CHINA: POLITICS AND PERFORMANCE CURTAIL ECONOMIC PLANS FOR 1987

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200140001-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: March 19, 2012
• Sequence Number: 1
• Publication Date: March 31, 1987
• Content Type: MEMO

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Central Intelligence Agency
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DOC NO
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DIRECTORATE OF INTELLIGENCE
31 March 1987
China: Politics and Performance Curtail Economic Plans for 1987
Summary
Leadership disagreements over the pace and direction of economic
reform have combined with problems in China's economic performance
last year to force changes in economic policy and plans in 1987. Beijing's
agenda includes increased emphasis on grain production, more subsidies
to workers, and focusing on enterprise efficiency instead of on price
reform and the bankruptcy law. The remedies proposed in March at the
National People's Congress, however--with significant retrenchment from
original plans--will probably not prove as effective as Beijing hopes. We
do not expect Beijing's policy adjustments to create new problems in the
Sino-US relationship, but pressure to correct trade deficits could
aggravate existing frictions. Delegates to the Joint Commission on
Commerce and Trade in April can expect pressure on bilateral trade issues,
and may also hear contradictory views on China's reform policies.
This memorandum was prepared by Office of East Asian Analysis.
Information available as of 30 March 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, Economics Assessments Branch,
China Division, OEA,
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December's student demonstrations and the 16 January ouster of Party General
Secretary Hu Yaobang brought into the open increasingly contentious leadership
disagreements over economic policy. Premier and Acting General Secretary Zhao Ziyang
is trying to shield reforms from assaults by party ideologues. But under pressure from
conservative party officials uncomfortable with market-oriented policies and because of
widespread official concern over budget deficits, declining foreign exchange reserves,
and other economic problems, policymakers began to modify reform policies in late
1986. Reforms that would have had the heaviest impact on workers--reductions in
urban food and housing subsidies, price reform, and bankruptcy legislation--were put on
hold at least partly because of a fear of worker unrest in the wake of student
demonstrations. Price subsidies, which reformers had begun phasing out last year, are
now scheduled to increase. And although the use of market incentives in agriculture
was reaffirmed in China's annual guidance on rural policy, reformers decided to increase
state investment because of conservative charges that agricultural infrastructure and
development in some areas have been neglected.
The View From the Top
At the National People's Congress in March, Zhao, State Planning Commission
head Song Ping, and Minister of Finance Wang Bingqian presented a carefully balanced
picture of economic performance in 1986 in what we believe was Zhao's attempt to
restart Beijing's stalled reform program. But he also, in our view, was trying to mollify
the concerns of orthodox party officials.
Song Ping's speech on China's economic and social development cited a number
of accomplishments for 1986, including higher grain production; more reasonable
industrial growth rates (figure 1); progress on priority construction projects; and
improved supplies of consumer goods accompanied by slower inflation in retail prices.
Song also raised several problems, however: low priority construction projects that
drained off scarce financial and material resources; consumer demand growing too fast,
with wage growth outpacing productivity gains; factories producing too many
low-quality, unwanted goods; and continued budget and trade deficits.
Wang Bingqian echoed Song's concern about deficits in his presentation of the
draft 1987 budget, noting that China, which enjoyed an $880 million surplus in 1985,
suffered a $1.9 billion deficit in 1986. According to Wang, the leadership had expected a
balanced budget, but even midyear indications that a deficit was possible did not allow
Beijing time to implement measures that might have kept the budget in balance.
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Figure 1
China: Growth in Industrial Output by Quarter,
in Annualized Percentage Rate
I
1985
I
1986
Jan-Feb
1987
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Wang also noted the rise in foreign borrowing--to triple its level in early
1985--and announced that borrowing would double again in 1987. Although China's
indebtedness is still relatively low for a developing country, the increase in foreign
borrowing and the drop in foreign exchange reserve (figure 2), are, we suspect, a
source of concern for the leadership.
Economic Performance in 1986--a Statistical Summary
National Income
Agricultural Output Value
Grain Production
Cotton
Industrial Output Value
-Light Industry
-Heavy Industry
-Steel
Total Investment
General Retail Price Index
Urban Workers Cost-of-Living Index
Total Trade
-Imports
-Exports
Trade Deficit
Average Annual Cash Wage
-After inflation
779.0 Billion Yuan
394.7 Billion Yuan
391.1 Million Tons
3.5 Million Tons
1,115.7 Billion Yuan
532.4 Billion Yuan
583.3 Billion Yuan
52.1 Million Tons
296.7 Billion Yuan
73.8 Billion US$
42.9 Billion US$
30.9 Billion US$
12.0 Billion US$
1,332 Yuan
Up 7.4%
Up 3.5%
Up 3.2%
Down 14.6%
Up 11.1%
Up 12.7%
Up 9.6%
Up 11.2%
Up 16.7%
Up 6.0%
Up 7.0%
Up 15.1%
Up 1.6%
Up 13.1%
Down 24%
Up 16.0%
Up 8.4%
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The Policy Response and Its Impact
Beijing's agenda for coping with economic difficulties in 1987 reflects the
retrenchment in the reform program, although many aspects of the program, including
opening to the West, will continue. Priority will be given to increasing enterprise
efficiency--which enjoys widespread support--rather than riskier and more innovative
reform initiatives. At the same time, however, the leadership projects a $2.16 billion
deficit--up 14 percent from 1986--as it tries to minimize the potential for worker unrest
and finance subsidies and investments in critical areas.
