CHINA: PROBLEMS IN MEETING CONSUMER EXPECTATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00554R000200050002-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 22
• Document Creation Date: December 21, 2016
• Document Release Date: August 26, 2008
• Sequence Number: 2
• Publication Date: December 1, 1982
• Content Type: REPORT

Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Directorate of Confidential
Intelligence
China:
Problems in Meeting
Consumer Expectations
State Dept. review completed
Confidential
EA 82-10136
December 1982
copy 345
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Directorate of
Intelligence
China:
Problems in Meeting
Consumer Expectations
Comments and queries are welcome and may be
addressed to the Chief. Domestic Policy Branch,
OEA,
Intelligence Council
Confidential
EA 82-10136
December 1982
This paper was prepared by
Office of East Asian Analysis.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
China:
Problems in Meeting
Consumer Expectations
Key Judgments China's post-Mao government faced a discontented population when it took
Information available office in 1976. Wages and living conditions had not improved since 1957;
as of 1 November 1982 real income for urban workers was down and peasant income had increased
was used in this report.
only slightly. Since 1976, as a result of heavy government expenditures on
consumer programs, personal incomes have risen and living conditions have
improved. There are now signs, however, that Beijing regards this heavy
spending as a short-term fix and considers its debt to the consumer as
largely repaid. The leadership believes further improvements in living
standards, if attempted too rapidly, will siphon off resources needed for the
military and for building a strong heavy industrial base.
Investment recently has rebounded, reducing the resources available for
current consumption. Peasants are being told not to expect further large
hikes in prices for their products, and urban workers are being advised that
further wage increases must be based on gains in productivity. For the
population at large, this means that, at best, living standards will improve
only slowly.
The leadership's attempts to regain worker and peasant confidence by
raising wages and incomes appears to have met with only moderate success.
Most workers and peasants can point to improvements in their living
conditions; but we believe they remain dissatisfied with the extent of those
gains and skeptical of government promises of further improvements.
Beijing's measures have led to gains in agricultural productivity, but
productivity in the industrial sector has responded little, if at all, to higher
bonuses and wages. Moreover, these efforts have entailed considerable
costs: defense spending has been squeezed; investment cuts have slowed
growth in such vital sectors as energy and transportation; consumer
subsidies have swollen budget deficits; inflation has accelerated; and
consumer expectations have risen.
We believe that sporadic attempts at economic reforms eventually will
yield some gains in economic growth. But deep-seated problems of low
labor productivity and inefficient use of capital defy easy solution and will
continue to hamper growth in output and personal income. As a result,
discontent among the population again may grow, creating further pres-
sures on political leaders to change economic policy.
iii Confidential
EA 82-10136
December 1982
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Key Judgments iii
A-2. China: Commodity Consumption by Urban Residents,
Selected Items
A-6. China: Commodity Consumption by Rural Residents,
Selected Items
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
China:
Problems in Meeting
Consumer Expectations
China's Consumers Get Attention
By investing heavily in some areas of the modern
sector and using labor-intensive methods elsewhere,
China attained high rates of economic growth, both in
the 1950s and the decade that began in the mid-
1960s. The investment was made possible at the
expense of consumers, particularly since the mid-
1960s. For the Chinese consumer in the mid-1970s,
wages and living conditions were no better than they
had been two decades earlier. There had been minor
improvements-rural health services, for example-
but gains were rare and it was far easier to point to
evidence of decline. In the cities, public services had
deteriorated, and to purchase food or get a haircut one
had to wait in line far longer than in the 1950s.
Official Chinese data show a 4-percent decline in real
personal income per capita for urban residents be-
tween 1957 and 1975. For peasants, the data suggest
a 22-percent increase, however, that works out to only
a 1.1 percent average annual growth (table 1).
This prolonged stagnation of real incomes contrasts
with the visible improvement in living conditions
during the 1950s. During the years of the First Five-
Year Plan (1953-57), urban real incomes grew at an
average annual rate of 8.2 percent, peasant incomes at
3.3 percent yearly.' In 1958 and 1959, however,
Beijing embarked on the disastrous Great Leap For-
ward, and then spent the first half of the 1960s
recovering. During the 1958 to 1965 period, per
capita real income for urban workers declined. Peas-
ants fared better; by 1965 their real incomes had
regained 1957 levels. During the Cultural Revolution,
with its emphasis on egalitarianism and ideological
incentives, Chinese data suggest that real incomes for
both workers and peasants rose only slightly.
Complaints by urban workers about wages and living
standards during the late 1960s and early 1970s were
symptomatic of serious morale problems and growing
labor unrest. The general wage increase enacted by
See appendix B for a brief comment on sources and methods.
