CHINA'S UNCERTAIN ECONOMIC CLIMATE: IMPACT ON US INTERESTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000200650001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: May 21, 2012
• Sequence Number: 1
• Publication Date: February 27, 1987
• Content Type: REPORT

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uentrai e ige ce Agency
DIRECTORATE OF INTELLIGENCE
27 February 1987
China's Uncertain Economic Climate: Impact on US Interests
Summary
Differences in Beijing over the direction of economic policy, more
public and intense since the fall of Hu Yaobang, will probably complicate
existing problems in Sino-US economic relations, rather than create new
ones. Specifically, China may find it more difficult to respond positively to
the complaints of foreign investors or to meet US needs on a bilateral in-
vestment treaty. Trade frictions, especially textile issues and China's defi-
cit, may be exacerbated and GATT negotiations will probably be more dif-
ficult. Coming visits by US officials will provide important indications of
the magnitude of the effect of internal political struggles on the Sino-US
economic relationship.
This typescript was written by
tributions from
Office of East Asian Analysis, based on con-
China Division, OEA. Information available as of 18 Feb-
ruary was used in its preparation. Comments and queries are welcome and may be di-
rected to the Chief, Economic Assessments Branch, China Division, OEg4
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Conservative Influence on Foreign Economic Ties
Chinese economic policy statements show a resurgence of more conservative,
planning-oriented themes since the fall of Hu Yaobang, reflecting what we believe could
be a revived and protracted struggle between reformers and conservatives over the
pace and direction of economic reform. We expect controversy to surround many of the
reform policies that support China's open door to the West and specifically its relation-
ship with the United States, including encouragement of foreign investment, membership
in GATT, interest in foreign technology, and even promotion of study abroad. Many of
these were already issues in Sino-US relations, but the atmosphere of uncertainty in
Beijing will probably make progress in resolving them more difficult.
Attracting Foreign Investment
Even before Hu's fall and the economic debates, Beijing was having difficulty an-
swering foreign complaints about China's investment climate. China has been slow to
address such issues as labor costs, required use of Chinese materials, local-level ob-
struction of central regulations, and most important, the ability to repatriate profits. But
last year, a 50-percent drop in the value of new investment agreements to only $3.3 bil-
lion probably alarmed Beijing into action. New direct foreign investment regulations is-
sued in October, however, made only minor concessions and sidestepped investors' key
concerns; in particular, Beijing did virtually nothing to increase foreign firms' ability to
bring profits out of China in foreign currency.
Reformers are concerned that recent political events will lead investors to con-
clude that China's investment climate is unstable
We believe, however, that the current debates will, at least in the
short term, make it difficult to offer new incentives to foreign investors. Moreover, a
conservative shift would harden China's opposition to demands of the United States in
the proposed bilateral investment treaty--certain international law standards and the
precedence of international law over domestic law--which would further complicate the
already stalled negotiations. Without improvements in the investment climate, US
firms--whose investment so far has been largely limited to offshore oil exploration and
coal mining--will, we believe, remain cautious.
In our opinion, 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. Ministry of Foreign Economic Relations and Trade
(MOFERT) calculations of trade accounts--which differ from Western methods--show a
continuing trade deficit with the United States, though it was down to $800 million last
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year from $2 billion in 1985; according to US customs statistics, which factor in
Chinese-origin re-exports through Hong Kong, China enjoyed a $2.2 billion surplus, up
from $368 million in 1985. We expect Beijing to take a hard line in the textile negotia-
tions because last year textiles became China's primary source--26 percent--of foreign
exchange. This increased dependence on textiles adds impetus to Beijing's invigorated
promotion of its textile industry and will stiffen resistance to international pressure to
limit textile exports. Consequently, Beijing will be less amenable to limiting sales to the
United States and may threaten retaliation against US exports if protectionist measures
are implemented.
Foreign Loans Policy
The internal debate has also touched on China's efforts to secure international
credits, aid, and concessionary financing, including US Eximbank loans. The effect will
depend on the focus of conservative attacks in coming months. An attack on China's
use of foreign loans could reduce Chinese pressure on the United States and Japan for
concessionary financing, while increasing pressure for countertrade, compensation trade,
or even restructured loans. If the conservatives, instead, highlight the need to reduce
imports and improve foreign exchange holdings, Beijing may press even more for low-
cost financing on what the Chinese do buy. According to press accounts, Eximbank is
involved in transactions with China worth $120 million, and is considering another $1
billion in projects which may be affected by the debate over loan policy.
