CHINA: COPING WITH ACELERATED GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00447R000301850001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: June 8, 2010
• Sequence Number: 1
• Publication Date: June 21, 1985
• Content Type: MEMO

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Central InbdligFnoe Agency
VIA hMp nac20505
DIRECTORATE OF INTELLIGENCE
21 June 1985
China: Coping With Accelerated Growth
Summary
China's first-quarter 1985 industrial output increased
23 percent over the same period last year, according to
official Chinese statistics. We believe the rapid
industrial growth was caused by surges in personal income
and investment spending as well as by production adjustments
related to economic reforms and technical modernization of
Chinese industry. Although welcoming rapid growth as an
indicator that industrial reforms are achieving success, 25X1
Chinese officials worry that the high growth rate will
aggravate shortages of energy and raw materials, strain
transportation facilities, and add to inflation.
Beijing has employed a combination of administrative
measures and Western-style macroeconomic adjustments to try
to bring the overheating economy under control, and reform
proponents thus far have been able to manage the problems
arising from the reforms while continuing to advance their
agenda. Lack of experience in managing a decentralized
economy, strong desires by local officials for quick
economic results, and large private holdings of cash suggest,
to us, however, that China's economic mandarins may not be 25X1
able to control the economy as well as they hope.
First-Quarter Economic Performance
China's industrial output in the first quarter increased 23
percent over the same period last year. This continues a trend
This memorandum was prepared by Domestic Policy
Branch, China Division, Office of East Asian Affairs. Comments
of questions are welcome and should be addressed to Chief, China
Division, OEA 25X1
EA M
85-10120
25X1
25X1
25X1
Duplicate of C05422695:
RIP
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of double-digit growth in industrial output that began in 1983
and accelerated during the second half of 1984. With industrial
production growing 10.5 percent in 1983, 14 percent overall in
1984, and 18 percent in the fourth quarter of 1984, China
probably has the fastest growing economy in the world. Unlike
seasonal production patterns in past years, the total value of
industrial production in the first quarter of this year was
almost the same as that of the fourth quarter of 1984.
The growth rate for light industry probably slightly
exceeded the rate for heavy industry during the first quarter.
January and February figures indicate growth rates for light and
heavy industry of approximately 26 and 21 percent,
respectively. China's southern coastal provinces had industrial
growth rates two to three times higher than those in the
northeast. Industrial production in Zhejiang, Fujian, and
Guangdong increased by more than 30 percent in the first quarter,
while growth rates for Heilongjiang, Jilin, Liaoning, and Tianjin
municipality were approximately 11 to 15 percent. Production of
mining equipment, metal-cutting machines, and small tractors grew
at rates above the 23-percent national average, and the
production of motor vehicles increased at a 60-percent annual
rate. The steel, energy, and transport sectors, however,
expanded at lower rates than the overall industrial growth
rate. Coal and oil production increased 10.3 percent in the
first quarter While electrical power generation was up 8
percent. According to a Hong Kong newpaper controlled by
Beijing, steel output increased 6 percent in the first quarter. 25X1
Total retail sales increased 32.7 percent in the first
quarter, and strong consumer demand sustained a boom in the
production of electrical home appliances. Output of washing
machines, electrical fans, and air conditioners increased nearly
100 percent, and production of refrigerators more than doubled.
Do Chinese Statistics Overstate Growth?
Although we generally have confidence in Chinese production
statistics, we believe the recent figures may overstate Chinese
industrial performance for a number of reasons:
1 According to Chinese statistics, industrial production 25X1
increased at an annual average rate of 7.9 percent from 1979 to
1983.
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25X1
-- Enterprises increasingly purchase semifinished goods and
industrial components from other firms rather than
manufacture the inputs themselves, and these transactions
now may be recorded in calculations of overall industrial
output.
-- Chinese calculations of real growth may not be adjusted
adequately for price increases of some products.
-- Beginning this year, Beijing is recording the output of
village industries in the industrial output total,
instead of in the agricultural output total. Because
village industries are the most rapidly growing sector in
China's economy, the new accounting method may give a
somewhat higher growth rate for industry than would have
been recorded before. Industrial output in 1984
increased 14 percent, but the new accounting method would
have yielded a growth rate of 15.9 percent.
