SINO-EAST EUROPEAN ECONOMIC RELATIONS: MODERATE GROWTH EXPECTED

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000300380001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: April 13, 2012
• Sequence Number: 1
• Publication Date: August 12, 1987
• Content Type: MEMO

Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 CIA-RDP04T00907R000300380001-9
Central Intelligence Agency
X98 Fk'W_i
"Wnr:m~a
Washington, D. C. 20505
DIRECTORATE OF INTELLIGENCE
12 August 1987
Sino-East European Economic Relations:
Moderate Growth Expected
Summary
China's economic ties with Eastern Europe have grown rapidly in
recent years and will probably continue to strengthen over the near term.
The expansion in bilateral trade, which has more than doubled since 1983,
is based on both partners' desire to barter for goods rather than expend
foreign exchange, as well as on the attractiveness of the respective
markets--a huge potential for East European sales in China, and a market
in Eastern Europe for lower quality Chinese goods that cannot be sold in
the West. Bilateral scientific and technical ties have also mushroomed,
covering new areas of high technology with agreements extending over
longer periods. Boosted by both Chinese and East European desires for
closer political relations and by the complementary nature of their
economies, we expect S&T relations to continue strong over the next
decade and trade to increase at a more modest pace at least through
1990. The warming in relations will not have a direct impact on the
This memorandum was prepared by the Trade and Technology Branch, China Division,
Office of East Asian Analysis. Information available as of 1 August 1987 was used in its
preparation. Comments and queries are welcome and ma be directed to the Chief,
Trade and Technology Branch, China Division, OEA
ILLEGIB
25X1
2oA]
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
SECRET
controlled hardware.
United States unless China attempts to use it to press for more barter and
countertrade with US firms. Problems could also arise if China transfers
controlled Western technology to the Bloc, but we are reasonably
confident that China will transfer at most some of the know-how it has
gained through exposure to the West and will not knowingly retransfer
China has expanded trade with Eastern Europe in the 1980s despite a chronic
trade deficit with the region. Although it remains only 5 percent of China's total trade,
according to Chinese statistics, trade with Eastern Europe jumped from $1.6 billion in
1983 to $3.5 billion last year' (see figure). In 1985, Beijing signed five-year trade
agreements--generally calling for trade on a barter basis--with all East European
countries. China exports raw
materials, consumer goods, and light industrial goods in exchange for motor vehicles
and industrial equipment needed to modernize its factories.
China also has broadened the scope of cooperative S&T projects under existing
bilateral agreements with East European countries, signed new accords involving a wide
range of Chinese and East European organizations, and permitted ad hoc arrangements
between Chinese -and East European enterprises to expand (see appendix B). Under
annual bilateral protocols started during the 1950s--which resumed in 1974 after a
hiatus during the 1960s--Chinese and East European scientists are cooperating in more
than 300 projects Joint projects in the 25X1
last two years alone have roughly equalled the number underway during the entire
preceding decade. In addition, official press releases reveal that Chinese and East
European researchers are exchanging scientific literature, attending conferences, and
working on joint projects under a growing number of accords signed outside the formal
protocol mechanism. The Chinese Academy of Sciences last year, for example, signed
agreements with the Bulgarian, East German, and Hungarian Academies. 25X1
Many of these new agreements are long-term; agreements with East Germany
and Bulgaria, for example, extend through the year 2000, and China has signed five- or
10-year agreements with Poland, Romania, Czechoslovakia, Bulgaria, and Hungary.
Because many of the longer term agreements have been signed only recently, we do not
know how much--or even if--they will influence the scope and nature of scientific
cooperation. Nonetheless, we believe they are symbolically significant, and imply a
commitment on both sides to improved relations in the 1990s.
1 Except as otherwise noted, all statistics in this paper are based on Chinese Customs
data.
-2-
SECRET
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
SECRET
Sino-East European Trade Relations at a Glance
Poland now ranks second only to the Soviet Union among China's
socialist trading partners and is China's ninth largest foreign market. Total trade
has nearly doubled in each of the last two years, and reached $1 billion in 1986.
