CHINA'S SEVENTH FIVE-YEAR PLAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00539R000400560002-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 28
• Document Creation Date: December 27, 2016
• Document Release Date: October 26, 2011
• Sequence Number: 2
• Publication Date: March 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
Five-Year Plan
China's Seventh
A Research Paper
EA 87-10006
March 1987
Copy 4 9 4
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Directorate of Confidential
Intelligence
China's Seventh
Five-Year Plan
A Research Paper
This paper was written by Office of
East Asian Analysis. Comments and queries are
welcome and may be directed to the Chief, China
Division, OE
Confidential
EA 87-10006
March 1987
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Five-Year Plan
? Scope Note This paper describes and analyzes China's Seventh Five-Year Plan to determine
what it tells about trends in Beijing's economic priorities. The study, like our 1983
assessment of the Sixth Five-Year Plan, will establish a framework from which to
analyze growth rates, policy changes, and trade patterns.
Further studies on actual economic performance, as well as assessments of the
impact of recent leadership changes on economic reform, are under way.
Confidential
EA 87-10006
March 1987
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China's Seventh
Five-Year Plan 25X1
Summary We believe current leadership changes in Beijing will lead to a slowdown in
Information available the economic reform program and a postponement of some of the more
as oft March 1987 controversial and innovative proposals. Statements by Chinese leaders,
was used in this report.
however, suggest that the basic economic goals in the Seventh Five-Year
Plan (1986-90) remain unchanged and that the Chinese will pursue the
Plan's three major goals:
? Invigorating state-owned enterprises by making them independent eco-
nomic entities responsible for their own production, profits, and losses.
? Expanding the role of markets.
? Reducing the use of direct administrative regulation to control the
economy and increasing the role of indirect macroeconomic levers (such
as taxes and interest rates).
Progress in reaching these goals will be hampered by the need to back off
temporarily on some supporting reforms, including labor and price reform,
which were planned for 1987. Because of the unsettled political situation, it
is difficult to forecast how long reform will be affected, but these
supporting reforms would increase consumer prices and cut housing and
food subsidies-moves currently viewed by the Chinese leadership as
potentially destabilizing.
The evolution of the plan document suggested an unusual openness in
China's political process, blending the opinions of a wide circle of
government, party, and technical experts during the three-year drafting
period. Both proponents and opponents of reform, within limits, criticized
current policies and broached still very controversial topics. We expect this
openness to characterize future planning.
In general, the Plan's economic production targets appear well thought out
and attainable-higher than the targets for the past five years, but below
growth rates achieved during that time. The gross value of industrial and
agricultural output is planned to increase at 6.7 percent annually. Al-
though this rate will probably be met as an annual average, the implemen-
tation of reform during the period is likely to cause overall economic
growth, as well as the production of individual sectors, to be uneven. The
increased attention and funding allocated to energy and transportation
highlight Beijing's concern that these sectors are severe constraints to
economic growth, but in neither case do we expect planned improvements
to ease significantly these constraints. We cannot evaluate more minor
goals of the plan because only highlights of the document have been
released.
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The plan's targets for regional development illustrate Beijing's growing
acceptance of the ideological propriety-or at least the economic inevita-
bility-of income disparities. Economic growth between and within the
various regions is expected to proceed at different rates, causing unavoid-
able differences in income.
A decreasing share of state investment is scheduled to go to military
expenditures over the period, and the giant Three Gorges Dam hydroelec-
tric project is not included in the plan. Initial work for a mammoth south-
to-north water diversion project is included, however, and Beijing may be
reserving funds in case the Three Gorges Project is approved before 1990.
Over 900 other major projects call for state capital construction expendi-
tures of 500 billion yuan (US $135 billion), a jump of almost 50 percent
above the last plan.
The impact of the Plan on US economic interests will be mixed. Some US
industries will benefit from the type of goods that China hopes to purchase;
the plan calls for imports of computer software, advanced technologies-
including telecommunications and electronics-and transport- and energy-
related equipment. Sales opportunities may improve later in the plan period
because Beijing has pledged to strictly limit spending during the first two
years. However, a shortage of foreign exchange, fueled by declining
revenues from oil exports and by China's hesitancy to borrow, will make a
bonanza unlikely for these US firms even during the later years of the plan.
Other US industries may be hurt by Beijing's plan to expand its exports by
8 percent annually. Increased competition will probably come in expanded
exports of Chinese textiles, grain, coal, and light manufactured goods.
Many of the manufactured goods China hopes to export also will compete
with those of US allies in East Asia, which are already experiencing a
slowdown in their export growth.
