COMMENTS ON CHINA'S SUBMISSION TO GATT ON TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200120001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 27, 2016
• Document Release Date: March 20, 2012
• Sequence Number: 1
• Publication Date: March 26, 1987
• Content Type: MEMO

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Central Intelligence Agency
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DIRECTORATE OF INTELLIGENCE
26 March 1987
Comments on China's Submission to GATT on Trade
Background
In the wake of the political uncertainty following the ouster of
General Secretary Hu Yaobang in January, China's economic reform
leaders appear to be focusing on the defense of core policies of economic
reform and the opening to the outside world. As a result, we expect no
bold new reform initiatives over the short term, and look for little progress
to be made on those issues important to China's accession to GATT.
Moreover, because we believe China is facing a serious foreign exchange
crunch, we doubt Beijing will regain the momentum of reform in the trade
system. In this uncertain environment, US and foreign officials must be
able to differentiate between the reforms Beijing has put in place and the
reforms pending implementation. The "Memorandum on China's Foreign
Trade Regime" China submitted to the GATT Secretariat earlier this year
appears to broadly emphasize the direction of economic reform without
reference to what has been accomplished and what remains to be done.
The following comments provide some balance to Beijing's sweeping
generalizations presented in the memorandum, providing clarification on
some points and raising questions on others.
This memorandum was prepared by Office of East Asian Analysis.
Information available as of 26 March 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, China Division, OEA,F-
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Agricultural Reform
"Considerable progress has been made in the development of township
enterprises, the great majority of which being collective and individual. The price
control over agricultural and sideline products has been largely liberalized." (p. 5)
? Local government agencies have been separated from economic units in most
cases, but peasants are still largely dependent on the state agencies for the
provision of production inputs--such as fertilizer and fuel--and to market most
of their products.
? To say price control has been "largely liberalized" is an exaggeration. The state
makes sure prices stay within a certain range and sets the range of allowable
prices. Additionally, commodities procured from peasants under contracts are
purchased at prices "negotiated" with the state.
Ownership
"Currently there are not only state-owned and collective enterprises, but also
individual economy, private enterprises, Chinese-foreign equity joint ventures,
Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises in
China." (p. 4)
? According to the State Statistical Bureau, state-owned enterprises accounted for
one-fifth of all industrial enterprises in 1985, with the balance under collective
ownership. State-owned enterprises, however, account for 70 percent of China's
total production. Nearly 22 percent of collectively owned enterprises are
township enterprises. We have no data on the the size of the other ownership
forms, although private ownership and wholly foreign-owned ventures represent
a very minor share of the whole. The output of individual-owned, joint venture,
and foreign-owned enterprises account for less than 1 percent of China's gross
industrial output value.
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"Many medium and small-sized state enterprises are allowed to be
contracted or leased out." (p. 5)
? In large measure, the enterprises selected for leasing arrangements are small and
deficit-ridden. According to the State Statistial Bureau, 2,900 small, state-owned
enterprises have been leased or contracted out. This leasing, however, appears
regionalized; Liaoning Province alone accounts for more than 20 percent of
leased enterprises.
"Shareholder-enterprises have been set up on an experimental basis." (p. 5)
? In mid-1986, Beijing authorized the sale of enterprise shares on an individual
basis to factory workers in collective enterprises. The sale of such instruments is
restricted and they cannot be publicly sold or traded. Beijing has also appears to
have limited experiments with stock issues in urban factories to those that are
collectively owned.
? Shareholder enterprises bear little resemblance to the Western concept of stock
ownership, and the state remains the major shareholder. There is no secondary
market to sell shares and no system for determining the value of shares. The
Chinese version of stocks bears more resemblance to Western bonds in that they
are an important method for raising funds for capital expenditures.