Poland supplies China with industrial machinery, cars, trucks, buses, power
industry equipment, machine tools, construction machinery, and a wide variety
of steel products and chemicals. China ships Poland supplies for agriculture
and food industries and under the newest bilateral trade agreement will supply
nonferrous metals, chemicals, car tires, raw cotton, textiles, basic food items
such as soybeans, corn, and rice, and a variety of consumer goods.
Trade with Romania, China's second largest East European trading
partner, did not meet Chinese expectations last year. Although the 1986 trade
protocol called for an increase of 40 percent over 1985, trade actually increased
only 5 percent. Romania supplies China with iron and steel, fertilizer,
machinery, and vehicles. China exports coal, textiles, and machinery. China's
trade deficit with Romania was the largest among East European countries last
year, reaching $290 million.
Czechoslovakian trade with China increased nearly 40 percent in 1985,
but slowed to a 15-percent increase in 1986. China shipped apparel, textiles,
and food products while importing vehicles, iron, steel, and machinery.
Chinese statistics indicate that trade with East Germany rose 73 percent
in 1985 and another 27 percent last year. China shipped clothing, textiles, and
grain, while buying vehicles, iron, steel, and machinery.
Trade with Hungary accounted for only 10 percent of China's trade with
Eastern Europe in 1986, but has been growing rapidly, doubling in 1985 and
increasing 75 percent last year. According to the US Embassy in Beijing, trade
still did not reach the level projected in the 1986 protocol. Trucks and other
motor vehicles represent a major share of China's imports from Hungary. F_
Yugoslavia is the only East European country with which China conducts
most trade on a cash basis. As Beijing's concern about its hard currency
position has grown, trade with Yugoslavia--which has consistently produced a
deficit for China--has become increasingly unattractive. Although the Yugoslav
press projected that bilateral trade would double in 1986, Chinese statistics
show it dropping by more than 20 percent.
Trade with Bulgaria accounted for only three percent of China's trade
with Eastern Europe last year. China exchanges its consumer goods and textile
machinery for Bulgarian food-processing equipment, metals, and chemicals. F_
-3-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
China's Trade With Eastern Europe, 1983-86
EXPORTS
IMPORTS
Legend
Bulgaria
Czechoslovakia
i GDR
M Hungary
= Poland
Romania
Yugoslavia
1983
1985
1986
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
Technical cooperation in industry has also grown markedly; Chinese ministries
have signed agreements with their East European counterparts in such areas as
electronics, telecommunications, coal mining, and geology. Independent
technology-sharing arrangements have developed between individual factories as well.
last year China's central trade corporations signed technology contracts with
Poland, East Germany, Bulgaria, Hungary, and Czechoslovakia worth $270
million--roughly 6 percent of total technology purchases, according to Chinese Ministry
of Foreign Economic Relations and Trade statistics.
The Evolving Political Relationship
In support of the expanding economic relationship, political ties have also
begun to warm, albeit under the watchful eye of the Soviet Union. In 1983
China took its first cautious step toward the reestablishment of Sino-East
European party relations when it addressed East European socialists as
"comrades" and sent two middle-ranking Foreign Ministry officials to Poland,
East Germany, Bulgaria, Czechoslovakia, and Hungary. The relationship
blossomed in 1985 with the restoration of political relations at the vice-premier
level and the revival of parliamentary and trade union links. In the past three
years, both the number of exchanges and the rank of officials travelling have
increased steadily
Since last fall China has been visited by Poland's Communist Party First
Secretary Jaruzelski, East German party General Secretary Honecker, Czech
Premier Strougal, Bulgarian party General Secretary Zhivkov, and by deputy
prime ministers from Hungary and Romania. Although China has maintained
official party relations with only East Germany and Romania, the distinction
between party and state has gradually blurred in relations with the other East
European countries. For instance, East European leaders have often been
referred to by their party titles while visiting high-ranking Chinese party
officials. The June 1987 visit of Premier and Acting Party General Secretary
Zhao Ziyang to Eastern Europe in effect cemented the party-to-party ties with
Czechoslovakia, Hungary, and Bulgaria.
