(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000605740001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: January 12, 2017
• Document Release Date: March 7, 2011
• Sequence Number: 1
• Publication Date: February 26, 1986
• Content Type: MEMO

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Central Intelligence Agency
DATE 3 3~?
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- Ci le,
DIRECTORATE OF INTELLIGENCE
26 February 1986
China: The Impact of Lower Oil Prices on Trade
Summary
Declining oil prices and Beijing's recently announced freeze on oil
export levels could cost China $1.6 billion in foreign exchange earnings
this year. Already struggling with a $13.7 billion trade deficit, Beijing will,
we believe, tighten foreign exchange controls and increase import
restrictions. These controls may affect China's efforts to attract foreign
joint ventures; US exports to China, however, will be affected onl
moderately, with the weight of import cutbacks falling on Japan.
Since 1979, petroleum and petroleum products have been a major component of
China's export revenues, accounting for approximately one-fifth of total export earnings.
The depressed oil market, however, threatens this important source of foreign exchange.
in the last month China cut nearly $6 off its
per-barrel price of oil. Although in the past China has steadily increased exports by
undercutting OPEC prices, last month Beijing announced it would support OPEC and hold
This memorandum was prepared by I Office of East Asian Analysis.
Information available as of 26 February 1986 was used in its preparation. Comments
and queries are welcome and may be directed to the Chief, Development Issues, China,
OEA
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this year's oil exports at their 1985 levels. Consequently, we estimate China's earnings
from petroleum exports could decline $1.6 billion from last year's earnings of nearly $6.4
This loss will exacerbate Beijing's efforts to correct its growing trade deficit,
which reached a record $13.7 billion last year according to Chinese Customs statistics.
Imports soared by 50 percent in 1985 as rapid industrial growth and high consumer
demand--sparked by an increased money supply--led to sharply higher purchases of
raw industrial materials and consumer durables. Although petroleum export revenues
increased by nearly 25 percent over those of 1984, earnings by other major
exports--textiles, apparel--were sharply lower and, according to Chinese data, overall
export earnings rose by only 6 percent.
Beijing's Response
With little chance of turning to alternative commodities to compensate for the
expected drop in oil earnings, Beijing will need to slow its runaway imports to reverse
the growing trade deficit. We believe much of the slowdown in import growth will be
effected through stricter foreign exchange controls, including an additional curtailment
of the purchase authority previously granted to local traders under decentralization.
Beijing will also continue other restrictive measures such as import licensing and
selective tariff increases. According to Hong Kong press reports, Beijing's attempts to
conserve foreign exchange could drive some small Chinese import and export
companies out of business. These same sources caution that, because of foreign
exchange shortages, China may also renege on negotiated contracts--similiar to the
cancellations of grain and synthetic fiber contracts that occurred in 1983.
Stricter foreign exchange allocation will also affect attempts to attract foreign
joint ventures in China. ~
In addition, we expect that tightened foreign exchange will result in the
postponement or cancellation of many Chinese ventures that require substantial capital
imports.
Tightening import restraints would change the composition of China's purchases
over the next year. Restrictions are already in place on commodities that China can
produce domestically, including such consumer durables as color televisions,
refrigerators, radio cassettes, and motor vehicles. But Beijing will also need to cut
deeper into its import shopping list to compensate for the expected $1.6 billion drop in
1 This assumes export volume at the 1985 level and an average price of $18 per barrel.
Petroleum products--nearly 20 percent of oil-related export volume--earn
approximately 25 percent more per barrel than crude.
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Dina Trade Bd e
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foreign exchange. We believe these cuts will begin with capital equipment purchases
for postponed or cancelled government projects. We also expect Beijing will continue
its efforts to slow down its overheated economy, which grew at an estimated 18
percent last year. If successful, China's high imports of raw industrial materials would be
reduced.
Impact on US Exports
We believe Beijing will continue to encounter problems slowing economic growth
and therefore will achieve only moderate success in reducing industrial and capital
equipment purchases. Consequently, the effect on US exports to China, more than
one-third of which are machinery and transport equipment, will be marginal. Moreover,
demand for raw materials and chemicals--which represent an additional 25 percent of
US exports to China--should also be sustained.
While the impact on US trade will be relatively low, we believe Japan--China's
largest trading partner--will suffer most from Beijing's import cutbacks. With a $6.5
billion trade surplus with China last year, Tokyo has already come under fire from
Chinese officials as a major contributor to Beijing's deficit problems. During 1985, the
volume of many Japanese exports to China doubled--computers, copiers, televisions,
tape recorders, automobiles, refrigerators, and washing machines--leading to a
phenomenal 73-percent increase in Japan's exports to China.
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China: The Impact of Lower Oil Prices on Trade
National Security Council
1 - David Laux, Senior Staff Member for China, Taiwan, and Hong Kong, Room 302, Old
Executive Office Bldg., NSC
Department of State - Bureau of East Asian & Pacific Affairs
1 - Joan Plaisted, Office of Chinese Affairs, Room 4318
1 - Robert Goldberg, Office of Chinese Affairs, Room 4318
1 - Doug Paal, S/P, Room 7330
Department of State - Bureau of Economic & Business Affairs
1 - Robert Price, Director of East-West Trade, Room 3819
Department of State - Bureau of Intelligence & Research
1 - Chris Clarke, China Division, Office of Analysis for East Asia and the Pacific, Room
8840
1 - John Danylyk, Chief, Communist Economic Relations Division, Office of Economic
Analysis, Room 8722
Department of the Treasury
1 - Mary Yee, Office of East-West Economic Policy, Room 4450
Department of Commerce
1 - Myna Stoltz, Country Policy Analysis, East Asia and Pacific, Room 3820
Office of the US Trade Representative
1 - William Abnett, Director of China Affairs
Department of Agriculture
1 - Frederick Surls, Economic Research Service, GHI Bldg., Room 350
Defense Intelligence Agency
1 - DB4E2, Pentagon
Department of Energy
1 - Douglas Faulkner, Room GA257, Forrestal Bldg.
Central Intelligence Agency
2 - C/OEA/CH
1 - C/OEA/CH/FOR
1 - C/OEA/CH/DEF
1 - C/OEA/CH/DOM
1 - OEA/Research Director, 4G48
1 - D/OEA, 4F18
1 - DDI, 7E44
1 - Senior Review Panel, 5G00
1 - PDB Staff, 7F30
1 - NIO/EA, 7E62
1 - C/PES, 7F24
1 - FBIS/NEAAD/China Branch, 306 Key
1 - C/EA=5 E 18
1 - OCR/ISG, 1H19
1 - CPAS/ILS, 7G50
5 - CPAS/IMC/CB, 7G07
1 - Author
1 - Chrono
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OEA/CH/DE ~25Feb86
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