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Contents
Scope Note
Summary
The Political Climate and the Plan
A Key Five-Year Period
Major Projects
Regional Targets
Military
Quality of Life
Major Goals of the Seventh Five-Year Plan (1986-90)
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China's Seventh
Five-Year Plan
As a result, we look for the Chinese to adhere to the
major points of their Seventh Five-Year Plan, un-
veiled at the Fourth Session of the Sixth National
People's Congress in March 1986. The document,
which covers the 1986-90 period, includes more than
the production targets of previous plans, and contains
sections on politics, science, and education, as well as
on ideology and foreign affairs. According to the
Chinese press, the primary task during the next five
years is to create a sound overall setting in which
economic reform can progress smoothly. In pursuit of
this goal, the plan calls for:
? Increasing the productivity of medium and large
state-owned enterprises by making them more re-
sponsible for their profits and losses.
? Gradually expanding the role of markets.
? Placing greater emphasis on macroeconomic con-
trols-such as interest rates and taxes-to guide the
been put on hold.
The dismissal in January of Hu Yaobang as General
Secretary of the Chinese Communist Party has
chilled the intellectual atmosphere that allowed
China's economists to explore Western economic con-
cepts and propose unorthodox approaches to China's
development problems. Because of the unsettled polit-
ical situation, it is difficult to forecast how seriously
and for how long economic reform will be affected;
nonetheless, official media have highlighted conserva-
tive themes not seen in many years. An economic
newspaper praised Chinese self-reliance, a term asso-
ciated with Maoist economic policies, and other press
reports criticized Western-style consumerism. A slow-
down in some areas of reform was looming even
before Hu's dismissal, as Beijing coped with the social
side effects of reform. For now at least, planned
initiatives that would have the greatest impact on
workers-price reform, reductions in food and hous-
ing subsidies, and full-scale bankruptcy laws-have
Although the more radical and potentially destabiliz-
ing reforms appear dead for the moment, press reports
and statements by Chinese leaders indicate that Deng
Xiaoping remains committed to basic economic re-
form. The official announcement of Hu's removal
stressed that personnel changes would not affect
China's opening to the West and that economic
reform would continue. The appointment of Zhao
Ziyang, a highly respected advocate of economic
reform, as acting Party General Secretary was intend-
ed to send a similar, reassuring signal. Press reports
and diplomatic reporting suggest that even those
officials who are critical of market-oriented reforms
believe that some market mechanisms are necessary
to prod the planned economy, and favor continued
exchanges with the West, albeit on a smaller scale
than reform leaders have advocated.
economy.
A Key Five-Year Period
In our judgment, the 1986-90 period shaped up to be
a critical one for the reform movement and its
leadership even before the recent events in Beijing.
The period is likely to see the death or incapacitation
of Deng Xiaoping (83 this year), whose vision and
leadership are largely responsible for the program's
progress. Popular concern about the permanence of
the reform policies and the succession will be great, as
will concern about the ability of Deng's successors to
manage the reform program.
The 1986-90 period will probably be a difficult eco-
nomic one, too. Western economists agree that the
easiest gains in economic productivity from reform
have already been achieved. Much of the increase in
agricultural productivity, for example, was achieved
by removing state interference from small work units,
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In the late 1920s, the Soviets began constructing five-
year plans as guidelines for economic planning and to
motivate production units. China, borrowing from the
Soviet Union, established its first five-year plan for
the years 1953 through 1957.
In both China and the USSR, five-year plans are
intended to set policy direction and broad goals, and
often bear little resemblance to the five annual
plans-the operative directives for enterprises. The
text of the five-year plan is often not agreed on until
sometime sifter the planning period has begun, and
leaves errors, omissions, and changes to be addressed
in the annual plans. In recent years, both countries
have invested significant resources in upgrading eco-
nomic forecasting capabilities to improve their long-
term planning.
The targets in China's plan are less ambitious than
those in the Soviets' 12th Five-Year Plan. And, when
the plans end in 1990, the results are likely to mirror
those of the most recent plans-China will surpass
the majority of its targets, and the Soviet Union will
fall short. The two countries also differ in the number
of organizations participating in the planning process.
Numerous administrative bodies and industrial min-
istries play an active role in constructing Soviet
plans, whereas Chinese plans-at least until this
most recent one-were drawn up by a relatively small
number of central officials.
and simply allowing peasants to farm the way they
wanted. But, in reforming other sectors of the econo-
my, it will be more difficult to link personal income
closely to productivity. The more complicated reforms
that lie ahead also risk greater social and economic
disruptions than have occurred to date.