Enterprise Autonomy
"Governments at all levels have had their functions separated from those of
the enterprises, streamlined their administration work and delegated more power to
lower levels." (p. 5)
? There is still considerable debate in China over the definition of the roles of all of
the power groups surrounding state enterprises. Last week the National Party
Congress (NPC) Standing Committee again failed to agree on a draft--which is
now in its seventh version--of the state sector industrial enterprise law to
present to the full NPC session currently in session. The law is intended to
codify the relations between enterprise managers, the party committee, and other
enterprise power centers and to define relations between enterprises and their
ministries. Under the law, enterprise managers would become legally responsible
for the performance and operations of their enterprises.
? Failure to pass an enterprise law has also delayed implementation of the state
sector bankruptcy law passed last fall. The bankruptcy law is slated to go into
effect three months after the passage of the enterprise law.
? The decentralization of power has often halted at the provincial or municipal
level, with the locality taking up the role forfeited by the central government. In
addition, in many instances local officials have proven unwilling to follow Beijing's
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lead--or even direction--to surrender their own roles in production and have set
up administrative "corporations" to maintain a degree of control. These
corporations have prevented the devolution of power from reaching the
enterprises and continue to interfere in production decisions and operations. One
People's Daily article reported that most of the state's large and medium-sized
enterprises are under the control of such administrative and semiadministrative
companies.
"The excessive and rigid control of enterprises by the state has been greatly
changed. The enterprises are moving towards the direction of full authority for
their own managment and full responsibility for their own profits and losses." (p. 5)
? In practice, the degree of autonomy accorded enterprises varies by industry, size
of firm, and whether it is state or collectively owned. In general, the greatest
autonomy is found in small, collective industries producing items not directly
related to the national interest. Industries that are major foreign exchange
earners tend to have less autonomy.
? The factory management responsibility system--which is designed to give the
factory director key decisionmaking authority--is operating in one-third of
state-owned industrial enterprises, according to a Chinese survey.
implementation is spotty, however, as evidenced by a 1986
survey of 10 provinces, which found that only 20 percent of those enterprises
practicing the manager responsibility system had fully implemented it.
? Enterprises' assumption of full responsibility over profits and losses will be slow
in coming. In the absence of bankruptcy regulations, factories with deficits can
continue to rely on state bailouts to cover their losses. Factory managers also
remain unenthusiastic about accepting the responsibility for profits and losses
under a price system that remains irrational.
? Party secretaries in factories continue to exert great influence over managerial
decisions. At best, managers must consult with party committees on personnel
decisions; the authority promised to managers for firing workers has not been
granted.
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"Some large and medium-sized enterprises or syndicates are approved to
engage in exporting their own products and importing raw materials for their own
use." (p. 11)
? The right to export directly is still granted to relatively few enterprises as the
entrenched state trading system protects its own interests. According to the US
Consulate in Hong Kong, between 1981 and 1984 only six factories--all in
Guangzhou--were granted export authority. Following a period of reconsolidation
in 1985, last year more than 100 additional factories were given direct export
authority.
"The system of retaining a proportion of foreign exchange earned is practised
so as to expand the right of local governments, departments and enterprises
concerned to dispose of foreign exchange at their own discretion." (p. 11)
? Almost all export factories) I are allowed
to retain a portion of their foreign exchange earnings. Although Beijing has
dictated that exporters would retain at least 12.5 percent of their foreign
exchange earnings, some factories receive less than this standard.
? Despite the retention of foreign exchange, these enterprises have no direct
control over the foreign exchange they earn. All retained foreign exchange must
be deposited with the Bank of China where the enterprise is given access to a
foreign exchange quota. Following a multilayered approval process for use of the
foreign exchange--which must support exports--factory managers still must buy
their foreign exchange back from the bank at the official exchange rate plus a
small surcharge.
"The establishment of conglomerates and groups of enterprises is
encouraged." (p. 5)
? In the past year, Beijing has promoted horizontal linkages among enterprises as a
means of increasing production. To date, we have seen much of this
"encouragement" occur in the form of state-directed recentralization. For
example, "export syndicates" have been formed in the textile sector to improve
-the production management of thousands of state and collectively-run
enterprises. Through the syndicates, the planning and production of individual
fabric and apparel manufacturers will be coordinated to produce a particular type
of finished product. Management groups, composed of managers from the
constituent enterprises, will direct the syndicates under the guidance of the local
Ministry of Textile Industry bureaus.
