FOREIGN AND DOMESTIC DEBT IN COMMUNIST CHINA

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• Original Classification: K
• Document Page Count: 15
• Document Creation Date: December 23, 2016
• Document Release Date: July 29, 2013
• Sequence Number: 1
• Publication Date: October 1, 1960
• Content Type: REPORT

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N? 3
Economic Intelligence Report
FOREIGN AND DOMESTIC DEBT
IN COMMUNIST CHINA
CIA/RR ER 60-27
October 1960
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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NOTICE
This report has been loaned to the recipient by
the Central intelligence Agency. When it has
served its purpose it should be destroyed Or
returned to the-:
CIA 'Librarian
Central Intelligence Agency
Washington 25, D. C.
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Economic Intelligence Report
FOREIGN AND DOMESTIC DEBT
IN COMMUNIST CHINA
CIA/RR ER 60-27
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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STAT
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CONTENTS
Foreign and Domestic Debt in Communist China
Appendixes
Page
1
Appendix A. Methodology for Estimating Chinese Debt
and Debt Repayments
3
1.
Accumulation of Chinese Debt, 1950-58
.
3
a. Loans from the USSR
3
b. Domestic Bonds
4
2.
Repayment of Chinese Debt, 1950-60 . ?
?
?
4
Appendix B. Source References
Tables
11
1. Distribution of Chinese Communist Domestic Bonds,
1950 and 1954-58 7
2. Scheduled Debt Service on Chinese Communist Domestic
Bonds, l95+-68 8
3. Estimated Allocation of the Chinese Communist Budget
Account for Expenditures on Loans, 1954-60 9
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FOREIGN AND DOMESTIC DEBT IN COMMUNIST CHINA
After the Communists gained control over all of mainland China
in 1949, they repudiated the debts of the former Nationalist govern-
ment and began a pay-as-you-go policy, which entailed only minor
deficits in domestic budgets and international accounts. During the
first decade of Communist rule the internal and external public debt
was remarkably low, amounting at its peak in 1958 to only 5 percent
of the gross national product. Borrowing from all sources from 1950
through 1959 totaled 9,056 million yuan,* and the total government
debt at the end of 1959 was 5,834 million yuan.** Receipts of credit
by the government of Communist China were at their highest level in
1955, amounting to 2,276 million yuan, or 8.5 percent of total budg-
etary receipts.
The debt of the Chinese Communist government has been incurred
by the receipt of loans from the USSR and by the sale of bonds to the
Chinese people. Soviet deliveries on credit reached a peak of
1,657 million yuan in 1955, representing one-fourth of total Chinese
imports in that year. Communist China used the last of the Soviet
credits in 1957, bringing the total of loans from the USSR to 5,294
million yuan. The Chinese issued their first series of national
bonds, the "Peoples Victory Bond," in 1950. During the 3 subsequent
years, no bonds were sold, but from 1954 through 1958 the Chinese
issued an annual series of "National Economic Construction Bonds."
National bond sales, which amounted to 3,762 million yuan during
1950-58, were discontinued at the end of 1958 and have not been re-
sumed.
Although the size of the national debt in Communist China has been
kept low, more than one-half of the debt is held by the USSR and re-
quires payments of interest and principal in scarce foreign exchange.
The repayment of this debt to the USSR has been more disadvantageous
to China than the repayment of domestic bonds, all of which are owned
* One yuan equals 1 ruble in Chinese transactions with the rest of
the Sino-Soviet Bloc (4 rubles equal US $1 at the official rate of
exchange). In exchanges with non-Bloc countries, 2.5 yuan equal
US $1. All monetary values in this report are current.
** This figure includes 234 million yuan of debt scheduled for re-
payment but not repaid. Domestic bondholders have failed to redeem
Some bonds in the years that they were due and have been given the
privilege of redeeming these bonds in subsequent years.
