
306
376
290
312
326
345
n
Reexports by Hong
Kong
85 a/
100
1
109
107
89
119
120
tj
Chinas export surplus
335
394
473
389
394
439
455
a. Reexports estimated for 1964 and 1965.
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recovery rests with the Chinese exports retained
in Hong Kong, not with goods reexported to third
countries.' Hong Kong merchants have apparently
regained much of the business diverted to Singapore
in 1967. Thus, at a time when Hong Kong's imports
from all countries have been growing by 19% each
year, China's share of the Hong Kong market has
fallen, from 27% in 1966 to 18% in 1969 and perhaps
even lower in 1970. Since 1968, Japan has sup-
planted China as the leading exporter to Hong Kong.
5. The commodity composition of China's ex-
ports, shown in Table 2, indicates that the prin-
cipal items shipped to Hong Kong are foodstuffs,
textiles, light manufactures, and various specialty
products. It also indicates that textiles have
been the main laggard since 1967, with meat,
animals, and fish being slightly above the level
of 1966.
5. An examination in detail of these two
broad categories for the years 1966 and 1969 indi-
cates more specifically the types of commodities
that have been moving to Hong Kong from China in
smaller amounts in recent years. These data are
presented in Table 3.
7. Several factors may explain the lag in
exports of textiles and meat products to Hong
Kong: (a) supply problems within China, (b) a
shift to alternate suppliers by Hong Kong, or
(c) a shift in Hong Kong's demand for specific
commodities as well as a slow growth in demand
for the major items of Chinese exports. While
the first factor undoubtedly was valid in 1967-68,
it no longer seems to be very important. China's
total exports to the Free World of these commodi-
ties were higher in 1969 than in 1966. Thus the
principal cause would seam to lie within the Hong
Kong market itself, even though it cannot be pre-
cisely specified. In the case of meat products,
Hong Kong's total imports since 1966 have risen
relative to those from China, indicating some
shift to alternate suppliers for these products.
But the principal shift is indicated by the drop
in Hong Kong's total imports of cotton fabrics --
commodities that China supplies -- and the jump
in imports of synthetic fabrics coming from other
countries, Japan in particular.
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Table 2
Communist China: Commodity Composition of Exports to Hong Kong a/
Million US $
1964
1965
1966
1967
1968
1969
1970
179
203
224
198
206
229
129
Meat, animals, and fish
86
103
117
102
102
121
66
Grain
19
16
19
20
23
24
13
Fruit and vegetables
28
36
39
38
43
44
26
Crude materials, fuels,
and edible oils
Oil seeds
3
3
3
3
2
cn
n
tTj
Textile fibers
1
1
1
1 -
1
Plants for medicine,
perfume, etc.
14
15
13
14
9
Chemicals
Manufactures
Of which:
Textiles, yarn,
and fabrics
67
70
104
66
68
71
41
Clothing
16
24
17
12
14
16
9
Human hair
1
N -gl .
2
15
13
25
-
1
1
1
1
1
1
6
Total
345
406
485
397
401
445
249
a. Including reexports by r7ong Kong to third- countries.
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Table 3
Hong Kong: impo' s of Textiles and Meat Products
Million US $
Imports
from China
Total I'iports
Commodity -
1966
1969
1966
1969
Textiles
104
71
293
422
Of which:
Cotton fabrics
63
33
102
70
Wool fabrics
5
1
26
29
Silk fabrics
7
3
8
7
Synthetic fabrics
7
6
48
125
Household linens
of cotton
16
13
17
17
Meat products
117
1.1
149
168
Meat
22
29
33
47
Live animals
73
64
82
76
Fish
22
28
34
45
Overseas Remittances
8. Many Chinese living outside the Mainland
maintain ties with their homeland by sending funds
to relatives still living in China. The individual
amounts, are small, but the total each year is sub-
stantial and provides a significant portion of
China's foreign exchange earnings. About 55% of
the remittances come from Chinese living in Hong
Kong ind Macao. The other 45% originates in South-
east Asia and other parts of the world. T.lmost
all of these funds are believed to flow through
the Hong Kong banks, with most of the remittance
business handled by the Chinese Communist banks
in Hong Kong. Remittances are deposited with the
banks in the Colony or come to them from banks
outside Hong Kong. These banks in turn transfer
these funds to the Hong Kong branch of the Bank
of China which actually remits them to the Mainland.
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Very few remittances are believed to be sent
directly to the Mainland.
9. The following tabulation shows the esti-
mated level of total remittances from. Overseas
Chinese from 1964 to 1969:
Million Million
Year US $ Year US $
1964 110
1965 90
1966 110
1967 110
1968 110
1969 140
.
indicate that the Cultural Revolution had little
effect on them. The $140 million in 1969 repre-
sent a 25% increase over the 1968 estimate and is
the highest total since 1952. Possible factors in
this rise are increased prosperity in the Chinese
communities of Southeast Asia and increased re-
quests from relatives, perhaps stimulated by the
"war preparations" campaign in China.*
Remitted Profits
10. Communist China owns many businesses and
has investments in many other enterprises in Hong
Kong. A portion of the profits from these busi-
nesses is remitted back to the Mainland each year
providing a third source of hard currency earnings
from Hong Kong. There are 12 banks owned by
Chinese Communists, headed by the Hong Kong branch
of the Bank of China. Among their services, these
banks handle the remittance business and much of
the financing of China - Hong Kong trade. China
Resources Company and other Chinese-owned trading
ave been airly constant until 1969
Most re orte
It is also possible that th.f 1969 figure is a
more comprehensive estimate than the earlier ones?