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Figure 2
China: Foreign Exchange Holdings
State balance
- i~_ I I I I I I I I I I
0 S O N D J F M A M J J' A S O N D J F M A M J J A S
a From July 1985, Bank of China totals include Chinese holdings of
foreign government securities, such as US Government Treasury bills.
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Specific Targets for 1987
Song Ping's speech included specific targets for various sectors of the
economy:
Agriculture
? Grain output of 400 to 405 million metric tons, up about 3 percent,
equalling 1984's record ouput.
? Overall growth in agriculture of 4 percent.
? State investment in agriculture up 670 million yuan to 2.4 million yuan.
Industry
? Overall industrial growth of 7 percent.
? Updating 20 percent of China's light industry product line.
Living Standards
? Enforcing family planning guidelines.
? Increasing worker wages by 14 billion Yuan, or 8.4 percent,
to 180 billion Yuan.
? Retail sales to rise 12.1 percent, to 555 billion Yuan.
We suspect Beijing's policy mix for 1987 is likely to fall short of the mark. In our
view, the problems are worse than the speeches admit, and probably will not improve
significantly this year. Specifically, we do not expect the policies enumerated in March
to be sufficient to effectively cope with the budget deficit, inflation, and grain shortfalls.
Indeed, measures designed to ease financial concerns among workers and factory
managers will, we believe, only add to Beijing's woes by increasing expenditures for
price subsidies and bailouts of floundering enterprises.
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Figure 3
China: Grain Production and Shares of Sown Area
0 1975 76 77 78 79 80 81 82 83 84 85 86 0
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Budget Deficits
Beijing's budget deficit in 1987 may well exceed projections:
? The leadership's control of expenditures is inadequate. Expenditures last year ran
7 percent over budget, largely because of excessive capital construction--despite
Beijing's toughest effort in years to slash investments. The policies designed to
cut construction this year--review of existing projects, cancellations and
postponements of nonpriority items--have already been in force for several
months with limited success.
? Based on past performance, the leadership's projections of at least some budget
components are unrealistic. For example, the $2.16 billion deficit estimated for
1987 assumes no growth in capital construction--overly optimistic in light of
Beijing's poor record controlling spending last year. We also suspect that
planned reductions totaling almost $1 billion in renovation expenses and
government administrative expenses are unlikely.
Moreover, the true size of the budget deficit is masked by Chinese bookkeeping
procedures. By western calculations, China's deficit last year was $3.9 billion, not $1.9
billion and this year the deficity would rise 58 percent to $6.16 billion. The Chinese,
however, count foreign borrowing as revenue in the budget; when Beijing doubles its
borrowing abroad this year, it will lower the deficit a corresponding amount, showing
only a 14 percent rise. Likewise, bonds issued domestically--such as a planned 10
billion Yuan issue this year to finance priority capital construction projects--are
considered revenue, and reduce the deficit even while they increase indebtedness. F_
Beijing's call for grain production equal to 1984's record output depends,
according to Vice Premier Tian Jiyun, on the "mercy of heaven"; indeed, we believe it
out of reach because of poor weather this winter--including drought in many prime
agricultural areas that will affect both summer and fall harvests--and a downward trend
in sown acreage devoted to grain (figure 3). Because of the weather, incentives such as
priority access to loans, fertilizer, and diesel fuel in exchange for grain output
commitments may have little effect on actual grain production levels.
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Figure 4
Wage Increases for China's Workers:
Inflation vs. Real Wage Gains
Average cash wage of
workers and staff
(hundred yuan)
Real wage increase
(percent)
Rise in cost of
living (percent)
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Beijing's strategy for keeping a lid on inflation is to keep the growth in worker
incomes below growth in worker productivity. Following 20-percent growth in wages in
1986, the Chinese hope to limit the increase this year to 8 percent, and thus about 2
percent after inflation. Given poor central control over factory allocation of worker
bonuses, we believe a slowdown in the growth of wages may prove unachievable (figure
4). Even if Beijing succeeds, however, it has already announced plans to give with one
hand what it holds back with the other: Wang Bingqian's announcement of intentions to
increase price subsidies by 39 percent may cool worker dissatisfaction, but will also add
to inflationary pressure by propping up workers' disposable incomes.