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by Chinese Communist residents and can be redeemed in Chinese cur-
rency through an appropriation from the state budget. It is estimated
that, from 1955 through 1958, China paid 2,071 million yuan in in-
terest and principal to the USSR, representing nearly 20 percent of
the total value of Chinese imports from the USSR in those years. In
1958 alone, the Chinese payment of interest and principal to the USSR,
634 million yuan, was equal in value to one-half of all the machinery
and equipment imported from the USSR. When China has completely re-
paid the Soviet loans, the ruble foreign exchange now used for loan
repayments will be available to permit either a substantial increase
in imports from the USSR or a decrease in exports.
Communist China has made annual appropriations from its state
budget to cover the interest and principal payments on both domestic
and foreign debt. China began repaying its debt to the USSR in 1954
and probably will make the last repayment in 1964. Interest on\loans
from the USSR has been at rates of 1 to 2 percent per year. China is
making interest and principal payments on its domestic debt according
to published schedules for redemption of the "National Economic Con-
struction Bonds." The last appropriation for redemption of bonds is
scheduled for 1968.
Appendix A to this report presents details of both receipts and
repayments of foreign and domestic credits and describes the method
used for estimating the level of debt repayments.
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APPENDIX A
METHODOLOGY FOR ESTIMATING CHINESE DEBT AND DEBT REPAYMENTS
1. Accumulation of Chinese Debt, 1950-58
a. Loans from the USSR
Communist China has reported the receipt of credits from the
USSR in the following amounts (million yuan) 1/*:
1950
1951
1952
244
625
1,305
1950-52
2,1711.**
1953
438
1954
884
1955
1,657
1956
117.4
1957
23.3
1953-57
3,120
Total
5,294
The Chinese Communists have specified the amount and purpose of
only two of the individual loans that they have received from the USSR:
an economic loan worth US $300 million to be drawn during the years 1950
through 1955, bearing interest at 1 percent per year and repayable in
10 equal installments beginning not later than 31 December 1954, and a
second economic loan of 520 million rubles. An unanticipated loan from
the USSR was referred to in the Chinese budget report for 1954, but the
purpose of this loan was not indicated. Communist China received a loan
from the USSR of unspecified amount in 1955 to purchase the Soviet
shares in four Sino-Soviet joint-stock companies. The Chinese budget
* For serially numbered source references, see Appendix B.
** The Chinese Communists reported the total amount of loans received
from the USSR as 2,174 million yuan for the years 1950-52; the alloca-
tion by individual years for this period is estimated from budget fig-
ures. The Chinese reported the amount of loans from the USSR in each
year for the period 1953-57.
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for 1955 referred to the receipt of military material from the USSR in
the form of a loan. 2/
b. Domestic Bonds
The Chinese Communists reported six national bond issues during
1950-58, providing total revenue of 3,762 million yuan. The "Peoples
Victory Bond" of 1950 represented the first nationwide sale of bonds by
the Chinese. During 1951-53, no domestic bonds were issued, but each
year from 1954 through 1957 the Chinese scheduled an issue of "National
Economic Construction Bonds" in the planned amount of 600 million yuan
annually. The planned amount of the "National Economic Construction
Bond" for 1958 was 625 million yuan. All these issues, except that of
1950, were oversubscribed. Table 1* indicates the distribution of bonds
among various sections of the Chinese population. 2/
The terms of the "National Economic Construction Bonds" issued
each year from 1954 through 1958 are nearly identical. These bonds all
carried a 10-year normal maturity, except the 1954 series, which is for
8 years. The bonds are in the denominations of 1, 2, 5, 10, 50, and
100 yuan and carry interest of 4 percent. Interest coupons attached to
the bonds are redeemable on the specified dates at all branches of the
Peoples Bank. Beginning in 1959, national bonds were discontinued, and
local governments were authorized for the first time to issue local gov-
ernment bonds.
2. Repayment of Chinese Debt, 1950-60
Communist China has made payments on foreign and domestic debt each
year through the state budget account, Expenditures on Loans. The total
amount of funds budgeted in this account and the actual payments from
the account have appeared each year for 1955-59 in the official reports
on the Chinese Communist budget and for earlier years in other Chinese
sources.LI/ A Chinese publication of 1957 2/ reported the following
five subaccounts under this general budget account:
1. Repayment of Principal on Public Bonds
2. Payment of Interest on Public Bonds
3. Repayment of Principal on Foreign Loans
4. Payment of Interest on Foreign Loans
5. Obligation Expenditures
Table 1 follows on p. 7.