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Foreign Exchange Reform
"Since 1979, China has gradually carried out reforms of its foreign exchange
system." (p. 20)
? Beijing has established foreign exchange trading centers in the special economic
zones and Shanghai, and in late 1986 lifted some of the controls on the trading
of foreign currencies for renminbi in three of the special economic
zones--Shenzhen, Zhuhai, and Xiamen. Although this free trading of foreign
exchange is a significant step in the reform process, US Consulate officials in
Hong Kong report that, at least in Shenzhen, officials remain unwilling to let the
foreign currencies float in response to market demand.
? Last November, State Planning Commission Chairman Song Ping announced that
foreign exchange allocation reforms would go ahead in 1987, a theme that was
reiterated in mid-February by MOFERT official Wu Jiahuang during discussions
with US Embassy officials on China's GATT application. But in late February, a
senior MOFERT official claimed that Beijing has decided to postpone this reform.
With reform of the foreign trade sector based on changes in the foreign
exchange allocation system, this postponement will significantly slow trade
Mandatory vs. Guidance Planning
"Totally mandatory foreign trade planning practiced in the past has been
replaced correspondingly by mandatory planning, guidance planning and adjustment
through market forces." (p. 12)
? The proportion of mandatory plan to guidance plan varies from factory to factory,
industry to industry, and province to province, with seemingly no clear national
program to guide this presumably essential aspect of economic reform, according
to the US Consulate in Chengdu. The range of mandatory planning for industrial
enterprises varies from 18 percent in Shanghai to 80 percent in Sichuan
(excluding Chongqing). The share of total production under mandatory planning
in Zhejiang and Jiangsu provinces is 23 and 40 percent respectively. One factor
that naturally influences the proportion of mandatory to guidance planning is the
type of product manufactured and the raw materials used.
? While the number of mandatory plans is decreasing, the state still has a very
direct hand in controlling production through the ministries and state enterprises.
In addition, guidance plans tend to be treated as mandatory. We do not know
what the consequences are for an enterprise that does not fulfill its guidance
quota as opposed to not fulfilling its mandatory quota.
? The movement toward adjustment through market forces is overstated.
Enterprises are permitted to sell over-quota production at prices negotiated
within state-set parameters. Currently, about 50 percent of steel, 60 percent of
coal, and 84 percent of cement are sold outside of the state plan.
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"Price control is being gradually relaxed." (p. 5)
? Beijing eased controls on the prices of vegetables and meat in 1985, and freed
prices of major consumer goods--such as bicycles and televisions--last fall. But
plans for the continued freeing of consumer items from price controls announced
in December were reversed in mid-January as the State Council called for the
rigid maintenance of the existing price structure. Beijing's plans to decontrol
prices of key industrial commodity prices this year have also been scrapped
because of concerns about the potential inflationary impact. Beijing realizes that
the country's distorted price system needs reforming, but conservatives generally
favor centrally regulated price adjustments rather than relaxation of state price
controls.
? Beijing is committed to intervening in the market to keep price fluctuations within
acceptable limits. For instance, when China loosened controls on vegetable
prices in May 1985, prices on free markets in Beijing soared and municipal
authorities ordered state supply units to increase purchases from surrounding
areas and sell them at lower prices to bring free market prices down.
? Beijing often points to rising average prices of key commodities as evidence of
less price control. In most instances, these higher prices do not reflect an
increase in state prices, but a higher proportion of the commodity being sold
over-quota at above state-set prices. Even these over-quota prices usually are
strictly controlled within set boundaries.