The drafting of the Seventh Five-Year Plan was
characterized by a new openness in policy formula-
tion, a process we expect to continue unless Zhao and
the reformers lose control over economic policy. The
three-and-a-half-year drafting period saw a clear
expansion of what could be debated and who could
participate in that debate. This was in stark contrast
to the drafting of previous Chinese plans which,
according to the Chinese press, involved far fewer
government and party officials and no scholars, scien-
tists, or businessmen. Moreover, the debate allowed
discussion of alternative approaches to China's devel-
opment problems.'
The Plan is also noteworthy as the first ever to be
discussed or adopted by the National People's Con-
gress (NPC) before being distributed for implementa-
tion, and only the third plan ever to be made public.
Of these, the First Five-Year Plan (1953-57) was not
published until July 1955, and the Sixth Plan (1981-
85) was not released until December 1982. The
Chinese press publicized the differing opinions of the
NPC delegates, tabulating their criticisms and dis-
senting votes-almost as if to prove that the new
leadership was open minded. Indeed, a comparison
with the initial text indicates that 31 changes were
made to Zhao Ziyang's proposal.
Beijing has not released the entire 100,000-word text.
However, excerpts in the Chinese press give the
highlights of each of the 56 chapters, and include the
major points covered in the proposal for the plan
published at the National Party Conference in Sep-
tember 1985 (see appendix).
Without the text of the entire plan, it is difficult to
judge how comprehensively economic targets were
drawn up for the period compared with those for
' The debate was confined within limits, of course. Marxism could
not be rejected, although the form it should take to be suitable to
modern China could be discussed. A senior party theoretician
stated in late 1986 that virtually all topics were open to discus-
sion-except the party's leadership and state ownership of the
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Chronology of the Seventh Five-Year Plan
Proposal as Described in the Chinese Press
Early 1983
The State Council ordered "relevant departments" to
begin research on the major economic and social
issues likely to face the nation from 1986 through
1990. Government leaders in charge of various de-
partments, administrative regions, and enterprises
met with scholars from natural and social sciences
institutes.
August 1985
The input from the more than 1,000 people reviewing
the document was drawn together into the sixth draft.
The Politburo revised the document, and the seventh
draft was distributed to all delegates to the coming
party conference with directions to hold discussions
on the document.
Early 1984
The Central Committee Secretariat and the State
Council began deliberation on the material being
gathered.
April 1985
Drafting began, under the direction of the Secretariat
and the State Council, on a "proposal" laying down
the major tasks, principles, and policies for the Plan.
July 1985
The Secretariat, having approved in principle the
fourth draft of the proposal, submitted the fifth draft
to a group of 200 individuals for 10 days in mid-July.
The group included national leaders in the party,
government, and the military; economists; natural
scientists; officials from selected large state-owned
enterprises; and leaders from 10 provinces, munici-
palities, and autonomous regions. Draft copies were
also submitted to all members of the Central Com-
mittee, the Central Advisory Commission, and the
Central Discipline Inspection Commission asking for
suggestions.
Concurrently, the Central Committee called a sympo-
sium of "party and nonparty democratic personages, "
whose opinions were incorporated into the eighth
draft.
September 1985
The eighth draft was presented at the Fourth Plenary
Session of the Central Committee and at the Nation-
al Conference of Party Delegates, where the proposal
was made public for the first time. Further revisions
were made, and the ninth draft was approved by the
party conference.
March 1986
The National People's Congress revised and approved
Zhao Ziyang's report and a resolution supporting the
guidelines and policies of the Plan. Excerpts were
approved and published, and the entire Plan was
approved in principle.
previous plans. The new Plan targets tend to be
slightly conservative, falling between past overly con-
servative plans and much higher, actual production
levels (see figure 1). The priority areas for economic
development remain much the same as in the Sixth
Plan-energy, transportation, and technology-but
the issues have changed dramatically. For the Sixth
Plan, national leaders debated purely economic issues
such as the rate of investment, consumer needs, and
the relative growth of heavy and light industry. For
the Seventh Plan, debate over such economic targets
appears to have been relegated to lower level officials,
leaving the top leadership free to discuss the broader
political and ideological issues.
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Figure 1
China: Gross Value of Industrial and Agricultural Output,
Planned Versus Actual, 1981-90
a Includes the value of village industrial production, which has historically been
included in agricultural output but, according to some Chinese statements, will be
shifted to GVIO. The plan target for GVAO without the value of village industries is
4-percent annual growth.
their decisionmaking (see-inset).
In addition to setting the customary production priori-
ties and targets, the plan lays out a general timetable
for reform during the period, and gives officials and
.enterprise managers- 11 general principles' to guide
According to the Plan, reform will be carried out in..
three stages. The first will take one or two years and
will concentrate on "invigorating large and medium-
size state enterprises,"., which means enterprises will
become economic entities responsible for their own
production, profits, and losses. Productivity is to
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Guidelines for Decisionmaking, as Outlined
in the Seventh Five-Year Plan
1) Give priority to reform and make sure that reform
and development are adapted to and promote each
other.