What Beijing Wants
We believe that Beijing looks to Eastern Europe for trade and technology largely
because it considers barter trade a way to acquire basic technology and equipment
without outlays of scarce foreign exchange. Goods manufactured in Eastern Europe also
tend to be less expensive than Western items. Additionally, the Chinese can sell Eastern
Europe goods that because of inferior quality could not compete on the international
market, as well as items restrained by Western import barriers.
- 4 -
SECRET
9 X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
Beijing apparently also expects to learn from some of the more technologically
advanced East European countries. Recent bilateral agreements have included high-tech
topics--such as semiconductors, data processing, materials research, space technology,
genetic engineering, nuclear power, and telecommunications--as well as more
traditional areas such as heavy industry, energy, and transportation. Although China is
also seeking Western technology, we believe that Beijing seeks East European assistance
to compensate for technologies China cannot acquire because of export controls.
Beijing, for example, has sought Yugoslav assistance
in linking US minicomputers into a nationwide network; US and multilateral export
controls for China permit sales of the computer hardware but limit transfers of data
networking know-how.
Political considerations have also been a factor in China's encouragement of
closer economic links to Eastern Europe. According to Embassy reporting, Beijing wants
to increase its influence in the region--and reduce that of the Soviets--by becoming an
alternative market for East European equipment, and by providing an alternative model
Political factors have been an important motive for Bloc countries to boost their
economic ties to Beijing. The Soviet Union, for example, plays an active role in
encouraging East European countries to improve relations with China. Several of the
recent meetings between Chinese and East European officials have been either preceded
or followed by consultations between Soviet and East European officials. According to
Embassy reporting, Hungarian officials have said that the Soviets are encouraging closer
Sino-East European ties to help Moscow improve its relations with Beijing.
In addition, the East Europeans view China as a potentially huge market, and
shortages of hard currency make barter trade for Chinese raw materials and textiles
extremely attractive. Moreover, we believe that some East European countries have
encouraged S&T ties to China because they expect the technology flow to be in their
favor. Bulgaria and Czechoslovakia, for example, have been favorably impressed with
China's electronics capability. Most East European countries have much to learn from
China's experience with the sophisticated Western technology in many of its research
and production facilities; all but Yugoslavia are subject to more stringent Western export
Looking Ahead
There are limits on the expansion of Sino-East European relations. Eastern
Europe, for example, must satisfy its obligations to the Soviet Union before allocating
resources for trade with China. In addition, the Chinese are unable to use all of the East
European products. A large portion of East European sales, for example, are vehicles, on
which China has placed an import ban because of oversupply. On the political side,
Moscow would probably rein in Sino-East European relations if they become too rosy, or
-5-
SECRET
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9 _
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
SECRET
if they fail to lead to improved ties between Moscow and Beijing. The US Embassy in
Warsaw reported that, according to a knowledgeable Polish source, increased
Sino Polish cooperation is deeply troubling to the Soviets, who count the number of
articles about China in the Polish press.
On balance, we believe China's S&T relations with Eastern Europe will expand
more rapidly than bilateral trade. Clearly, the growing number and duration of bilateral
agreements as well as the inclusion of high-tech topics in joint research and industrial
cooperation projects indicate a commitment on both sides to closer S&T ties well into
the 1990s. Despite the advantages of barter trade and the generally complementary
nature of their economies, we believe bilateral trade will expand over the near term at a
much slower rate than in recent years. The volume of trade for this year may even
show a slight decline in value term because of the 25X1
decline in price of raw materials and primary products, the decrease in Chinese
purchases of autos and machinery, and the decrease in East European purchases of
textiles and light industrial goods. But, because of the agreements China has signed
with the region, annual trade should average slightly more than last year's volume
between now and 1990. 25X1
Regarding specific country accounts, we believe China's trade will continue to
expand with East Germany, Poland, and--from a much smaller base--with Yugoslavia:
? China and East Germany are actively cultivating the bilateral relationship, and L1 25X1
East Germany must be given special 25X1
attention because it is the most technically advanced of China's East European
trading partners. East Germany reportedly is seeking areas for
cooperation--especially in scientific research--that will demonstrate that
cooperation can be productive.
