CHINA: THE POLITICS OF GRAIN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200200001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: March 21, 2012
• Sequence Number: 1
• Publication Date: April 14, 1987
• Content Type: MEMO

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Central Intelligence Agency
14 April 1987
China: The Politics of Grain
SUMMARY
Conservative leaders are becoming more critical of market-oriented
rural reforms that they believe--with some justification--have contributed
to a leveling off in grain production, a key barometer of success for the
rural reform program. If the current drought persists, damaging this year's
grain harvest, this criticism will probably intensify. Indeed, we believe
conservatives would try to capitalize on forecasts of a poor harvest to put
reformers on the defensive when Chinese leaders meet late this summer
to hammer out arrangements for the October party congress. We believe
reformers already have sought to accommodate some conservative
concerns and are playing down new rural reforms. Nevertheless, a poorer
than expected harvest coming on top of other economic problems
(decreasing foreign exchange holdings, state budget deficits, and
increasing state enterprise losses) would not only damage the reformers'
ability to regain the initiative, but hurt their chances of gaining the key
personnel changes they want prior to the party congress.
DATE y / 7 Fi~L~
DOC NO ~~ ~~ ~7~QO~ /
OIR
P ~ PD /
25X1
China Division, OEA,
This memorandum was prepared by (Office of East Asian Analysis.
Information available as of 14 April 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, Political Assessments Branch,
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1987--A Nervous Eye on Agriculture
Drought has reportedly affected about 10 percent of China's cultivated acreage,
including key grain producing areas of the north China plain and south China. If
favorable weather returns soon, China could still have a respectable harvest, but we
believe Chinese leaders are concerned that production will fall far short of the target
they have publicly set of 405 million metric tons--14 million more than last year and
nearly equal to the 1984 record harvest.
Leadership concern over the size of the grain harvest has its roots in part in the
Maoist period. Following the famine years of 1959-1961, brought on by a combination
of bad weather and the disastrous policies of the "Great Leap Forward," grain production
became the key measure of agricultural success, embodied in the Maoist dictums of
"take grain as the key link" and "store grain everywhere." Conservative leaders still
regard good grain harvests as a key to national stability and have long feared that rural
reforms would hurt grain production.
These concerns, however, are not just rooted in the past. Despite sharp
production increases in the early 1980s, China's grain supply remains precarious because
of rising demand. A recent study by the US Department of Agriculture suggests that
because of China's increasing population and changing food consumption patterns, as
well as Beijing's decision to export grain to help finance the modernization program,
Beijing has been unable to increase its grain reserves. Indeed, the study concludes that
by 1986, demand was approaching the limit of available supplies. Although China has
not disclosed the size of its grain stocks, Vice Premier Tian Jiyun recently acknowledged
that this year supplies will be tight even if China has a record grain harvest. If the
drought persists, we believe that Beijing will have no choice but to draw down grain
stocks and use scarce foreign exchange to import more grain to meet both domestic
demand and export obligations.
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Rural Reforms Draw Increasing Fire
The conservatives have jumped on the leveling off of grain production to criticize
certain market-oriented rural reforms, which they regard--with some validity--as being
responsible for this problem and others that have developed. Conservatives point out,
for example, that:
continue to rely on some quota purchases of grain at low state-set prices.
politically. Given these constraints, the reformers admit they see no alternative but to
Reform leaders now face a dilemma, however. Since 1984, grain production has
leveled off. To reinvigorate production, reformers would like to introduce additional
market-oriented reforms--the so-called "second stage" rural reforms--but they cannot
afford to free grain prices to stimulate production without either increasing food
subsidies, or allowing price increases to be passed on to urban consumers. In our
judgment, Beijing regards the first option as too expensive and the second as too risky
subsequent urban reforms.