2) Keep a basic balance between demand and supply,
and try to balance state budgets and foreign
exchange.
3) Give top priority to improving productivity and
especially product quality, and correctly handle the
relations between productivity and growth rates and
between quality and quantity.
4) Further rationalize the industrial structure to keep
pace with the people's changing demand patterns and
with the modernization of the economy.
5) Keep total investment in fixed assets within proper
limits; rationalize investment patterns; and accelerate
the development of the energy, transport, telecom-
munications, and raw and semifinished materials
industries.
6) Shift the emphasis of development to the techno-
logical transformation, renovation, and expansion of
existing enterprises, and have them expand chiefly by
increasing productivity.
7) Attach strategic importance to the advance of
science and education, promote scientific and techno-
logical progress, and accelerate the development of
intellectual resources.
8) Open wider to the outside world and better link the
development of the domestic economy to expanded
economic and technological exchange with other
countries.
9) Further improve the material and cultural lives of
both urban and rural residents on the basis of
increased production and higher productivity.
10) Promote the cultural and ideological advance of
socialist society while furthering its material
progress.
11) In all efforts to build the country, maintain the
Chinese tradition of hard work and thrift.
increase by creating more economic competition
among enterprises and by encouraging them to form
lateral relationships-such as subcontracting-with
other enterprises. Beijing is allowing enterprises to
carry out experiments with bonuses and other incen-
tives for individual workers, including issuing workers
stock in their enterprise. Excerpts from the Plan
indicate that Beijing will proceed without experimen-
tation on some measures, including the devolution of
state-owned enterprises. With the exception of a few
strategic government departments and industries-
such as defense and energy-all ministries, provinces,
and autonomous regions must turn their enterprises
over to departments and municipalities. Vice Premier
Li Peng told a June 1986 national conference on the
machine-building industry that, after the national
ministry had divested itself of its enterprises, munici-
palities and departments would devolve the ones they
currently operate to lower level administrative units.
It is not clear, however, how much of this devolution is
scheduled during the first stage of the Plan.
Parallel to the reform of enterprises in the first
stage-and essential to the success of this reform-
the plan calls for further development of macroeco-
nomic "levers" with which to control the economy.
Some levers are currently being improved, such as
bankruptcy laws and central banking reforms, and
more are to be undertaken during the plan's final two
stages of reform.
The Plan states that in the second stage of reform,
originally scheduled to begin this year or in 1988, the
role of state mandatory planning will be further
reduced, with state quotas and regulations dropped
wherever possible. Macroeconomic levers are to be
improved in the tax, financial, and monetary systems,
and the first stages of price reform are to be undertak-
en. Prices are also to be used as a "lever" to encourage
production in all but a limited number of "strategic
commodities."
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Figure 2
China: State Expenditures in the Last
Year of the Five-Year Plans
0 1957 62 70 75 80 85 9e
During the third and final stage of reform, as outlined
only vaguely in the Plan, Beijing will concentrate on
placing enterprises under the proper authorities (pre-
sumably downward divestitures), removing barriers
between departments and regions, and separating the
functions of government and enterprises.
Major Projects
The excerpts from the Plan call for 925 major capital
construction projects.' The number is somewhat mis-
leading, however, as at least 60 percent are continua-
tions of long-term projects, and only 450 of the
projects are to be completed during the plan period
(see figure 2).
figure 3).
Following an uncontrolled 40-percent jump in capital
construction expenditures in 1985, the Plan sets the
goal of limiting expenditures to 500 billion yuan (US
$135 billion), still almost 50 percent more than capital
construction during the previous plan. Beijing is com-
mitted to using the first two years to slow capital
construction expenditures and to improve the alloca-
tion of funds to the key sectors of the economy.
Energy, transportation, and telecommunications re-
main priority areas for funding, and show the biggest
increase over the Sixth Plan, rising from 34 to 37
percent of total capital construction expenditures (see
proved before 1990.
Noticeably absent from the Plan is the giant Three
Gorges Dam hydroelectric project, which many for-
eign observers expected to be included. The Chinese-
owned Hong Kong paper Ta Kung Pao has reported
that "preparatory work" for the project will be com-
pleted during the Plan, but other reporting suggests
that the final decision on the project and its timing
has yet to be made.