The Future of Special Economic Zones
Chinese policymakers such as State Councillor Gu Mu have been quick to reas-
sure the Japanese and others that Beijing's policy toward Special Economic Zones (SEZs)
will not change, but conservative attacks on such "nonproductive" investments as hotels
and restaurants may lead to additional changes in regulations governing the types of in-
vestment allowed. Beijing had already sought to discourage these projects; last Octo-
ber's foreign investment regulations excluded nonproductive investments from the new
incentives offered to foreigners. Conservatives may seek to impose greater central
control over all aspects of SEZ economic activity, including taxes and wages, which in
our view would reduce their already limited attractiveness to foreign investors. US firms
have little invested in the SEZs and will probably not be affected much by any changes
in SEZ policy.
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GATT Negotiations
Obstacles already working against China's efforts to join GATT are now com-
pounded by fallout from Hu's demise; the negotiations will probably be even longer. In
working toward accession, Beijing has encountered recurring difficulties in reassuring
GATT members that China's large nonmarket economy and bureaucratic trade manage-
ment structure would allow Chinese participation in GATT consistent with organizational
guidelines. Most important, Beijing had indicated to the GATT organization that reforms
would show some progress in 1987 on the key obstacle, China's distorted and arbitrary
system of state-set prices. In the wake of student protests and Beijing's fears of worker
unrest, however, price reform--plans for which had already been scaled back in Novem-
ber--is on hold. Indeed, the State Council announced in January that there would be no
price increases this year. Because a delay in price reform will throw China's already
tentative policy timetable off, US negotiators--among the key discussants in talks lead-
ing up to China's GATT application this month--will probably find accession talks even
more complicated than expected.
Technology Transfer
Because of the debates over economic policy, we expect a low-key reaction to
the US announcement--scheduled for the Secretary of State's March visit--of a more
liberal export control policy for China. Reformers will be anxious to forestall charges
from conservative critics that they are making China dependent on the West. Moreover,
widely published reports indicate that China is having difficulty absorbing the "high-
tech" items it is already receiving. Consequently, we expect Beijing to mitigate its pub-
lic demands for even greater access to sophisticated technologies, though private ex-
pressions of discontent with remaining restrictions will probably continue.
We also believe that, in the short term, the United States may see a levelling off,
perhaps even a falloff, in the dollar value of all technology exports--high-tech as well
as more mundane equipment, know-how, and training--to China. Indeed, Chinese sta-
tistics published in late January show a declining US share, of China's technology im-
ports in 1986, partly because of large, probably one-time, contracts with other countries.
But last year, China had already begun to reassess the role of foreign technology in its
modernization effort and had taken steps to revamp the import process, centralize deci-
sionmaking on big-ticket items, eliminate redundant acquisitions, and link equipment
purchases to transfers of production know-how.' The present Chinese political climate,
in our view, will reinforce steps in this direction.
' Under the five-year plan covering 1986-90, technology imports will increase, and we
expect the US share to stabilize or even rise as 1990 approaches.
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Study Abroad
Beijing moved last year to tighten regulations governing study abroad in order to
increase the number of students returning to China after completing their studies. Al-
though the demonstrations in December have not been blamed on foreign-trained stu-
dents, concerns about the a eal of Western ideas and values will increase the res-
sures for tighter controls.
/ The new
measures, disclosed in January, will further reduce the number of students sent to the
United States and other Western countries, with more preconditions and shorter stays
allowed--policies more in line with what conservatives had sought last year.
Signposts
Although we expect to see the current political uncertainties in Beijing reflected
in each of the areas noted above, the effect on US interests may vary greatly. In our
judgment, bilateral trade issues and additional concessions to investors will probably be
affected most. In any case, a key party statement and a series of visits by US officials
in coming weeks should provide important clues:
? Zhao's Address to the National People's Congress. Premier Zhao Ziyang's annual
work report to the National People's Congress in March should discuss economic
policy and lay out reform plans for 1987. It will be an important indication of the
impact the present economic debate will have on US interests.
? The Secretary of State's Visit. The Secretary's March visit does not have an ec-
onomic focus, but it will provide an opportunity for senior leaders to offer reas-
surances and clarifications of policy. The tone of Chinese statements should also
indicate whether relations with Washington have become an issue in Beijing.
? The Secretary of Commerce's Visit. Planning efforts for the Joint Committee for
Commerce and Trade (JCCT) meetings in Beijing this April should provide indica-
tions of changes in Chinese perceptions of the Sino-US economic relationship.
Working groups will discuss trade and investment, market access issues, and US
antidumping import investigations.
? Other bilateral negotiations. In coming weeks, US and Chinese officials will meet
to discuss textile trade and will continue a series of informal bilateral meetings
on GATT. These sessions should provide the best indication of how recent
events will affect Sino-US economic relations.