Market-oriented rural reforms introduced in the late 1970s by Deng Xiaoping and
his proteges initially boosted agricultural production by giving peasants incentives linked
to their performance.l These policies produced a string of bumber harvests through
1984 that bolstered the position of reform leaders and provided the impetus for
? Loosening price controls on a wide variety of goods and boosting the money
supply have led to inflation that in turn increased the cost of producing grain.
Since grain prices have not been allowed to rise accordingly, grain production
has become less profitable. A report in People's Daily claims that in one key
grain producing region, the price of electricity doubled, water charges tripled, and
diesel fuel prices quadrupled since reforms were introduced, resulting in a net
income decline of 120 Yuan per acre of harvested grain. As a result, peasants
have turned to producing other, more lucrative cash crops not subject to state
price controls. (see graph)
Key elements of reforms inititated in the late 1970s and early 1980s included:
? Raising prices the state paid to farmers for grain, cotton, hogs, and several other
key agricultural commodities.
? Transfering decisionmaking authority from rural officials to peasants through the
"household reponsibility system."
enterprises.
? Expanding rural free market outlets for nonrationed agricultural products, such as
vegetables and some meats.
? Encouraging peasants to engage in entrepreneurial activities such as fish and
poultry breeding, service trades, and small-scale industrial and mining
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? Government encouragement of rural enterprises opened other, more profitable
opportunities for peasants than growing grain; rural enterprise development also
diverted scarce credit and supplies from basic agriculture. (See inset for
discussion of rural enterprise development and problems.)
? Policymakers miscalculated in assuming peasants would invest a portion of their
increased earnings in maintaining crucial infrastructure, such as irrigation
facilities, and thus failed to earmark enough state money for this purpose. As a
result, development and maintenance of irrigation facilities have
suffered--investment in water conservancy reportedly declined from 2.1 billion
~yuan in 1980 to 1.1 billion Yuan in 1984. Reformers are, therefore, vulnerable to
charges .that their policies have reduced China's ability to withstand drought.
? Peasants have put much of their increased earnings to "nonproductive" use. For
example, a Chinese policy researcher claimed that some 7 billion square meters
of rural housing was built from 1980 to 1986, at an estimated cost of 120 billion
Yuan. Some conservative leaders have attacked this "consumer-oriented"
spending for reducing funds and supplies needed to increase production.
? Construction of houses, enterprises, and roads also have cost the nation vital
cultivated acreage--between 1980 and 1985 the yearly decline in cultivated land
averaged roughly 500,000 hectares. Although this is a yearly loss of less than
one-half of 1 percent of China's total cultivated acreage, much of the lost
acreage has been among the country's most productive.
Conservatives also charge that rural reforms have exacerbated social problems by
encouraging income inequalities, corruption, increases in the practice of traditional forms
of religion and superstitions, and a breakdown in some social services such as health
care and care for the aged. Moreover, they maintain that the rural party apparatus has
suffered under reforms--rural party officials, once in charge of rural development, now
have an ill-defined role and are even forbidden from engaging in many of the profitable
activities available to the peasantry.
1987 Rural Policy--Caution Prevails
We believe Zhao Ziyang and other reformers are well aware of the potential
political fallout from a poor grain harvest, and indeed share conservative concerns over
the economic consequences of such a shortfall. Hoping to blunt conservative criticism,
reform leaders apparently have taken the lead since last fall's work conference on
agriculture in addressing concerns over declining investment and growing inequalities in
rural development:
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China's Rural Enterprises: Controlling the Boom
The rapid development of rural enterprises is a key issue in the debate over
rural policies. Reform policies encouraged peasant entrepreneurship and the
development of small village and township-run enterprises in order to diversify
agriculture and to soak up excess rural labor. The most dramatic growth of
these enterprises, which include animal husbandry, fish and poultry breeding,
small-scale industry and mining, and services, occurred in 1985, when
employment jumped from 14 to 20 percent of the total rural labor force. In
1986, the output value of these enterprises exceeded that of agricultural
~~
production for the first time, according to Chinese statistics.