2 Unless otherwise indicated, all references are to changes in per
capita incomes.
1957 1975 Average Annual
Growth, 1958-75
(percent)
Money income 253.6 268.2
Real income 253.6 243.4
Rural
Beijing in 1971 and 1972 was an early attempt,
largely ineffective, to placate an urban work force
angry about the government freeze on wages and
promotions. Similarly, recommendations in 1975 for
regular promotions, wage increases, and a system of
production bonuses-contained in a controversial
State Council document-were aimed at redressing
grievances and boosting morale.'
Farmers also experienced financial difficulties, but 25X1
politically they were less of a problem for the leader-
ship than urban workers. Peasant protests about low
farm prices, strictures on private enterprise, and
meddling in farm operations by bureaucrats-major
farm issues-were much less visible and less likely to
gain momentum. Prior to the late 1970s, Beijing
responded by gradually reducing the prices of indus-
trial materials and equipment bought by rural collec-
tives. These reductions were widely publicized, but
their impact on personal incomes was slight.
Problems in Accelerating Industrial Development. It was drafted
under the auspices of Deng Xiaoping and became one of the issues
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
After Mao died, the new leaders thought that the
settled political situation would allow a quick return
to earlier high rates of growth. They developed ambi-
tious plans for capital imports to modernize the
economy-some US $7 billion worth of complete
plants were ordered from the West. But it became
evident that these plans, focused on heavy industry,
would not work. Shortcomings in the system of eco-
nomic management and serious bottlenecks in the
economy stood in the way of sustained rapid growth.
Increased Spending on Consumers
In 1977 China's leaders took the first steps to improve
worker morale by increasing wages and reintroducing
bonuses. Then at the third party plenum in December
1978, Beijing completely revamped its development
strategy. One of the chief elements in the nets strate-
gy was a focus on consumption (rather than invest-
ment) so as to improve incentives (and productivity).
Beijing hammered out the new development strategy
in a series of lengthy bargaining sessions, where
bureaucrats responsible for heavy industry, construc-
tion, and the military establishment tried to minimize
the damage to their own budgets. Eventual policy
steps having a direct impact on consumers included:
? 1977: Promoting lower level employees one to two
grades, thus raising the average wage for these
workers by about 10 percent.
? 1978: Reinstituting production bonuses, abandoned
during the late 1960s.
? 1979: (1) Raising procurement prices paid by the
government for some farm products; (2) Simulta-
neously, granting monthly food subsidies to all
urban workers to offset increases in retail prices
resulting from the increase in procurement prices;
(3) Again promoting lower level employees one to
two grades, thus increasing their average wages by
another 10 percent.
? 1978-81: Loosening restrictions on peasant sideline
activities and collective production and enlarging
the scope of free markets and private enterprise.F-
Government Spending on Consumers,
1978-81 (yuan)
-44.2 billion for price hikes of farm products.
-36 billion for price subsidies for agricultural inputs
and foodstuffs.
-7.8 billion in foregone agricultural taxes.
-30 billion for wage increases and bonuses.
-10.5 billion in wages for new entrants to the work
force.
-2.8 billion for improvements in urban services.
-5 billion for the state's share of new housing
construction.
According to Chinese Government reports, some 140
billion yuan were spent from 1978 to 1981 on various
programs aimed at raising incomes and improving
living standards (see box). By way of comparison, state
budgetary expenditures in 1981 totaled only 109
billion yuan.
With more resources being channeled into consump-
tion, other sectors increasingly have been squeezed.
The impact on heavy industry has been the greatest
but even the high-priority transport and energy sec-
tors have been affected. Chinese data show that the
share of national income allotted to investment has
steadily declined since 1978, while the portion going
into consumption uses has risen (see table 2). In 1981
additional spending for consumption purposes exceed-
ed in absolute terms the increase in national income,
resulting in strong inflationary pressures and substan-
tial redistribution of income.
Official data on China's state budget also show the
squeeze exerted on programs having little or no
consumption components. Most notable have been the
reductions in investment spending on new plant and
equipment and additional restrictions on defense
spending (see table 3).? Revenues and expenditures
'The defense item shown in the public version of the budget is only
a portion-perhaps half-of total defense spending. Our estimates
of total defense spending show it continuing to grow at the 1- to 2-
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Table 2 Percent Table 3
China: National Income Use China: State Budget Accounts
National income 100 100 100 100
expended
36.5
63.5
34.6
65.4
32.6
67.4
28.3
71.7
have declined since 1979, and, as mentioned, these
fiscal pressures have increased bureaucratic infighting
over budgetary matters. The inability to reach agree-
ment on the cuts needed to accommodate new con-
sumer programs in turn has been a major factor in
China's series of budget deficits.