-- The production of low-quality goods continues to be a
problem. Not all new industrial output is sold.
-- Some production figures may be exaggerated by local
officials and enterprise managers. 25X1
Nevertheless, we believe the economy is growing at a very rapid
pace, albeit somewhat slower than Chinese figures indicate.
What Is Causing the Rapid Industrial Growth?
Chinese leaders credit recent industrial reforms--such as
decentralizing management and linking remuneration of workers to
enterprise output--with facilitating the high level of
production, while also acknowledging that much of the rapid
growth is demand driven. Beijing points to large increases in
personal income and investment spending in particular, as key
factors in prompting the strong industrial performance.
According to a PRC-controlled Hong Kong newspaper, urban
wage bills shot up 40.6 percent and bonus payments by state-run
enterprises grew 104 percent during the first quarter, while
capital investment rose 33.1 percent. The first-quarter surges
followed a 19-percent increase in wages and bonuses and a 21.8-
percent increase in capital investment in'1984. Much of the
growth in income and investment spending in 1984 was funded by
bank loans. According to Chinese leaders, currency in
circulation increased 8 billion yuan more than planned last
u w s r
25X1
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25X1
Beijing also attributes rapid industrial growth to past
investment decisions and rural reforms. The Chinese media claim
that the economy is experiencing the results of high levels of
investment in the energy and transport sectors, as well as plant
renovations and adoption of new technology. Bumper harvests from
rural reforms have increased the availability of raw materials
for industrial use, while increasing rural incomes and fueling
consumption demand. 25X1
We believe the rapid industrial growth has been caused by
surges in personal income and investment spending and also
reflects successful agricultural reforms that have been
implemented during the past six years. China's economy probably
has benefited also from efficiency gains caused by the
appointment of better educated, technically competent managers
and Beijing's increased emphasis on enterprise profitability.
The high level of production has been facilitated by increased
enterprise flexibility in selling over-quota production at prices
above the state-set levels. To a lesser extent, rapid growth may
have been caused by recently implemented industri I reforms and
the technical modernization of Chinese industry.
Beijing's Reaction to the Rapid Growth
Although welcoming rapid growth as an indicator that urban
reforms are on track, Chinese leaders have expressed concern that
the growth rate has been excessive during the last few months.
Premier Zhao Ziyang, Vice Premier Tian Jiyun, and State
Councillor Song Ping, among others, have called for slowing the
growth rate to a pace that can be supported over the long run by
China's energy supplies, transportation es, government
revenue, and foreign exchange. 25X1
Media commentaries and remarks by senior officials suggest
that Beijing is uncertain how to weigh the relative:importanceof,
strong demand for commodities and supply-side. adjustments' in
explaining the ;rapid industrial growth. Zhao stated recent 1y
apparently
ou r be
normal orvabnor al Rapid growth
,
,
considered normal if it were caused by efficiency, :gaf 3 ach ev d
unanticipated surge in the money su l r x` ess ~-e production
of substandard or unsalable goods.
z Table 1 lists economic indicators for 1984 and the first
quarter of 1985_
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Dangers of Rapid Growth
We believe Beijing is extremely concerned that a
continuation of rapid industrial growth will exacerbate long-
standing problems in the economy--such as energy and
transportation shortages and the use of wasteful production
techniques--and undermine reform efforts. Despite impressive
increases in the production of coal, oil, and electricity in the
first quarter, energy supplies are strained. Additions to the
transportation network have not kept pace with the growth in
industrial output and the system remains seriously
overburdened. Chinese media report that factories still must
suspend production occasionally to wait for electricity and raw
materials.
Beijing acknowledges that high output in some cases is
caused not by efficiency gains but by the use of large amounts of
inputs. According to press reports, some enterprises have put
their workers on extra shifts or allowed them to work longer
hours. Other reports warn of overconsumption of raw materials
or what the Chinese call "eating next year's food today."
25X1
We believe Beijing is worried that undue emphasis on
achieving high growth rates will cause a wasteful use of
resources. In fact, Chinese media report that unit production
costs in some industries have risen. Deficits incurred by
enterprises during January and February increased 5.8 percent
over the same period last year. A dramatic example of the
dangers inherent in pursuing overly ambitious output targets
occurred at a Henan Province coal mine when attempts to double
output caused newly installed equipment to break down from
overloading--thereby interrupting production for nine days and
causing a loss of about 1 million yuan. Press reports suggest
that rapid growth also is wearing out equipment at excessive
rates, exhausting workers, increasing occupational hazards in
factories, and generating higher levels of environmental
pollution.