Conservative leader Chen Yun charged in September 1985 that rural policies had
led peasants and rural leaders to believe that there could be "no wealth without
industry," forgetting that there is "no stability without agriculture." Even reform
leaders have admitted that rural enterprises have many problems, including
mismanagement, poor quality products, and the inefficient use of scarce energy
and materials. Agriculture Minister He Kang recently told US officials that
roughly 10 percent of rural enterprises are going bankrupt every year, and noted
~ ~
that it did not make sense to continue to encourage new enterprises.
We believe reform leaders are now trying to address problems of rural
enterprises without damaging progress in rural industrialization. Finding a path
between "boom" and "bust" in rural enterprise development has proven difficult,
however. Last year Beijing attempted to slow their growth by reducing credit
and supplies to the sector, reportedly forcing hundreds of thousands of
households and entrepreneurs to abandon their businesses, and increasing the
numbers of rural enterprises running deficits. Faced with the prospect of
increased rural enterprise failures, rising rural unemployment and large numbers
of defaulted loans, Beijing loosened supplies and credit in mid year.
This year Beijing is reportedly encouraging the development of local rural credit
institutions, in part to provide more local funds for rural enterprises. We believe
Beijing hopes this will reduce the burden, and risk, on the state credit system,
as well as increase the likelihood that funds are channeled to enterprises that
have good financial prospects. Basic rural enterprise problems remain, however,
and conservatives will probably continue to attack the overheated growth of the
sector as a sign of reformers' mismanagement of agricultural policy.
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? Recent rural policy documents call fora 40-percent increase in state investment
in agriculture, with priority given to water conservancy projects in grain
producing and less-developed areas.
? Vice Premier Tian Jiyun recently announced plans to increase state aid to
underdeveloped areas, including the distribution of some 1 billion yuan in
~~
development loans to these areas annually through 1990.
We believe reform leaders are continuing to take a more cautious approach to
rural policy because of rising concern over the effect of the drought. In his work report
to the National People's Congress on 25 March, Zhao placed agriculture first among
economic problems needing attention. Although he called for deepening reform, he
proposed no specific new reforms. Instead, Zhao emphasized the need for the
government to invest more in technology to improve yields and called for a series of
new unspecified "guidances"--perhaps referring to administrative measures to protect
farmland and ensure grain production. Beijing has also made only incremental
adjustments in this year's grain purchase formulas, reducing the state grain purchase
target from 60 to 50 million metric tons. Rural policy experts have emphasized that the
"double track" grain procurement system will be used for a long time--meaning that
some quota grain procurement at low state-set prices will continue to be used to
achieve grain procurement targets.
Conservatives appear to have gained some ground, meanwhile, in redirecting the
party rectification campaign that has been under way in rural areas since 1985. Last
December, rectification leader and leading economic conservative Bo Yibo, whose
influence has increased since Hu Yaobang's fall, complained that the campaign had
placed too much stress on promoting market-oriented reforms, neglecting party work
style and education in communist principles. Although Bo stated that the objective of
rectification is to support reforms, his speech suggests he will try to shift the campaign
from promoting market-oriented reforms to helping rebuild the reputation and authority
of the rural party apparatus.