Urban-Rural Differences
The rapid gains in peasant incomes have only slightly
narrowed the differences between rural and urban
living standards. For many peasants, particularly
those living in the suburbs of large cities, the urban-
rural gap has closed markedly. Opportunities for
earning money outside of agriculture-in commerce
or other service jobs, for example-are greater in the
suburbs, and incomes of enterprising peasants often
surpass the earnings of factory workers. This compari-
son of a prosperous suburban peasant to an urban
worker earning an average or low wage is reflected in
press reports of complaints by urban residents that the
government has paid too much attention to rural
living standards
Nevertheless, for most of China's 800 million peas-
ants the urban-rural gap remains essentially un-
changed, as it has for generations (see figure 1). Rural
incomes are roughly half urban incomes, and, of the
four consumer durables shown in table 4, the rural-
urban ratio showed a definite improvement only for
bicycles during the 1979-81 period; for radios and
sewing machines it changed very little; and for wrist-
watches and clocks it deteriorated badly. Life for
most peasants is still primitive and difficult, accompa-
nied by supply shortages and inconveniences. City
Revenues 112.1 110.3 108.5 106.4
Expenditures 111.1 127.4 121.3 109.0
Of which:
residents continue to earn larger incomes and receive
preferential distribution of goods and services-in-
cluding highly sought after items such as bicycles, 25X1
electric fans, and television sets. Peasants do enjoy
more living space per capita than urban workers; but
rural housing in general lacks the conveniences-
indoor toilets, running water, and so forth-custom-
ary in urban areas.
Consumer Gains, 1979-81: A Summary 3 25X1
During the 1979-81 period, urban incomes grew by
7.5 percent and rural incomes by 14.2 percent annual-
ly in real terms. Urban gains came mostly through
increases in wages and bonuses, without correspond-
ing increases in productivity. Rural gains, on the other
hand were from both price increases for agricultural
products and higher productivity. The introduction of
various types of responsibility systems, the expansion
of private plots, and proliferation of free markets 25X1
contributed to large increases in farm output and
productivity. 25X1
Savings accumulated rapidly during the 1979-81 peri-
od-the portion of income saved in urban areas
quadrupled and in rural areas it doubled. Comments
' See appendix A for a more detailed description of changes in
income and consumption in urban and rural areas during 1978-81.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Figure 1 Figure 2
China: Urban and Rural Consumers, 1981 China: A Lorenz Curve of Urban and Rural
Income, 1979-80
E] Rural
M Urban
Real Income Per Capita-1978 Yuan
e
Consumption of Selected Commodities
-Per Capita
Foodgrains- kilograms
Household Stocks of Selected Consumer Durables
-Per 100 Households
12
Radios
M
R
588407 12-82
Confidential
e Rural
- Urban
0 20 40
Percentage of population
in the Chinese press suggest the new savings are
mainly "forced" savings caused by scarcities, not
voluntary savings for planned future purchases or 25X1
wealth accumulation.
Income distribution in urban areas is surprisingly
even, while in rural areas income disparities are wide.6
Per capita household incomes in urban areas, howev-
er, do differ considerably because of differences in the
portion of family members employed.
6 A commonly used measure of the relative equality/ inequality in a
nation's distribution of income is the "Lorenz Curve." A rough
sketch of the curve for China, based on World Bank data, is
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
25X1
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Table 4
China: Rural and Urban Household Stocks
of Consumer Durables
In both urban and rural areas, consumption patterns
are changing. Spending on consumer durables is
rising rapidly because of pent-up demand, and the
share spent on foodstuffs is staying even or declining.
Expenditures on clothing are rising rapidly in cities.
Peasants, on the other hand, are spending much larger
portions of their incomes on new housing.
Major Consumer Issues
Although Chinese consumers are better off now than
in 1976, the gains have not been without cost. Infla-
tion has accelerated, investment cuts have slowed the
elimination of bottlenecks in the energy and transport
sectors, and defense spending has been further
squeezed-to name only the major consequences.
Opponents of post-Mao consumer programs thus have
no trouble citing reasons why some of these programs
should be scaled back, or even eliminated. We believe
the following issues will continue to concern Chinese
leaders over the next few years.