Chinese budget planners have
held a substantial sum in reserve in case a major
project-presumably the Three Gorges Dam-is ap-
The Plan includes initiating the first phase of a
massive project to divert water from the Chang Jiang
(Yangtze River) to the North China Plain. Although
the project has been under consideration for over 30
years and an eastern route along the Grand Canal was
officially approved three years ago, it has received
little attention in the Chinese press. In recent discus-
sions with Chinese officials, US researchers learned
that a western route for the project, which had earlier
been discarded because it requires that water be
elevated by the Three Gorges Dam, is again under
consideration. All-out construction on the eastern
route may be awaiting the decision on the Three
Gorges project. Completing even the eastern route
along the Grand Canal-without a dam-would re-
quire pumping water up 40 meters over a 1,150-
kilometer route and crossing the Yellow River, greatly
straining China's budget and engineering skills.
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Figure 3
China: Composition of Investment in Fixed Assets, 1986-90
Raw, semifinished
materials industries,
78.27
Transport, 56.82
Defense, 20.35
Agriculture, 14.68
Textiles, light
industries, 10.84
Science, education,
culture, health, 9.98
Machine,
electronics
industries, 9.40
concept of regional self-sufficiency.
Regional Targets
The Plan divides the country into three economic
regions, with only slight boundary changes from those
outlined in the Sixth Plan, and places more emphasis
on economic cooperation within each region (see
figure 4). By encouraging regions to produce different
goods, China is further retreating from the Maoist
Because resources are generally allocated by province,
past regional projects have usually met with redtape,
mismanagement, and a lack of coordination. These
roadblocks may well remain; although the major
targets of each region have been announced, the
mechanism to improve intraregional cooperation is
noticeably missing from the highlights of the plan.
Military
Defense spending during the Plan is forecast to reach
102 billion yuan (US $28 billion), including 20 billion
yuan for capital construction, research, and engineer-
ing. This annual increase of roughly 3 percent in
defense spending stands in sharp contrast to total
government expenditures, which are projected to rise
four times as fast over the period, and continues the 25X1
trend devoting a declining portion of state budgetary
resources to the armed forces.' Some savings for the
' China's announced budget reflects the overall trends but not the
full extent of its defense spending. We estimate actual annual
military expenditures are approximately twice as large as the
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Figure 4
Regional Targets for the Seventh Five-Year Plan
WESTERN ECONOMIC REGION
To, drop farming, forestry, animal
husba& d , and transportation. Selec-
tw ly exploit energy and mineral re-
sowees build processing in-
diries. Currently comprises 58
percent. of Chin's area, 13 percent
of po ion. 7 percent of national
industrial and agricultural output.
To speed up production of energy
(electric, coal, and oil), nonferrous
metals, phosphorus, building mate-
rials, grain, and cash crops. Cur-
rently comprises 31 percent of Chi-
na's area, 49 percent of population,
37 percent of national industrial
and agricultural output.
0 500 Kilometers
0 500 Miles
Boundary representation is
not necessarily authoritative.
EASTERN ECONOMIC REGION
To upgrade industrial technology,
develop energy and transportation,
expand agriculture including light
and service industries. Four special
economic zones and 14 open port
cities to develop trade and tech-
nology. Currently comprises 11 per-
cent of China's area, 38 percent of
population, 56 percent of national
industrial and agricultural output.
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equipment and operating expenses.
military are possible, however, from the current reor-
ganization of the PLA, which calls for retiring older
ships, aircraft, and officers, as well as reducing forces
and streamlining administration. Defense industries
may also obtain some financial help from self-gener-
ated funds, both through international arms exports
and domestic sales of consumer goods. Defense indus-
tries are currently undergoing reforms that encourage
the production of civilian goods with the goal of being
profitable. Savings and profits from all of these
activities will probably be plowed back into new
become too wide.
Quality of Life
The textj states bluntly that economic growth between
and within economic regions will proceed at different
rates, causing disparities in income. Under the goal of
increasing the prosperity of all the people, Beijing is
encouraging a more direct link between income and
productivity, accepting widening gaps in income, and
at the same time adopting progressive income taxes
and other measures to ensure that the gaps do not
the use of gas for cooking.