Import Pricing
"Under (the agency pricing system), the domestic price of an import
commodity is composed of the cif value, import duty, internal taxes, banking
charges, commissions, etc." (p. 19)
? In many instances, we believe Beijing manipulates the variables in this pricing
equation to control "demand". US businessmen complain of the unknowns in the
equation, including the rate of exchange used to convert US dollars into renmint,i
? equivalents, which leaves them little room for recourse. According to the US
Embassy in Beijing, even when policies regarding import valuation are published,
there is a gap between policy and enforcement. Foreign businessmen complain
of capricious and uneven treatment by customs officials at the various entry
points, including outright harassment and the imposition of duties where policy
would indicate otherwise.
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Export Pricing
"(Export) prices are determined on the basis of domestic costs and
international market conditions... supply and demand conditions on international
markets are also taken into account in determining export prices." (p. 19)
? We do not know what role, if any, domestic costs play in determining export
prices. We believe export prices are generally based on international price levels
without reference to costs of production since, under China's irrational price
system, true costs are not known. In the past, provincial and municipal exporters
have often sold exports below cost with the losses covered by the state. During
the first eight months of 1986, nearly 18 percent of all state enterprises were
operating at a loss, up from 11 percent the previous two years.
Wages, Bonuses and Labor Reform
"The restoration of the bonus system and the trial implementation of linking
the total amount of wage and bonus with productivity have greatly enhanced the
productivity of the enterprise and the enthusiasm of the workers and staff." (p. 6)
? Last year Beijing continued to urge factory managers to set wages and bonuses
according to productivity and allowed some enterprises to base their total wage
bill on factory productivity. While Beijing would like to move away from the
egalitarian system under which wages are unrelated to productivity, there are
concerns that material rewards could create excessively wide income disparities.
For the most part, both wages and bonuses continue to be paid without regard to
individual productivity.
? On 1 October 1986, China inaugurated a labor reform package that promotes
contract labor agreements in place of the lifetime tenure system and guarantees
greater labor mobility. But labor reforms have been unevenly implemented, and
labor officials have told US Embassy officials that these reforms will be phased in
slowly over a two-year period. Even where the labor contract system has been
implemented, the real test of success will come in three to five years when
contracts for the first group of workers hired under the new system come up for ,
renewal. Although factory managers will have the right to dismiss workers, few
are expected to be fired.
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National Trade Policy
"China's foreign trade policy has been brought into effect throughout the
country." (p. 11)
? The lack of transparency in China's trading system is compounded by the uneven
application of trade policies and procedures nationwide. Although not condoning
discretionary application of its policies, Beijing has been ineffective in maintaining
a single, uniform customs and trade policy. This is further complicated by the
various secret internal guidelines. These regulations, out of the purview of
foreigners, are often implemented as trial policies which foreigners must accept
as if they were binding legislation. According to the US Consulate in Shanghai,
some foreign firms spend considerable amounts of time and money trying to gain
information on unpublished new laws or policies.
When an unexpected development of production or market changes occurs,
the state may make appropriate readjustment of the planned import and export
targets, including mandatory ones." (p. 13)
? In the past, Beijing has demonstrated a proclivity toward central intervention to
remedy economic disruptions. This is evidenced by the cyclical nature of trade
reform since 1979 as Beijing tightened control as problems arose and slowly
reinstituted more autonomy as conditions normalized. China's reform will retain
much of this on-again, off-again nature as Chinese leaders remain divided over
whether market forces are reliable tools for regulating the economy and as
periodic efforts at decentralization will spark increased trade deficits.
"As for parts or components of machinery, equipment, instruments and
meters which cannot be produced domestically, or the quality of which is not up to
standard, the duty shall be levied at lower rates than those on complete products."
(p. 13)
? In early February, People's Bank of China President Chen Muhua told a visiting US
diplomat that foreign exchange controls would be tightened and import
substitution policies followed more strictly--even to the extent of banning
foreign products of higher quality than those produced domestically.