Inflation. We believe that inflation is the principal
consumer issue facing China in the 1980s. Our calcu-
lations show that inflation during 1979-81 wiped out
over one-third of urban and one-fifth of rural income
gains, and inflationary pressures remain strong. Pub-
lic sensitivity in China to price hikes runs high,
particularly among those old enough to have vivid
memories of the hyperinflation in the late 1940s.F_
Units per 100 households
(except where noted)
Rural as Percent Rural Urban Rural as Percent
of Urban of Urban
32.7
44
125
35.2
39.6
28
70
40.0
29.1
55
241
22.8
41.9
42
100
42.0
The leadership is concerned that persistent inflation
could lead to public protests-especially in the cit-
ies-if unchecked. This concern rests at least in part
on the events of December 1981 when consumers
reacted to rumors of impending retail price hikes by
engaging in widespread panic buying. According to
provincial broadcasts, panic buying of staple food- 25X1
stuffs spread so quickly that within two days Beijing
issued a directive that characterized panic purchasing
as "detrimental to political stability" and demanded
that local officials take immediate action. Concur- 25X1
rently, at meetings of the Fifth National People's 25X1
Congress, several delegates expressed dismay over
Whenever possible, Beijing has increased subsidy
payments rather than boost retail prices. Having
decided to increase peasant incomes by raising the
procurement prices paid for farm products, the lead-
ership in early 1979 increased subsidy payments to
the purchasing agencies. When forced to raise some
retail prices for foodstuffs in late 1979, the govern-
ment started paying an extra 5 yuan per month to
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
urban workers as a food subsidy. According to official
data, outlays for price and food subsidies in 1981
exceeded 36 billion yuan-roughly equivalent to one-
third of state budget expenditures and perhaps 5
percent of GNP. The drain on revenues created by the
subsidy program helped produce the largest budget
deficit in the history of the People's Republic of China
in 1979 and further deficits in 1980 and 1981. The
government financed these deficits in part by issuing
currency, which added to inflationary pressures al-
ready present in the economy.
Beijing has responded to the inflation challenge by
ordering a freeze on most retail prices. Enforcing this
freeze, however, poses a major problem for the gov-
ernment with its inefficient and understaffed price
inspection teams. The leadership is also trying to soak
up excess currency in circulation and imposing re-
strictions on' bonuses. Annual bonus payments are to
be limited to the equivalent of no more than two
months' basic wages; but evasion of this stricture is
commonplace.
Unemployment. The slower economic growth and
stronger emphasis on cutting costs and improving
productivity now forecast for the remainder of the
1980s will make it more difficult for Beijing to create
new jobs at rates comparable to those of the past few
years. At the same time, the number of available new
entrants to the urban labor force will be growing
rapidly. We believe that Beijing will be hard pressed
to keep unemployment from rising and consequently
will find it even more difficult to maintain acceptable
growth in real incomes.
Wage Reform. Reforms in China's wage system-
virtually unchanged since the 1950s-are vital to
improvements in labor productivity. Wage reform
would also help Beijing control bonus payments (and
ease inflationary pressures), which in the absence of
regular wage increases and promotions have become
the primary source of income gains for workers. We
believe that in the absence of wage reform, labor
productivity will remain sluggish. Efforts' are. under
way to tighten the link between bonuses and produc-
tivity, but judging from China's experience thus far,
these efforts are likely to falter.
Agricultural Procurement Prices. While further in-
creases in the prices paid by the government for farm
products are unlikely in the early 1980s, the issue will
almost certainly remain alive and a source of contro-
versy among the leadership. At present, the consensus
in Beijing appears to be that another round of price
hikes on the order of those in 1979 would aggravate
an already serious fiscal situation. Still, some officials
are arguing that, because peasant living standards
and productivity are so low, additional agricultural
price hikes are necessary. On balance, we believe that
pressures on the budget and complaints that Beijing is
favoring peasants at the expense of urban workers
make price hikes politically untenable in the near
future.
Scarcity of Consumer Goods. Shortages are a domi-
nant fact of life for China's consumers; in many
instances they are more important determinants of
consumption patterns than are consumer preferences
or incomes. And shortages often are not simply a
result of the lack of raw materials or the inability to 25X1
manufacture particular consumer goods. Frequently
they are due to quirks in the system itself-to
irrational prices, peculiarities in the incentive system,
or simply organizational barriers
Some of these factors are illustrated by a survey
conducted in the large industrial city of Shenyang in
China's northeast, where this past summer 10 percent
of retail goods in department stores were out of stock.
In 18 of the city's department stores, 453 kinds of
consumer goods were out of stock. Among these, 176
kinds, or 38.9 percent, were textile products. Woolen
blankets have been unavailable for "quite a few
years;" cotton ones for two years. Other unavailable
goods were mostly small articles.