Chinese newspaper and journal articles are increas-
ingly referring to the need to improve living standards
to create the proper environment for carrying out
reform, and the plan shows ambitious goals for im-
proving the quality of life. In addition to the goals for
wages and consumption and the production targets
(see appendix and table 1), the plan calls for improve-
ments in drinking water supplies, construction of 650
million square meters of urban housing, and rapid
increases in residential central heating systems and
We believe the target for 6.7-percent average annual
growth in the gross value of industrial and agricultur-
al output (GVIAO) is feasible and will allow the
Chinese to reach the overall modernization goal-set
at the 12th Party Congress in 1982-of doubling 1980
output by 1990. The goal of increasing the gross
national product by 7.5 percent annually should be
Table 1
Goals for the Production of Consumer
Goods and Food Products
Product
1990 Goal
Increase Over 1985
(percent)
Soft drinks
3 million tons
400
Refrigerators
6.5-7.5 million
370 to 440
Beer
6.5 million tons
210
Garments
2.8 billion pieces
65
Chemical fibers
1.45 million tons
53
Detergent
1.4 million tons
41
Washing machines
12 million
36
Color televisions
5 million
22
Paper, cardboard
10 million tons
21
Cigarettes
26 million cartons
11
Food products
Milk
Eggs
8.75 million tons
65
Aquatic products
9 million tons
29
Sugar
5.5-6.0 million tons
24 to 35
Meat
22.75 million tons
30
Oil crops
18.25 million tons
16
Grain
425-450 million
tons
12 to 19
viewed with caution, however, because China's meth-
odology for calculating the figure results in a measure
bearing little resemblance to the Western concept of 25X1
GNP.
Although the overall average growth rates will proba-
bly be reached, we believe it unlikely that economic
growth during the period will be steady, as called for
in the plan document. As with the implementation of
past reforms, those outlined in the current plan will
probably cause swings in production as officials seek
the right mix of incentives and regulations.
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Table 2
Industrial Production Goals
1990 Goal
Increase Over 1985
(percent)
Ethylene
1.2-1.4 million tons
84 to 115
Soda ash
3.5 million tons
75
Building industry
229 billion yuan
40
Fertilizers
16.3 million tons
22
Rolled steel
44-46.5 million tons
20 to 26
Cement
180 million tons
26
Timber
68-72 million cubic
meters
8 to 14
Table 3
Energy Goals
1990 Goal Increase Over Annual
1985 Increase
(percent) (percent)
Total energy 991 million tons of
standard coal
Oil 3 million barrels/
day
Gas 15 billion cu
meters
Electricity 550 billion kW
hours
18
3
20
4
17
35
6
Furthermore, we believe some targets will be difficult
to reach. Industry's target of 7.5-percent annual
growth is, in our opinion, more likely to be surpassed
by light than heavy industry (see table 2). The urban
reform program promulgated in late 1984 has made
little progress in reforming heavy industry, and we
view its problems as long term and difficult to resolve:
? Poorly trained and uneducated managers.
? Inefficient allocation of resources because of irratio-
nal prices.
? Low labor mobility.
? Lack of a nationwide social security system to
provide for displaced workers.
? Few penalties for inefficient production, such as
through bankruptcy laws and bank regulations on
lending.
Because many of the one-time gains in agricultural
productivity from adopting the peasant responsibility
system have probably occurred, we expect the growth
in agricultural output, which fueled overall economic
growth during the early 1980s, to slow and pull down
overall growth rates. The most rapidly growing sector
of the agricultural economy will continue to be the
rural industrial sector; total agricultural production is
targeted at 6-percent annual growth, but the goal for
agricultural growth without village industries is only
4 percent.
We believe that the goal of providing 145 million jobs
for new workers and peasants leaving agriculture is
unlikely to be fulfilled. Even if Beijing could provide
jobs in the industrial and service sectors to gainfully
employ that number, it is unlikely that it will have to;
a study by the US Bureau of the Census, based on
Chinese population data, indicates that at most only
85 million new jobs will be required. This apparent
inconsistency between Chinese planning for labor and
population may result in better conditions than Beij-
ing is expecting in a number of areas:
? Lower unemployment figures.
? Fewer problems resettling peasants outside large
urban areas.
? Fewer jobs that have to be created in the service and
industrial sectors.
The Plan's energy production targets are low in
anticipation of the slower growth in production that
has occurred in the last year (see table 3). The planned
average annual growth in energy production during
the period falls short of the planned 6.7-percent
growth in the overall economy, and is well below the
1985 energy growth rate. And although some in-
creased efficiency in the use of energy is likely, the
supply of energy will remain well below demand
throughout the plan period.
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Table 4
Transportation Goals
Increase Over
1985 (percent)
Total freight carried
9.4 billion tons
45
Passenger volume
8.5-9.0 billion persons
60
Capacity at major ports
500 million tons
52
Highway freight
900 million tons
38
Rail passengers
1.4 billion
36
Freight carried by state
transport departments
3.7 billion tons
35
Rail freight
1.6 billion tons
26
Water freight
600 million tons
23
Water passengers
229 million
12
reaches the Plan goal.