Impact on Party Congress
The success of rural policies has been the cornerstone of the reform program. A
respectable harvest, therefore, would help reformers deflect conservative criticism. By
the same token, a poor harvest, coming on top of other, persisting economic problems
(declining foreign exchange reserves, increased state enterprise losses, and rising state
budget deficits), would, in our judgment, be a serious blow to the reform camp, and
Deng Xiaoping. Indeed, according to official press, delegates to the recent National
People's Congress criticized Zhao Ziyang for not paying enough attention to agricultural
problems in his work report. A provincial leader also reportedly complained that the
government's grain policies are dealing with "trifles rather than essentials." (C NF)
Because the preparatory meetings for next fall's 13th party congress will probably
coincide with preliminary grain forecasts, we believe conservative leaders would
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capitalize on projections of a grain shortfall to try to dominate these meetings. The
reformers, therefore, could find themselves on the defensive on a key policy matter and
in a weakened position to press for the personnel changes they want, including the
choice of Zhao's successor as premier. Conservatives, such as Bo Yibo, operating under
Deng's overall direction, apparently already have been charged with drawing up
recommendations for changes in the composition of the party's central committee--a
move we believe Deng made to mollify conservative complaints that Hu Yaobang had
monopolized party partonage at their expense. In our view, the conservatives might also
use their increased say in personnel matters to try to veto Zhao's preferred candidate
for the premiership, Vice Premier Tian Jiyun. Tian, who has worked closely with Zhao
since the late 1970s in implementing rural policies and is now in charge of the
implementation of the overall reform program, would, in our judgment, be very
vulnerable to conservative attack if the grain outlook was bad. Although far less likely,
even Zhao's confirmation as party chief at the congress could run into trouble if
economic problems worsen.
We believe a poor agricultural outlook would also make it harder for the
reformers to control the agenda of the congress. Rather than gaining an endorsement
to move ahead with reform, they could find themselves trying to fend off conservative
efforts to roll back and circumscribe some reform policies and to reimpose greater
centralized planning and control in general.
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Subject: China: The Politics of Grain
Distribution:
National Security Council
1 - Douglas Paal, Director of Asian Affairs, NSC, Room 493, OEOB
Department of State
1 - Richard Williams, Director, Office of Chinese Affairs (EAP/C),
Room 4318
1 - Joan Plaisted, Deputy Director of Economic Affairs, Office of
Chinese Affairs (EAP/C), Room 4318
1 - Richard Howarth, Director, Office of Economic Policy (EAP/EP),
Room 5321
1 - John Danylyk, Chief, INR/EC Communist Economic Relations Division,
Room 8662
1 - G. Eugene Martin, (EAP/CH), Room 4318
1 - Tom Fingar, Chief, INR/EAP/CH, Room 8840
1 - Chris Clarke, INR/EAP, Room 8840
Department of Defense
1 - DIA/JSI, Room 1C945, Pentagon
1 - John Sloan, DIO for East Asia, Room X238, Pentagon
Office of the US Trade Representative
1 - William Abnett, Director of China Affairs, 600 17th Street N.W.,
Washington, DC 20506, Room 300
Chief 6412, Room 2S010-2, Fort Meade
Chief, 6441, Room 1 W 140, Fort Meade
Department of Treasury
1 - Johnathan Hill, Office of East-West Economic Policy, Room 4426
Department of Commerce
1 - Jeffrey Lee, Office of PRC and Hong Kong, Room 2317
1 - John Perkins, Office of Intelligence Liaison, Room 6854
25X1
25X1
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Central Intelligence Agency
1 - DDI (7E44)
1 - NIC/Analytic Group (7E47)
1 - NIO/EA (7E62)
1 - D/OEA (4F 18)
2 - C/OEA/CH (4G20)
1 - OEA Production Staff (4G48)
1 - C/OEA/SDS (4G32)
1 - C/OEA/CH/IS (4G32)
1 - C/OEA/CH/EA (4G32)
4 - C/OEA/CH/PA (4G32)
1 - C/OEA/CH/TT (4G32)
5 - CPAS/IMC/CB (7G07)
1 - CPAS/ILS (7G50)
1 - CH/EA/CORR (5D38)
1 - C/EA/RR (5E18)
1 - C/PES (7G 15)
1 - C/DO/PPS (3D01)
1 - D/OLL (7624)
1 - SRP (5G00)
1 - D/LDA (1 H 18)
1 - C/LDA/C H (1 H 18)
1 - D/DCI/DDCI Executive Staff (7D60)
1 - PDB Staff (7G 15)
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