The department stores cited several reasons for the
shortages:
? Factories did not want to manufacture goods that
bring in low profits.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
? Wholesale departments mixed slow-selling goods
with those in high demand, and they refused to
break up large lots. In both cases, retailers would
not buy for fear of overstocking, and this led to the
unavailability of such goods as sheets, pillow cases,
and children's blankets.
? Shops would not sell goods that earned little profit,
therefore, small articles such as plastic buttons were
hard to find.
According to the Ministry of Commerce, these prob-
lems exist throughout urban China.
Shortages are particularly acute in rural areas. A
recent article in the journal Economic Research
illustrated the severity of this problem, especially with
regard to consumer durables. A survey of one county
showed that supply as a percentage of demand ranged
from a low of zero for small electric fans to a high of
44.3 percent for high-grade apparel. These data prob-
ably are not representative of the situation in all of
rural China, but they illustrate well a major difficulty
facing Beijing: large increases in income unmatched
by supplies of goods.
Entrepreneurship. Expressions of private and collec-
tive entrepreneurship, while welcomed by liberal ele-
ments in China's new leadership, are mistrusted by
others, particularly lower level cadre. An enlarged
private/collective sector in China would create addi-
tional jobs for unemployed urban youth and peasants
and facilitate the expansion of neglected services, such
as barbershops and restaurants, which are especially
suitable for small-scale private or collective operation.
Despite these obvious economic advantages, there are
signs that local governmental restrictions are suffocat-
ing entrepreneurial activity in many areas. The US
consulate has reported that in the southern city of
Guangzhou, for example, many private businesses
have closed down in recent months as a result of
excessive registration fees and overregulation. In ad-
dition, private businessmen complain that they must
compete with state enterprises for supplies and fuel
and are frequently forced to locate their businesses in
undesirable parts of town. The lesson of Guangzhou
for the leadership in Beijing is that considerable local
leadership resistance to private or collective entrepre-
neurship must be overcome before those forms of
economic organization can become significant sources
of economic stimulus.
Prospects: Benign Neglect? 25X1
There are signs that the leadership is easing up on its
proconsumer policies and paying more attention to
investment needs. Investment spending in 1982 is 25X1
back up, after last year's cuts (which fell short of
intended reductions). Reflecting this, heavy industrial
growth has rebounded. And there are signs that
military spending may receive a boost. Speakers at the
12th Party Congress in September promised contin-
ued stress on improvements in living standards, but in
the next breath said that income gains must be 25X1
smaller than gains in productivity.
The policy that seems to be emerging is essentially the
policy that prevailed in the 1950s and 1960s until it
was undermined by leftist influences: small but steady
increases in personal incomes accompanied by in-
creases in government spending on public services and
housing-all tied closely to gains in productivity. For
some time, productivity has stagnated. If Beijing is
unable to resolve the productivity conundrum and 25X1
must reduce consumption growth below the rates now
anticipated, there is a very real possibility that later in
the 1980s the government will face both a deeply 25X1
discontented population and an economy capable of
only slow growth-resulting in pressures and opportu-
nities for changes in policies and policymakers.
Beijing's primary objectives remain military strength
and basic economic self-sufficiency; and we believe
that the leadership believes any gains in living stand-
ards above some minimal level will siphon off re-
sources and slow the drive to reach these objectives.
The new economic development strategy adopted in
late 1978, with its emphasis on efficiency, necessarily
assigns a higher priority to consumer interests and to
industries producing consumer goods-through re-
quirements for stronger incentives and exports. But
25X1
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
the present view of the Chinese leadership appears to
be that greater spending on current and future con-
sumption reduces the resources that can be channeled
into those industries that are basic to economic and
military strength. As the Chinese succeed in placating
consumers and redressing the imbalances in their
economy, this view will grow stonger and will proba-
bly ;predominate for some time to come. For the
population at large, this means that, at best, living
conditions will slowly and steadily improve. It also
means that consumer programs will be accorded a low
priority, and in a crunch will be sacrificed for higher
priority goals
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
25X1
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Appendix A
Urban and Rural Consumption
Since 1978
Urban Consumers
Income Growth. While money incomes grew by an
annual average rate of 11.9 percent during the 1979-
81 period in urban areas, real incomes grew at a
substantially lower 7.5-percent yearly rate (table A-1).
Inflation sharply reduced gains in real income during
1979-81-the official urban cost-of-living index
shows a total increase of 12.9 percent for the period.
A rapidly expanding money supply, widespread short-
ages of consumer goods, and strong consumer de-
mand-all contributed to the inflationary surge.
Other data suggest slower growth.' More important,
real incomes grew more slowly with each passing
year. From a high of 12.3 percent in the base year of
1978, real income growth declined slightly in 1979
and again in 1980; then in 1981 growth was only 1.3
percent. Real wages actually declined last year; had
not a larger percentage of family members found
employment, per capita real income would have
fallen.