? According to the Polish press, the 1987 trade protocol with China calls for
maintaining the current high level of trade. The protocol also calls for wide
Polish participation in industrial modernization and development projects in China.
Polish Vice Premier Wladyslaw Gwiazda has publicly stressed the importance of
importing technologically advanced machines and equipment from China.
? Yugoslavia's responsiveness to Chinese concerns over the trade imbalance and
resultant drain on hard currency--it has increased imports and is encouraging
barter deals--will enable Sino-Yugoslavian economic contacts to expand in 1987,
in our judgment. More than half of the 64 projects scheduled for industrial
cooperation in 1987 involve some form of countertrade, according to press
accounts.
-6-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
SECRET
In contrast, we believe China's economic relations with Romania, Czechoslovakia,
and Hungary--already showing strains--will falter:
? According to the Chinese commercial counselor in Bucharest, the Romanians
want hard-currency payments for what the Chinese consider to be inferior goods,
while China has called for 100-percent barter trade.
? The current bilateral trade protocol calls for Czechoslovak trade this year to drop
to its 1983 level. According to a Chinese diplomat in Prague, the Chinese blame
the anticipated fall on the slow Czechoslovak foreign trade bureaucracy and the
need for Soviet approval for the sale of Czechoslovak products containing
Soviet-origin components.
? We believe that trade with Hungary this year will remain at the 1986 level, as
called for in the 1987 trade protocol. The trade mix will have to be altered
before trade can be greatly increased; China does not desire any more Hungarian
trucks and Hungary is not in need of additional Chinese consumer goods.
Implications for the United States
Despite the attractions of barter, we believe China generally will continue to
prefer high-quality US and Western equipment to that available in Eastern Europe.
However, when comparable equipment and technology are available from East European
suppliers--as in power-generation machinery, railcars, and heavy trucks--China probably
will find barter with Eastern Europe preferable to spending hard currency on US goods.
China may use its growing barter trade with the Bloc to press the United States for
more barter and countertrade to help alleviate its shortage of hard currency.
China's technology transfer to the Bloc is of potentially great significance but will
probably not become a problem. Beijing is aware of US concerns that the Soviet Union
might attempt to take advantage of China's greater access to Western technology,
and--despite warmer ties to Eastern Europe--we believe shares US convictions that
transfers of technology that would contribute to Soviet military strength must be
avoided at all costs.2 Beijing also recognizes that its access to Western technology
would be sharply curtailed if China were found to have violated end-use certificates
agreeing not to transfer COCOM-controlled items.
-7-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9
';F('RFT
As a result, we believe Beijing will rebuff overtures to transfer, COCOM-controlled
items to Eastern Europe. Beijing, in fact, manages all trade with Eastern Europe, and
also tightly controls reexports of Western technology to any third countries 2.5X1
. Nonetheless, we expect such overtures to continue as contacts 25X1
between Chinese and East European entities--particularly in high-tech areas--proliferate
and it becomes more difficult for Beijing to monitor its factories and corporations.
Activities not covered by COCOM controls are also likely to increase. Although
we know little about the specific activities to take place under Sino-East European S&T
agreements covering high-tech areas, we believe that exchanges of scientists and
technicians will at times involve transfers of the knowledge gained by Chinese engineers
and scientists trained in the West or involved in Sino-foreign cooperative ventures
We believe, moreover, that visits to China by East European 25X1
technical personnel will bring East Europeans into facilities that have sophisticated
Western equipment. 25X1
-8-
SECRET
2bA1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/22 : CIA-RDP04T00907R000300380001-9