Remittances i-.re estimated to
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firms in Hong Kong conduct much of the China -
Hong Kong trade. Several large China products
stores have been established in the Colony offering
Mainlani goods, including some quality souvenirs
and art objects for tourists. Other enterprises
not directly involved in commodity trade include
travel services engaged in Hong Kong's booming
tourist trade, insurance companies, movie theaters,
publishing houses, and newspapers.
11. Little precise information is available
about total Chinese Communist investment in Hong
Kong and the degree of ownership of many enter-
prises. Likewise, little is known about the level
of profitability of the enterprises or about what
portion of profits is actually remitted to the
Communist businesses and investment inHo.ngKong
at about $30 million in 1969, including $2.8 mil-
lion in payment by the Hong Kong government for
water from the Mainland. While there is little
concrete information with which to judge the
validity of this estimate, it seems to be a reason-
able "ball-park" number. In any case, China's net
business and investment earnings from Hong Kong
probably reached a new peak in 1969, even though
trade earnings did not. Thus, if the $30 million
is a reasonable estimate for 1969, the counterpart
earnings for earlier years would be lower. Finally,
while information is not available on the portion
of net earnings remitted to the Mainland, it is
believed that the remittance estimates noted
earlier include part, if not all, of each year's
remitted profits.
Significance of Earnings from Hong Kong
12. China's hard currency earnings from and
through Hong Kong provide the prime offset to the
trade deficits with the Industrial West. Table 4
shows the pattern of the earnings and of China's
trade deficits with the Industrial West since 1964.
For the period as a whole, China's earnings from
Hong Kong have exceeded the trade deficits with
the industrial West. But the general upward trend
in earnings has been much less steep than the
rising trend in the trade deficit. In 1964-66,
total earnings from Hong Kong exceeded considerably
_ 8 _
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Versus Trade Deficit with the Industrial West
Table 4
Communist China: Earnings from Trade with Hong Kong
-Trade surplus
Overseas remittances
Total -earnings
Trade deficit with
the Industrial West
1964
1965
1966
1967
1968
335
394.
473
389
394
110
90
110
110
110
445
484
583
499
504
-269
-360
-630
Million US $
1969
Preliminary
1970
Total
439
455
2,879
140
140
810
579
595
3,689
-560
-700
-3,654
trJ
1-3
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the trade deficits with the Industrial West; since
1966, the reverse has been true, except in 1969
when the two were roughly equal. The 196 7-68
situation may be largely a reflection of difficul-
ties created by the Cultural Revolution, but the
1969-70 data suggest that something more enduring
may have set in. China's earnings are barely back
o the level of 1966, but the trade deficits with
the Industrial West are much higher than they were
in 1966.
13. The lag in recovery lies in the Chinese
exports retained in Hong Kong for local consump-
tion, which have yet to regain the 1966 level.
To the extent that this reflects supply difficul-
ties on the Mainland or the loss of a portion of
the Hong Kong market for these commodities to
another supplier, the problem may be transitory.
To the extent that it reflects a slow growth in
Hong Kong's demand for the major items in China's
export bundle, however, it will restrict China's
ability to increase its earnings from this trade.
It might be noted that China's internal investment
policy implies the postponement of modernizations
of China's light industries, whereas Japan and
other competitors in the Hong Kong market are
better able to meet the demands of an increasingly
affluent Hong Kong society. A marketing problem
with Hong Kong might seriously constrain China's
ability to expand its imports from the Industrial
West. Nevertheless, regardless of problems, Hong
Kong will continue to be the key source of hard
currency for China for some time to come.
Conclusions
14. Hong Kong has been China's prime source
of hard currency earnings needed to finance the
large deficits in trade with the Industrial West.
Trade earnings, including entrepot trade, comprise
about three-quarters of China's total hard cur-
rency earnings from Hong Kong. The remainder
consists of remittances handled by the Hong Kong
banks, from Chinese residing in Hong Kong, South-
east Asia, and other parts of the world and of
profits remitted back to the Mainland by Chinese
10
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Communist-owned businesses. and investments in Hong
Kong.
15. Total earnings of foreign exchange from
Hong Kong from 1964 to 1970 are equal to about
$3.7 billion, slightly more than the sum of China's
trade deficits with the industrial West for these
seven years. However, the pattern of earnings and
deficits has changed significantly over this period.
Earnings from Hong Kong exceeded the deficits with
the Industrial West in 1964-66; the reverse has
been generally true for 1967-70. For 1967-68 the
disruptions of the Cultural Revolution may have
had the greatest effect. For 1969-70, the lag in
recovery of export earnings suggests some problems
for Chinese products in the Hong Kong market.
Chinese exports to Hong Kong have been rising
again since 1967, although at a slower rate than
before. Hong Kong's demand has fallen off for
cotton fabrics in recent years and will likely
grow slowly for other major categories of Chinese
exports, especially foodstuffs. Accordingly,
China's earnings from Hong Kong, while still large,
seem likely to grow slowly and thereby to place
some constraint on Peking's ability to expand
industrial imports from Japan and Western Europe.
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