Income Distribution. In its 1981 survey of the Chi-
nese economy, the World Bank found an "extraordi-
narily" low degree of urban inequality in comparison
with other countries. A survey taken by the Chinese in
early 1980 implies that the poorest 40 percent of
China's urban population receive about 30 percent of
total urban income, that the richest 20 percent receive
about 28 percent, and that the richest 10 percent
receive about 16 percent. The Bank economists attrib-
ute this degree of equality basically to three factors.
First, there is little private property income (rents,
dividends, and profits), which tends to be very un-
equally distributed in other countries. Second, there is
little income from self-employment, which in other
' For a variety of reasons, we believe official price indexes under-
state the rate of inflation. Data on commodity consumption (table
A-2) seem to indicate real income growth lower than the 7.5-
percent annual average derived by using the official cost-of-living
index for urban workers. Per capita consumption of three of the
four nondurables shown in table A-2 grew by less than 7.5 percent
annually during the period 1979-81; as did per capita consumption
of two of the four most popular durables.
countries also has exhibited a high degree of inequal-
ity. Finally, wages and salaries are comparatively
equal, primarily because the relative pay of manageri-
al, professional, and technical employees is much
lower than in most other developing countries.
China is similar to other developing countries in one
important respect: differences in household per capita
income are closely related to differences in the per-
centage of family members employed. Thus, while the
difference between the richest and poorest households
in earnings per worker is only 9 yuan, the gap in
household per capita incomes is 46 yuan. The employ-
ment rates' for households in the poorest and richest
categories are 25 percent and 85 percent. To a
considerable extent these differences are due to varia-
tions in the age and sex composition of households,
but the differences are also partly explained by the
existence of several million unemployed young people.
Despite the rapid growth of incomes during the past
several years, we believe that income distribution has
remained relatively unchanged. Developments, which
under other circumstances would have widened earn-
ings gaps, have been offset by other factors. For
example, the relatively high profitability of light
industry could have led to rapid bonus and wage
growth in that sector, but the addition of new, low-
paid workers to the work force has restrained the
growth of the average wage. Also, the institutions
responsible for allocating bonuses have distributed
them in an egalitarian way, diminishing any possibili-
ties that bonus payments might have contributed to a
less equal distribution of income.
Some groups, however, by virtue of their occupations
have either been ineligible for bonus payments or
unable to earn very large bonuses. Teachers, govern-
ment employees, and health personnel are among this
' Number of workers per household divided by total household
members.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Table A-I
China: Urban Income, Per Capita
1978
1979
1980
1981
Average Annual
Growth, 1979-81
(percent)
Income per capita (current yuan)
360.9
409.7
486.3
506.0
11.9
Percent change
9.1
13.5
18.7
4.1
Table A-2
China: Commodity Consumption by
Urban Residents, Selected Items
Per Capita Consumption of 1978 1981 Average Annual
Nondurable Goods Growth, 1979-81
(percent)
Foodgrains (kilograms) 205.5 216.0 1.7
Pork (kilograms) 13.5 16.5 6.9
Edible oils (kilograms) 4.0 6.0 14.5
Cotton cloth (square meters) 12.8 15.2 5.9
Household Stocks of Consumer Durables 1978 1979 1980 1981 Average Annual
(units per 100 households) Growth, 1979-81
(percent)
Bicycles 110 120 127 125 4.3
Sewing machines 58 59 66 70 6.5
Wristwatches 189 208 224 241 8.4
Radios 62 75 85 100 17.3
Televisions 13 17 32 58 61.4
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Table A-3
China: Urban Savings Deposits
1978
1979
1980
1981
Average
Annual
Growth,
1979-81
(Percent)
Personal savings
deposits (billion
current yuan)
15.56
20.26
28.25
35.38
31.5
group, and their real incomes have slipped relative to
people in other occupations. Beijing finally responded
to their complaints by raising wages for these groups
last year.
Perhaps most important among the factors preserving
the existing income distribution has been the growth
of employment. By encouraging early retirement
among parents and promoting the establishment of
collective and individual enterprises, Beijing has ac-
celerated the growth of job opportunities for the large
number of unemployed young people. Partly as a
result, the overall urban employment rate rose from
48.6 percent in 1978 to 56.4 percent in 1981-a
substantial gain.