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SUBJECT: CHINA'S UNCERTAIN ECONOMIC CLIMATE: IMPACT ON THE UNITED STATES
National Security Council
1 - James H. Kelly, Jr., Senior Staff Member, East Asia, Old Executive
Office Building, Room 302
1 - Doug Paal, Senior Assistant for China, Taiwan and Hong Kong, Old
Executive Office Building, Room 302
Department of State
1 - The Honorable Gaston Sigur, Assistant Secretary, East Asian and Pacific
Affairs, Room 6205
1 - J. Stapleton Roy, Deputy Assistant Secretary, East Asian and Pacific
Affairs, Room 6205
1 - Richard Solomon, Director, Policy Planning Staff, Room 7311
1 - Norman Levin, Policy Planning Staff, Room 7330
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 - Eugene Martin, Deputy Director of Political Affairs, Office of
Chinese Affairs (EAP/C), Room 4318
1 - John Danylyk, Chief, INR/EC/CER, Room 8662
1 - William Newcomb, INR/EC/CER, Room 8448
1 - Sherrod McCall, Director, INR/EAP, Room 8840
1 - Tom Fingar, Chief, INR/EAP/CH, Room 8840
1 - Chris Clarke, INR/EAP/CH, Room 8840
1 - Robert Duncan, Office of Economic Policy, Room 5321
1 - Dan Stein, Trade Development Program, State Annex SA-16, Room 301
Department of Treasury
1 - Douglas Mulholland, Deputy Assistant to the Secretary for National
Security, Room 4326, Main Treasury
1 - Robert A. Cornell, Deputy Assistant Secretary for Trade and Investment
Policy, Main Treasury
1 - James Griffin, Director, Office of East-West Economic Policy,
Room 4450, Main Treasury
1 - Jonathan Hill, Office of East-West Economic Policy, Room 4426, Main
Treasury
1 - Office of Intelligence Liaison, Room 4324, Main Treasury
Department of Commerce
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1 - Melvin W. Searls, Jr., Deputy Assistant Secretary for East Asia and
the Pacific, Room 3820
1 - Gilbert Kaplan, Deputy Assistant Secretary for Import Administration
1 - Christine Lucyk, Office of PRC and Hong Kong, Room 2317
1 - Jeffrey Lee, Office of PRC and Hong Kong, Room 2317
1 - Office of Intelligence Liaison, Room 6854
Office of the US Trade Representative
1 - Joseph Massey, Assistant Trade Representative for China and Japan,
Room 300, 600 17th Street N.W., Washington, D.C.
1 - William Abnett, Director for Chinese Affairs, Room 316
600 17th Street N.W., Washington, D.C.
National Security Agency
Chief B4121, Room 2S010-2, Ft. Meade
G732, Room 5A10-6, Ft. Meade
Department of Defense
1 - The Honorable Richard Armitage, Assistant Secretary for International
Security Affairs, Room 4E808, Pentagon
1 - John J. Sloan, Defense Intelligence Officer, East Asia and Pacific,
Room 2A520, Pentagon
1 - Deputy Chief, DE-2, 6th Floor, DIAC, Bolling AFB
1 - DE-2, 6th Floor, DIAC, Bolling AFB
1 - Chief, DB-2B, Room C2-835, DIAC, Bolling AFB
1 - DB-2B, Room C2-835, DIAC, Bolling AFB
2 - DB-5E2, Room B4-151, DIAC, Bolling AFB
Central Intelligence Agency
1 - DDI, Room 7E44
1 - F- -1 DCI/DDCI/Executive Staff, Room 7D60
1 - Senior Review Panel, Room 5G00
1 - PDB Staff, Room 7F30
1 - NIO/EA, Room 7E62
1 - NIO/ECON, Room 7E62
1 - C/PES, Room 7F24
1 - D/OEA, Room 4F18
2 - C/OEA/CH, Room 4G32
1 - C/OEA/CH/PA, Room 4G32
1 - C/OEA/CH/EA, Room 4G32
1 - C/OEA/CH/IS, Room 4G32
1 - C/OEA/CH/TT, Room 4G32
1 - OEA/Production Officer, Room 4G48
1 - C/OEA/NEA, Room 4G43
1 - C/OEA/SEA, Room 4F38
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1 - FBIS/NEAAD/China Branch, Room 306, Key
1 - FBIS/AG/China Branch, Room 212, Key
1 - LDA/AN/CHINA, Room 1H18
1 - SOVA/NIG/DPD, Room 4E65
1 - SOVA/NIG/DPD, Room 4E65
1 - SOVA/NIG/EPD, Room 5E66
1 - C/E om 5D10
1 - C/E Room 5038
1 - EA Room 5D54
1 - CPAS/ILS, Room 7G50
5 - CPAS/IMC/CB, Room 7G07
2 - Office of Congressional Affairs, Room 7802
5 - Author
1 - Chrono
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