25X1
According to Zhao, recent output levels were possible only
because China imported large mounts of raw materials. Imports
of rolled steel last year, for example, were equivalent to one-
third of China's total steel production for the year, yet China's
machinery industries still face shortages of rolled steel, as
well as pig iron, copper, zinc, and other,raw materials. High
levels of imports, moreover, are depleting China's foreign
exchange holdings. 25X1
Beijing recognizes that its industrial development cannot be
based on imports of raw materials and equipment--rather, energy,
transport, and raw materials constraints must be solved
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25X1
internally. Major goals of industrial reforms are to increase
managerial efficiency and labor productivity to make better use
of existing resources. Some of the forces driving China's raDid
growth, however, are undermining these reform goals.
Although industrial output has increased rapidly, it is not 25X1
sufficient to meet the high demand for consumer goods, equipment,
and building materials caused by the surge in personal income and
capital construction during the last six months. Rising prices
fueled by excess demand for finished goods and raw materials
threaten to jeopardize public acceptance of price reforms--a
crucial element in the reform program. Additionally, the threat
of bankruptcy is still not sufficiently strong to force
enterprises to produce quality consumer goods. A survey of 400
state-run enterprises showed that, as of December 1984, about 20
percent of stockpiled consumer goods were unsalable because they
were overpriced and of poor quality. Press reports emphasize
repeatedly that low product quality remains a serious problem.
Beijing seems especially concerned that recent economic
successes may have induced enterprise managers and local and
provincial officials to set unreasonably high production
targets. Three years ago Beijing set the goal of quadrupling the
value of China's 1980 output by the year 2000. The Anhui
provincial government, however, recently established the goal of
doubling the output value of town and village industries this
year, and Liang Lingguang, governor of Guangdong Province, was
quoted earlier this year as saying that per capita income should
quadruple in Guangdong by 1990. According to media reports, some
localities have set the targets of doublingg their output value by
1987 or 1988 and increasing 1980 output value eightfold'by the
end of the century.
Although downplaying the extent of the problem, recent
editorials have warned that, if officials set unreasonable output
talsit ti r.8 -r t o ,`
targets, enterprise managers may resort to
data. We bel i eve Bei j ing is concerned that,. f be raet~e _ '
spreads, it will become increasin6ly difficult to =Judge hoer wel l
control measures are.working. '25X1
Measures "to Slow Growth
e ng has. reac ed quickly to cool the overhead lg eon y,
implementing & ,combination of administrative :controls tnd
suasion by publicly exhorting enterprises"and localities n,ot
blindly pursue high growth rates. To emphasize its concern it..
has invoked the spector of the Great Leap Forward, during-which
efforts to meet absurdly high output targets caused
collapse and starvation of millions of peasants. 25X1
25X1
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I I
Many of the tools China has used recently to reduce consumer
demand and investment spending are similar to those used in
Western economies for macroeconomic management. In the first
quarter, China began pursuing a tight money policy and announced
its intention to slow the rate of growth of government spending,
reduce administrative expenditures by government units, and
narrow the budget deficit.