Surge in Savings. Official statistics show that since
1978 personal savings deposits in urban areas have
grown at an average annual rate of nearly 32 percent
(table A-3); and the share of urban incomes deposited
in savings accounts has almost quadrupled (from 2.2
percent in 1978 to 7.9 percent in 1981). In 1979, 54
percent of each additional yuan of income went into
savings. Increased supplies of consumer goods during
1980-81, along with rising prices, caused savings from
new income to fall, but savings still remain very high.
Changing Patterns of Consumption. Patterns of con-
sumption in urban areas-the result of consumer
preferences, prices, and money incomes-are distort-
ed in China by supply shortages and consumer subsi-
dies. Shortages prevent consumers from buying the
amounts and types of goods they would prefer, while
subsidies tend to encourage greater-than-normal con-
sumption of subsidized goods. Consumer surveys tak-
en by the State Statistical Bureau show that per
capita urban expenditures grew by a total of 46.8
percent during 1979-81 (table A-4). Consumers spent
relatively more on goods, less on services. Of the
developments evident in table A-4, the relatively small
decline in the share of spending on food and the sharp
increases in spending on clothing and daily articles
(miscellaneous household items and consumer dura-
bles) are the most significant. 25X1
By far, food remains the most important budget item,
accounting for more than one-half of the average
family budget. Although not shown in the table, we
believe that the composition of foodstuffs purchased
probably have changed since 1978. Consumers now
probably purchase relatively more nonstaple food-
stuffs (especially vegetables and fruits) and luxury
food items (pastries, liquors) than in the past; and they
probably eat out more frequently.
Spending on the next largest categories-clothing and
daily articles-now accounts for nearly one-fourth of
the family budget. Per capita spending on clothing
has risen by almost 60 percent since 1978, boosting its
share of total purchases from 13.6 percent in 1978 to
14.8 percent in 1981. Spending on daily articles grew
by 67 percent, raising the share of spending in that
category from 8.4 percent in 1978 to 9.6 percent in
1981. Purchases of durable goods accounted for much
of this rise. Consumer durables production has
boomed, reducing-but not eliminating-shortages.
Survey data on household stocks of durables (table A-
2) show significant growth, particularly in radios and
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Table A-4
China: Urban Consumption Patterns
Per capita expenditures 311.20
Commodities 279.56
Foodstuffs 178.88
Clothing 42.25
Daily articles 26.15
Cultural and recreational articles 12.96
Services
8.40
4.68
456.84
46.8
100.0
100.0
420.36
50.4
89.8
92.0
258.84
44.7
57.5
56.6
67.56
59.9
13.6
14.8
43.68
67
8.4
9.6
25.92
100
4.2
5.7
8.88
5.7
2.7
1.9
2.76
-11.5
1.0
0.6
8.40
79.5
1.5
1.8
36.48
15.3
10.2
8.0
television sets. Although their output is extremely
limited, washing machines and refrigerators have
become popular items among high-income consumers.
Occasionally media reports discuss consumer trends
that are not apparent in the aggregate data on
consumption patterns. Beijing Municipality authori-
ties have noted a number of developments affecting
their garment industry:
? While sales of manufactured garments in big de-
partment stores were down by 30 percent this
summer, the city's tailor shops had more work than
they could handle. This was attributed to consumer
desires for something new, something "with
originality."
? Silk is in heavy demand. It, along with jersey, light
woolen fabrics, and cream-colored polyesters, is
selling fast. Flowery dresses are growing in popular-
ity, but better fitting and more colorful slacks
remain the favorite form of dress.
? The number of safari jackets is increasing, and men
are buying more boldly patterned shirts.
Rural Consumers
Income Growth. Since 1978 money incomes of peas-
ants have risen at an average annual rate of almost 19
percent (table A-5). After discounting for inflation,
using the official price index, gains have averaged
over 14 percent annually in real terms. During the
past two years, however, because of inflation, the rate
of increase in real incomes dropped by almost one-
third from the rate recorded during 1978-79. As noted
above, we believe that official price indexes under-
state inflation and therefore overstate gains in real
income. Sketchy data on commodity consumption
suggest that consumption (and real income) gains have
averaged around 10 percent annually during 1978-81
(table A-6), several percentage points lower than
implied by official Chinese data.
Income Distribution. Despite obvious gains, the living
standards of most Chinese peasants are still very low.