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Import Licensing
"MOFERT readjusts the items of restricted import commodities in the light of
the availability of foreign exchange and the changes of domestic production and
market situation, and duly makes them public." (p. 17)
? Beijing's track record for publicizing regulation changes is a poor one. Often new
regulations are discovered after the change is foisted on the foreign
"MOFERT is the department exclusively responsible for administering the
licensing system. It may authorize the departments of foreign economic relations
and trade at the provincial level or the special commissioner offices located at the
main ports, to issue licenses for some import or export commodities within their
respective adminstrative areas." (p. 16)..."The interim regulations (on import
licensing) are unifiably implemented throughout China, without country or regional
restrictions." (p. 17)
? With few exceptions, MOFERT has delegated licensing authority to the local
levels. This authority is not uniformly delegated, however, and these local
jurisdications have differing lists of goods for which they can issue licenses.
Theoretically, it is possible to obtain from MOFERT a list of entities authorized to
issue licenses for a particular product or line of products. Whether a foreign firm
would be able to get such a list is uncertain, however, according to the US
Embassy in Beijing.
Transparency
"Orders for (licenses) should be placed through the corporations approved by
the State to engage in the business of importing such commodities...MOFERT
readjusts the items of restricted import commodities... and duly makes them public."
(p. 17)
? One principal obstacle affecting China's trading partners is the lack of
transparency in the country's trading regime. Information concerning the
availability of the various Chinese entities to engage in trade--provincial,
municipal, and local level enterprises and trading organizations--is scarce, as is
information on the availability of import licenses, the access to foreign exchange,
and the authority to import under regional and state economic plans. The criteria
used in foreign purchasing decisions for government procurement also remains a
prime area of opacity in China's trading system. The inability of Beijing to offer
consistent and high-caliber economic and trade data also adds to the confusion.
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United States Trade Representative
1 - W. Douglas Newkirk, Assistant Trade Representative for GATT Affairs,
600 17th Street NW, Washington, DC
1 - Cecilia Leahy Klein, Director for GATT Affairs, 600 17th Street NW,
Washington, DC
1 - William Abnett, Director for Chinese Affairs, Rm 315, Old Executive Office
Building
1 - Elizabeth Werner, Chinese Affairs, 600 17th Street NW, Washington, DC
Department of State
1 - Robert D. Goldberg, Bureau of East Asian and Pacific Affairs, Office for
Chinese Affairs, Rm 4318, Department of State
Central Intelligence Agency
2 - Chief, China, Office of East Asian Analysis, China Division, Rm 4G20,
Headquarters
10 - Trade and Technology, Office of East Asian Analysis, China Division
Rm 4G32, Headquarters
1 - Chief, International Security, Office of East Asian Analysis
China Division, Rm 4G32, Headquarters
1 - Chief, Political Assessments, Office of East Asian Analysis
China Division, Rm 4G32, Headquarters
1 - Chief, Economic Assessments, Office of East Asian Analysis
China Division, Rm 4G24, Headquarters
1 - Office of East Asian Analysis, Systems Development Staff, Rm 4G48, Headquarters
1 - Director, Office of East Asian Analysis, Rm 4F18, Headquarters
1 - DDI, Rm 7E44, Headquarters
1 - Senior Review Panel, Rm 5G00, Headquarters
1 - President's Daily Brief Staff, Rm 7F30, Headquarters
1 - EA, National Intelligence Officer, Rm 7E62, Headquarters
1 - Chief, Product Evaluation Staff, Rm 7F24, Headquarters
1 - Intelligence Liaison Staff, Office of Current Production and
Analytic Support, Rm 7G50, Headquarters
5 - Control Branch, Office of Current Production and Analytic Support,
IMC, Rm 7G07, Headquarters
1 - D/DCI/DDCI, Executive Staff, Rm 7D60, Headquarters
1 - Chrono, Office of East Asian Analysis, China Division, Rm 4G20
Headquarters
1 - Production Officer, Office of East Asian Analysis, Rm 4G48, Headquarters
1 ]Office of Global Issues, Economics Division, International
Trade ranc , Rm 3G46, Headquarters
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