Lacking the highly developed financial system necessary for
open market operations, Beijing absorbs excess currency by
selling goods from state-run stores. According to press reports,
the Ministry of Commerce has already spent $1 billion to import
consumer goods, including 2 million color TVs, 500,000
refrigerators, 400,000 washing machines, and 300,000 tape
recorders. The state reportedly has drawn another $1 billion
from foreign exchange holdings to import trucks, cars, and
chemical fibers. The Ministry of Commerce expects to withdraw an
additional 3.5 billion yuan from circulation by marking down
prices of oierstocked domestic commodities and selling them to
the public. F __1 25X1
In April, Beijing raised interest rates on time deposits
held by individuals and enterprises as another means of absorbing
excess currency. Rates on loans for working funds and capital
construction also were raised, and officials have stated their
intention to raise rates for other types of loans soon. 25X1
Beijing plans to exercise better macroeconomic control by
strengthening the powers of the banking system and the People's
Bank of China, Its central bank, in particular. The People's
Bank will now set quarterly credit limits for its branches and
the specialized banks, and banks are urged to generate additional
funds by acquiring new deposits or inducing borrowers to speed up.,
repayment of old loans. Banks have been ordered to stop offering
loans to inefficient enterprises and firms that produce poor
quality products for which there is little demand. No loans are
to be extended for capital construction projects whose spending
exceeds the state quota or for projects not listed in the state
plan. Banks now require enterprises and individuals to pledge
3 Some Chinese officials have complained, recently that China has
spent too much foreign exchange on consumer goods and not enough
on high-technology imports, while press reports suggest that
Beijing is concerned with a rapid drawdown of its foreign
exchange reserves. To absorb excess currency in the future, we
believe that Beijing will emphasize sales of domestic goods from
state-run stores. 25X1
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collateral equaling as much as 50 percent of the value of the
loan. Banks also have been ordered to make a better effort at
collecting overdue loans, and a new regulation allows banks to
acquire the pledged collateral if the borrower cannot repay the
To prevent indiscriminate increases in wages and bonuses,
enterprises must now establish special bank accounts for their
wage funds, which will be monitored by the banks. Beijing has
also ordered more rigorous efforts to recover taxes on worker
bonuses from enterprises and has suggested that it will implement
a tax on personal. income above a designated level. Since 1 April
no departments or work units have been allowed to increase their
payrolls, and changes will not be permitted until the planned
wage reforms are implemented in July. 25X1
Outlook
We believe Beijing's reaction to the overheating economy and
the widespread problems--such as price gouging, smuggling, and
black-marketeering--that have arisen during the last six months
is qualitatively different from its reaction to problems in the
past. Beijing-has expressed its determination to slow the
economy gradually, using what it hopes are carefully calibrated
macroeconomic policies, while strengthening oversight and control
without backtracking on fundamental reforms.
25X1
In recent weeks reform proponents have pushed their agenda
forward, calling on cadre to hold firm in the face of problems.
Since April Beijing has implemented politically sensitive hikes
in food prices in Beijing municipality and other major cities;
raised short-haul railroad rates for passengers and freight;
freed prices of sewing machines, watches, and some brands of
bikes; pressed ahead with reforms in enterprise management; and
announced its intention to implement sweeping wage reforms in
July. 25X1
We believe that, in-the transition from a centrally planned
system to a more market-oriented economy, China may experience
the weaknesses of both. Chinese leaders anticipated.problems
during the transition period; in his report to the National
People's Congress (NPC) in March, Zhao bluntly stated that
problems arising from reforms can be solved only through further
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reforms. Many of the problems that have arisen in the last six
months result from the fact that managerial autonomy has been
increased but reforms have not progressed far enough to allow the
market to discipline enterprises that make poor choices. Last
year managers were given more latitude in rewarding workers, but
because the state still pays operating expenses of firms that
lose money, managers were able to increase wages without worrying
about bankruptcy. Likewise, banks were given enhanced freedom to
extend loans but enterprises did not face bankruptcy if they
failed to repay them. Beijing recognizes the need to allow firms
to go bankrupt, but the present system of irrational prices makes
it difficult to determine which enterprises should be closed.
25X1
As Beijing approaches a crucial party conference in
September, reform leaders will be under intense pressure to
demonstrate that they can manage the economy using economic
levers such as interest rates, credit, and taxes. We believe the
control measures that have been implemented are generally
appropriate, but a shared desire for rapid growth on the part of
workers, managers, and local officials may make it more difficult
to slow the economy than Beijing anticipates. Promotion of
10,000 yuan households by the media last year and admonitions to
"get rich" through hard work have generated rising expectations
among workers for an increase in their standard of living. Many
local officials view "reform" as synonymous with rapid growth in
output and pressure enterprise managers to prove their competence
by increasing production. Suspected large cash holdings by
peasants and expectations of rising prices may keep consumer
spending high for some time, even though Beijing has claimed some
It is also possible, but less likely, that in trying to slow.