Data on commodity consumption and household
stocks of consumer durables in table A-6 portray an
economic group that enjoys a barely adequate diet
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Table A-5
China: Rural Income, Per Capita
1978 1979 1980 1981 Average Annual
Growth, 1979-81
(Percent)
Table A-6
China: Commodity Consumption by Rural Residents,
Selected Items
Foodgrains (kilograms)
248.0
257.0
256.2
1.1 a
Pork (kilograms)
5.9
6.5
NA
10.2
Edible oils (kilograms)
2.1
2.4
NA
14.3
Sugar (kilograms)
0.7
0.8
NA
14.3
Cotton cloth (square meters)
5.6
5.2
NA
-7.1
Household Stocks of Consumer Durables
(units per 100 households)
1977
1978
1981
Average Annual Growth,
1978-81 (Percent)
Bicycles
31
36
44
9.1
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
1978 1979
Rural savings 5.64 7.84
deposits (billion
current yuan)
The share of spending going to housing should rise as
incomes grow, but the reported increase seems larger
than would be expected from gains in incomes alone
and probably reflects a strong pent-up demand. Ac-
cording to the State Statistical Bureau, 12 percent of
all rural households built new houses in 1981. Rural
households averaged 4.3 rooms per household, 17
percent more than in 1978, and floorspace averaged
10.2 square meters per capita-over twice the average
for city dwellers.
That consumer durables are included in daily articles
helps explain why spending in that category grew by
156 percent between 1978 and 1981. As in the case of
housing, there is also pent-up demand. The daily
articles category also contains a wide variety of
common household items that are now, with the rapid
expansion of light industry, much more readily
available.
1980
1981
Average
Annual
Growth,
1979-81
(Percent)
11.7
17.0.
44.5
and little in the way of household wealth. Income
inequalities among rural residents remain large. Sur-
vey data indicate that three-fourths of China's peas-
ants earned less than 150 yuan in 1980, when
average peasant earnings were 191 yuan. With such a
wide variation in income, the statistically average
peasant is hard to find.
Savings Up Sharply. Nationally, rural savings have
tripled since 1978 (table A-7), and the portion of
income going into savings has doubled, rising from
slightly less than 1 percent in 1978 to about 2 percent
in 1.981. Peasants have reacted predictably; for exam-
ple, in some areas they have declined to produce
additional hogs for market because there is nothing.to
buy with the extra earnings.
Changing Patterns of Consumption. Survey data
issued by the State Statistical Bureau show that the
shares of rural spending on food, clothing, fuels, and
cultural activities and services declined between 1978
and 1981, while the shares spent on housing and
miscellaneous and household articles (daily articles)
rose markedly (table A-8). To a considerable degree,
the large decline in the share for foods (from almost
68 percent to less than 60 percent) reflects the lack of
a variety of more desirable foodstuffs, if not outright
shortages of basic items. We attribute the declines in
spending for fuels, cultural activities, and services to
continued shortages in supplies.
In publicizing improved living standards, Beijing has
noted some trends not apparent in the aggregate data:
? Peasants have started to abandon homemade and
handmade clothing and shoes, now preferring fac-
tory-made goods, "which they feel are better in
appearance;" and there has been a gradual shift in
purchases toward better quality clothing.
? Farmers prefer brand-name goods, just as city
residents do; but relatively inexpensive wristwatch-
es, for example, are also in great demand.
? Small items such as pans, cauldrons, bowls, chop-
sticks, and straw and palm fiber products are selling
well.
? Although there is a big demand for children's
clothing, the demand for toys is relatively low in
rural areas.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554ROO0200050002-0
Confidential
Table A-8
China: Rural Consumption Patterns
Per capita expenditures 116.08 190.81 64.4 100 100
Commodities 112.92 186.17 64.9 97.3 97.6
Foodstuffs 78.61 113.83 44.8 67.7 59.7
Staple 51.32 61.07 19.0 44.2 32.0
Other
Clothing
Fuels
Housing
Daily articles
24.67 41.50 68.2 21.2 21.7
2.62 11.26 330.0 2.2 5.9
14.74 23.57 59.9 12.7 12.3
8.28 10.59 27.9 7.1 5.6
3.67 18.67 409.0 3.2 9.8
7.62 19.51 156.0 6.6 10.2
3.16 4.64 46.8 2.7 2.4
15 Confidential
Approved For Release 2008/08/26: CIA-RDP84SO0554ROO0200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Appendix B
This assessment is based primarily on numerous bits
of information from a variety of official Chinese
sources. Whenever possible we have used data re-
leased by the State Statistical Bureau, China's princi-
pal statistics-gathering agency. Because China's sta-
tistical apparatus is understaffed and its personnel
largely undertrained, Chinese economic data are fre-
quently contradictory, incomplete, or simply inaccu-
rate. Some of our estimates-for example, those on
personal incomes-are subject to a greater margin of
error than others. As the Chinese release further data,
those data may differ slightly from our estimates, but
the major judgments presented in this paper should
not be affected.
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
 Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0
Confidential
Confidential
Approved For Release 2008/08/26: CIA-RDP84SO0554R000200050002-0