We also expect transportation to remain a major
constraint on economic growth through the plan
period (see table 4). Transportation goals call for total
freight tonnage carried to increase 8 percent annually
and thus outpace overall economic growth. This goal
of tonnage transported is more impressive than it
appears because as the economy develops the type of
goods handled will increase in volume faster than
weight. In any case, China's transportation sector will
be, in our judgment, unable to meet demand even if it
We believe the general thrust of the Plan bodes well
for US-Chinese economic relations, although some
increase in trade frictions is likely. In order to reach
Plan goals of an 8-percent-per-year increase in ex-
ports and for a 6-percent increase annually in imports,
for example, China will try to expand exports of
textiles, coal, and grain. Chinese sales of coal and
grain will be in direct competition with US sales, and
textiles will continue to cause trade frictions as China
attempts to expand its sales to the United States. We
believe Beijing will also try to diversify its exports into
light manufactured goods, many of which will com-
pete with products from US firms, as well as with
those of US allies in East Asia, which are already
experiencing a slowdown in their export growth. We
believe that the proposal to use prices and customs
duties to encourage the production of export goods
illustrates that Beijing plans to press exports to the
West. The number of trade complaints filed by
China's trading partners is therefore likely to increase
over the period. At the same time, we believe Chinese
purchases of consumer goods will be constrained by
Beijing's efforts to conserve foreign exchange and
protect domestic industries.
US firms selling advanced technologies and equip-
ment, however, will benefit from the Plan. China
generally views US technology as the world's best,
and we believe that particularly good opportunities
exist for sales of US equipment and technology in a
number of areas:
? Electronics, especially computers and integrated
circuits.
? Telecommunications.
? Energy-related equipment.
? Food processing.
? Transportation.
? Water conservancy projects.
We expect that US sales opportunities will be slow in
coming, however, particularly through the end of this
year, while Beijing is concentrating on controlling
expenditures and while leadership issues remain un-
settled. China's foreign exchange reserves dropped 25X1
sharply in 1985 as the plan was being prepared (see
figure 5).? Moreover, the decline in oil prices and the
growing Western concern about limiting imports of
Chinese textiles are undoubtedly causing the charac-
teristically conservative Chinese to be even more
concerned about bringing foreign exchange reserves
' This drop led to a recalculation of foreign exchange reserves in
mid-1985 to include holdings of foreign government securities,
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Figure 5
China: Foreign Exchange Reserves, 1983-86
Dec Dec Mar Jun Sep Dec Mar Jun Sep
1983 84 85 85 85 85 86 86 86
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Appendix A
Major Goals of the Seventh
Five-Year Plan (1986-90)
Agriculture. The gross value of agricultural output to
reach 353 billion yuan (in 1980 prices), an annual
average growth of 4 percent (or 6 percent if the output
value of village industries is included). State invest-
ment to increase, with emphasis on infrastructural
facilities, including weather forecasting. New forests
to cover 27.7 million hectares, increasing China's total
afforested area to 14 percent. See table 1 for food
production goals.
Economic Efficiency. International standards are to
be adopted for major products. The energy required to
produce 10,000 yuan of national income should be
11.4 metric tons of standard coal, down from the 1985
figure of 12.9 tons. Labor productivity to rise by an
average of 3.8 percent annually.
Banking. Total state credit available to increase by
474.5 billion yuan over the five years. Credit mainly
to be used for the operating expenses of industrial and
commercial enterprises, agriculture, and investment
in fixed assets.
Budget. A balanced state budget of 256.7 billion yuan
of state revenues and expenditures in 1990, or a total
of 1,119.4 billion yuan of each over the entire plan.
An average annual increase of 8 percent for educa-
tion, science, culture, public health, and sports. "Prop-
er limits" will be put on the growth of expenditures
for capital construction, national defense, and admin-
istration. See also figure 2.
Consumption. Total consumption funds for the five
years set at 3,007 billion yuan. Per capita annual
consumption of 517 yuan ($140 at current exchange
rates) by 1990, an average annual increase of 5
percent (4.2 percent for urban residents and 5.1 for
rural residents). Output of consumer goods to increase
40 percent, with major output targets as listed in table
1. Sales of consumer goods to increase 8.7 percent
annually to reach 574 billion yuan in 1990. The
number of retail stores, restaurants, and service shops
is to double to 25 million.
Culture. Literature and art to support the current
economic reforms and the drive for modernization.
Film, radio, and TV industries to improve quality
before increasing quantity-radiobroadcasting to
reach 80 percent of population, TV to reach 75
percent. Publications to increase roughly 50 percent
by 1990. A total of about 700 major cultural and
historical sites under state protection by 1990.
Economic Zones. Three regions for economic develop-
ment are created. (See figure 4.) Development plan-
ning is to occur at three levels-between provinces,
intraprovincial, and city.
Education. Nine-year compulsory education system to
be introduced gradually. By 1990, students in voca-
tional and technical schools to increase by 65 percent,
undergraduate students to increase by 21 percent, and
postgraduate students by 17 percent. Full-time adult
education and part-time training for cadres, workers,
and peasants to expand.