Of the four areas Song Ping emphasized for attacking China's economic problems
in 1987, we believe the leadership strategy will prove ineffective in controlling either
capital construction or worker incomes. Moreover, the lack of specific directives for
industrial enterprises seeking to improve efficiency will work against significant
improvements in productivity or tax revenues. Beijing can probably do a better job of
directing imports to Drioritv sectors. uccess in this area will not make up for
failures elsewhere.
The ability of the conservatives to capitalize on these problems will depend on
how well the economy performs. The leadership has deflated the budget issue
somewhat by forecasting a larger deficit this year. Should the deficit or inflation prove
an even greater problem than the leadership expects, however, we may see a renewal of
conservative repudiation of market techniques and stronger calls for recentralization of
control over bank loans, factory profits, and worker bonuses.
Implications for the United States
Differences in Beijing over the direction of economic policy will probably
complicate existing problems in Sino-US economic relations, rather than create new
ones. Conservative attacks on reform policy could focus on such ongoing concerns as
encouragement of foreign investment, membership in GATT, interest in foreign
technology, and even promotion of study abroad.
Although press articles and Embassy reporting thus far in 1987 indicate that
reformers and conservatives alike realize the need for an "open door" policy in China's
modernization, reformers are concerned that recent political events will lead investors to
conclude that China's investment climate is unstable. The current debates, moreover,
will, at least in the short term, make it difficult to offer new incentives to foreign
investors. Without improvements in the investment climate, US firms--whose
investments so far have been largely limited to offshore oil exploration and coal
mining--will, we believe, remain cautious.
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We expect, moreover, that pressure from conservatives to correct bilateral trade
deficits may aggravate existing friction with the United States over protectionism and
other issues relating to China's balance of trade. Beijing's difficulties in joining GATT
will be compounded by stalling on price reforms--China needs to improve its internal
pricing mechanism to be able to prove its participation will be consistent with GATT
organizational guidelines.
Because the US-China Joint Commission on Commerce and Trade (JCCT)
meetings in Beijing closely follow the NPC, we expect US participants to hear carefully
orchestrated assurances that China will maintain its open door policy, in keeping with
Zhao's March speech. From Embassy reporting following meetings with various Chinese
officials, however, we have noted an array of opinions regarding the strength or
weakness of specific reform policies or of reforms in general. Therefore, we expect
Chinese participants in various JCCT working groups to continue providing contradictory
views on the pace and direction of China's economic reforms, they may be unwilling to
discuss specifics.
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Subject: China's Economy: Politics and Performance Curtail Plans for 1987
Distribution:
National Security Council
1 - Doug Paal, Senior Assistant for China, Taiwan and Hong Kong,
Room 302, Old Executive Office Bldg., NSC
Department of State
1 - Joan Plaisted, Deputy Director of Economic Affairs, Office of
Chinese Affairs, Room 4318
1 - William Newcomb, INR/EC/CER, Room 8448
1 - Tom Fingar, Chief, INR/EAP/CH, Room 8840
Department of Treasury
1 - Douglas Mulhollad, Deputy Assistant to the Secretary for National
Security, Room 4326, Main Treasury
1 - Jonathan Hill, Office of East-West Economic Policy, Room 4426
Department of Commerce
1 - Jeffrey Lee, Office of PRC and Hong Kong, Room 2317
1 - Christine Lucyk, Office of PRC and Hong Kong, Room 2317
1 - Myna Stoltz, Country Policy Analyst, Office of East Asia and
the Pacific, Room 3820
3 - John Perkins, Office of Intelligence Liaison, Room 6854
Department of Energy
1 - Douglas Faulkner, Room GA257, Forrestal Building
Office of the US Trade Representative
1 - William Abnett, Director of China Affairs, 600 17th Street N.W.,
Washington, D.C., Room 300
Department of Defense
1 - Major William J. Suggs, Headquarters, Department of the Army,
Office of the Assistant Chief of Staff for Intelligence,
Attention: DAMI-Fll. Room 2A474, Pentagon
Central Intelligence Agency
2 - C/OEA/CH, Room 4G32
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1 - C/OEA/CH/IS, Room 4G32
1 - C/OEA/CH/EA, Room 4G32
1 - C/OEA/CH/PA, Room 4G32
1 - C/OEA/CH/TT, ROOM 4G32
1 - OEA/Production Officer, Room 4G48
1 - D/OEA, Room 4F18
1 - DDI, Room 7E44
1 - Senior Review Panel, Room 5G00
1 - PDB Staff, Room 7F30
1 - NIO/EA, Room 7E62
1 - C/PES, Room 7F24
1 - C/DO/PPS, Room 3D01
1 - C/EAk-]Room 5E18
1 - CPAS/ILS, Room 7G50
5 - CPAS/IMC/CB, Room 7G07
2 - Congressional Liaison, Room 7B02
15 - Author
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