the economy Beijing will decrease demand too much and bring
growth to a quick halt. Beijing not only lacks experience in
managing a more market-oriented economy, but the responsiveness
of enterprises and consumers to macroeconomic adjustments may be
changing as the reforms proceed. 25X1
We expect China's real growth rate this year will be
slightly higher than last year's 12 percent, while industrial
production should be substantially above the 8-percent growth
target established at the NPC. Nevertheless, we believe it is
premature to say that the Chinese economy is at a "takeoff" stage
of economic development. Unless China ca*n deepen efficiency
gains by successfully implementing industrial reforms, rapid
industrial growth will deplete government revenues and foreign
exchange holdings, and energy and transport shortages will
exacerbate inflation. Most of the industrial reforms--especially
price reforms and the opening of 14 cities and other areas on
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China's coast to Western business--remain controversial and
unproven, and therefore vulnerable to political setback.
Table 1
Economic Indicators
(Rates of Growth)
19
841
4th u rter
1st
ua ter
1984'-
1985"
Industrial Production
14
18
23
Bank Loans
28.9
17
Total Wages (including bonuses)
19
46
40.6
Bonus Payments
48.1
140.
Fixed Asset Investment
22
33.1
Capital Construction (State-
owned enterprises
23.8
Percentage increase from 1983.
Percentage increase from 4th quarter 1983.
Percentage increase from 1st quarter 1984.
10
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SUBJECT: China: Coping With Accelerated Growth
1 - Gaston Sigur, NSC, Room 302, Old EOB
1 - David Laux, NSC, Room 302, Old EOB
1 - Honorable Paul Wolfowitz, Assistant Secretary, Bureau of
East Asian and Pacific Affairs, Department of State,
Room 6205
1 - James Lilley, Principal Deputy Assistant Secretary,
Bureau of East Asian and Pacific Affairs, Department of
State, Room 6205
1 - Donald Anderson, Director, Office of Chinese Affairs
(EAP/C), Department of State, Room 4318
1 - Howard Lange, Deputy Director of Economic Affairs, Office
of Chinese Affairs (EAP/C), Department of State Room 4318
1 - Richard Howarth, Director, Office of Economic Policy
(EAP/EP), Department of State, Room 5321
1 - Honorable Morton Abramowitz, Director, INR, Department of
State, Room 6531
1 - John J. Taylor, Director, Office of Analysis for East
Asia and the Pacific, INR, Department of State, Room 8840
1 - Chris Clarke, INR/EAP/CH, Department of State, Room 8840
1 - John Danylyk, Chief, INR/EC, Communist Economic Relations
Division, Department of State, Room 8662
1 - Douglas Mulholland, Special Assistant to the Secretary
(National Security), Department of Treasury, Room 4326,
Main Treasury
1 - James Griffin, Director, Office of East-West Economic
Policy, Department of Treasury, Room 4450, Main Treasury
1 - Office of Intelligence Liaison, Department of Commerce,
Room 6854
1 - Room 2S010-2, National Security
-
-
-
Agency.
ea e
Ft
.
1 - Fred Surls, Leader, PRC Section, (ERS/IED/Asia Branch),
Department of Agriculture, Room 350, GHI Bldg., 500 12th
Street, S.W.
1 - DDI (7E44)
1 - Executive Director (7E55)
1 - NI0/EA (7E62)
1 - NI0/ECON (7E62)
1 - D/OEA (4F18)
2 - C/OEA/CH (4632)
1 - OEA Research Director (4G48)
1 - C/OEA/SDS (4632)
1 - C/OEA/CH/DEF (4632
1 - C/OEA/CH/DEV (4632
1 - C/OEA/CH/DOM (4632)
1 - C/OEA/CH/FOR (4G32)
1 - C/OEA/NA (4643)
1 - C/OEA/SA (4F38)
1 - PDB Staff (7G30)
5 - CPAS/IMC/CB (7607)
1 - CPAS/ILS (7G50)
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1 - C/EA/RR (5D10)
1 - C/EA/CORR (5D38)
1 - C/PES (7G15)
1 - OCR/ISG (1H19)
1 - C/DO/PPS (3D01)
1 - D/OLL (7B24)
1 - FBIS/AG/CB (212 Key)
1 - FBIS/NEAD/CB (212 Key)
DDI/OEA/CH/DOME
(21 June 1985)
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