Foreign Exchange. More to be earned through export,
an increased proportion to be earned from sources
other than trade, adequate reserves to be maintained,
and central control over foreign exchange and foreign
loans to be tightened.
Foreign Trade. Exports to grow 8.1 percent annually,
imports at 6.1 percent annually. Total annual value of
trade to reach US $83 billion by 1990.
Gross National Product. 1,117 billion yuan in 1990
(1985 prices), an annual increase of 7.5 percent, with a
total increase of 44.6 percent over 1985. Output of
primary industry is to reach 306 billion yuan in 1990,
growing at 4.2 percent per year; secondary industry to
reach 530 billion yuan, up 7.7 percent per year; and
tertiary industry to reach 281 billion yuan, or an
increase of 11.4 percent per year.
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Gross Value of Industrial and Agricultural Output
(GVIAO). In 1980 prices, 1990 GVIAO is to reach
1,677 billion yuan, up 38 percent from 1985, or 6.7
percent annually. This consists of industrial output
reaching 1,324 billion yuan or an annual increase of
7.5 percent, and agriculture reaching 353 billion yuan
for an annual increase of 4 percent each year over the
entire plan.
Health. Safe drinking water for 80 percent of the
rural population, over 85 percent of the total popula-
tion to receive innoculations. Add 400,000 beds in
hospitals above the county level, build 16 general
hospitals, and increase the number of health workers
in both traditional and Western medicine.
Housing. Urban housing to increase by 650 million
square meters, rural housing by 3 billion square
meters.
Industry. Gross value of output to reach 1,324 billion
yuan (1980 prices), up 43.4 percent for an annual
average increase of 7.5 percent (or 7 percent if the
output value of village industries is excluded). Output
of heavy industry to reach 663 billion yuan, light
industry to total 661 billion yuan, both growing at 7.5
percent annually. See table 2.
Investment. Controlling investment is a major priority
for the first two years of the plan. Investment during
the final three years is to balance supply and demand.
Total investment in fixed assets of 1,296 billion yuan,
of which 896 billion in state enterprises and institu-
tions, 160 billion in collective enterprises, and 240
billion in private enterprises. Capital construction of
500 billion yuan, of which 375 billion yuan will be
allocated by the central government. Funds for updat-
ing equipment and new technology to total 276 billion.
Fixed assets of state enterprises to grow by more than
600 billion. See also figures 2 and 3.
Labor and Social Security. Gradually establish a
social security system and social insurance system.
Provide 29 million new jobs in cities and towns.
Peasants encouraged to leave the land but not the
village.
Legal System. Socialist democracy institutionalized
and written into law. Statutes drawn up for state
administration, economic construction, and other un-
dertakings. The concept of legality and basic knowl-
edge of laws disseminated among all citizens. Public
security and judiciary to strengthen work.
Money Supply. To be increased based on the growth
of savings deposits.
National Income. 935 billion yuan, an increase of 38
percent, or 6.7 percent per year.
Pollution. 50 to 70 percent of major industrial pollut-
ants to be reduced to state-mandated emission levels.
Population. Average annual growth rate of 1.2 per-
cent, total population not to exceed 1.113 billion.
Regional Development. See figure 4.
Science and Technology. Concentration on 76 major
research projects and 200 projects designed to develop
technology and spread research achievements. Quality
of about 40 percent of major industrial products to
reach the level of advanced countries in the late 1970s
or early 1980s. A "Spark Plan" will demonstrate
technology improvements for township industries.
Special Economic Zones. Fourteen coastal cities,
Hainan Island, four special economic zones, and other
selected areas should continue their expansion and
develop export-oriented economies.
Technical Transformation. Investment to increase 87
percent to total 276 billion yuan; 600 major projects
will be launched, starting in the machine-building and
electronics industries.
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Urbanization. Small and selected medium-size cities
to be developed to prevent overpopulatioi of larger
cities. By 1990 there will be, by Chinese population
standards, at least 400 cities and 10,000 towns.'
Wages. Total wages of workers and other employees
to reach 190 billion yuan by 1990, up 4 percent per
year. Peasant income to increase 7 percent annually to
reach 560 yuan per capita. Wages to be paid accord-
ing to work done, while guarding against income
disparities.
Water Conservancy. Strengthen flood control mea-
sures on major rivers, begin project to divert water
from southern to northern China, undertake surveys
of land and water resources.
' Cities are areas where the state has approved a city administra-
tion. Towns are the site of a township government, and (a) if the
area is inhabited by fewer than 20,000 residents, 2,000 or more
must be nonagricultural, or (b) if inhabited by more than 20,000
residents, at least 10 percent of the residents must be non-
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