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The first subaccount covers the redemption of domestic bonds, and
the second covers interest payments on domestic bonds. The third and
fourth subaccounts cover payments of principal and interest on Chinese
Communist debt to the USSR. The fifth subaccount probably refers to
fixed payments made to former owners of joint public-private enter-
prises. In their annual budget statements the Chinese have not reported
the amounts of funds allocated from the general account, Expenditures on
Loans, into the five subaccounts described above. The amounts appropri-
ate to subaccounts 1, 2, and 5, however, can be derived from other Chi-
nese sources, leaving a residual amount for subaccounts 3 and 4.
The scheduled redemption of domestic bonds and the interest payments
on bonds (corresponding to subaccounts 1 and 2) are given in the offi-
cial regulations covering each bond issue. These regulations were pub-
lished by the Chinese Communists at the time that each series of bonds
was announced. All the regulations provide for accelerated redemption
of bonds based on an annual lottery type of drawing. The 1957 series,
for example, is to be repaid by 10 annual drawings. Five percent of the
total bond issue will be repaid on each of the first, second, third, and
fourth annual drawings; 10 percent, on each of the fifth, sixth, and sev-
enth annual drawings; and 15 percent, on each of the eighth and ninth
drawings. The remaining 20 percent will be repaid on the tenth drawing.
Interest on the bonds outstanding at the rate of 4 percent per year is
paid annually, except for the series of bonds issued in 1958, on which
interest payments will be made only at the time of redemption. The
scheduled payments of interest and bond redemptions for each of the six
bond issues, calculated from the Chinese regulations for these bonds,
are shown in Table 2.* The Chinese have reported that some bonds sched-
uled for redemption in a given year have not been redeemed for various
reasons, such as failure of the owners of the bonds to understand that
their bonds have been drawn for redemption or inaccessibility of redemp-
tion offices. Bondholders who fail to redeem their bonds when they are
due are permitted to redeem them during subsequent redemption periods. Y
It is believed that subaccount 5, Obligation Expenditures, is used
to finance the payments that are made to former owners of private busi-
ness and industrial firms in Communist China. The privately owned firms
became joint public-private enterprises under the Communist regime dur-
ing 1953-56 and will be completely owned by the state after 1962. A re-
cent Chinese Communist publication // states that payments are made from
the state treasury in the amount of 120 million yuan annually to the
former owners of private business and industrial enterprises, covering
fixed payments of 5 percent per year on the private assets of these
enterprises, amounting to "about 2,418 million yuan." The first of
these annual payments was made in 1956, and the last payment will be
made in 1962.
Table 2 follows on p. 8.
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Payments of principal and interest on Chinese Communist debt to the
USSR (subaccounts 3 and 4) are represented in this estimate by the re-
sidual in the general account, Expenditures on Loans, after deducting
for each year the amounts in subaccounts 1, 2, and 5. China probably
did not repay any of the principal of the Soviet loans until 1954. At
that time the first installment was paid on the 1950 economic loan,
which was the first loan that the USSR granted to Communist China. Dur-
ing the years 1950-53 it is probable that the only payments made by China
to the USSR were interest payments on the outstanding loan balances. The
very small amounts allocated by the Chinese during 1950-53 to the budget
account, Expenditures on Loans, were sufficient to cover only the inter-
est payments to the USSR and scheduled repayments on domestic bonds, in-
dicating that China did not begin repaying the principal of the Soviet
loans until 1954.
The calculated Chinese Communist payments of interest and principal
.to the USSR for the years 1954-60 are shown in Table 3.* The estimated
repayments of principal, as shown in this table, represent maximum
amounts. These repayments would be smaller if, as is possible, the Chi-
nese include the value of overdue bonds (which people failed to redeem
when they were due) in subaccount 1 and other items (probably small) in
subaccount 5.
* Table 3 follows on p. 9.
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Table 1
Distribution of Chinese Communist Domestic Bonds
1950 and 1954-58
Million Current Yuan
1950
1954
1955
1956
1957
1958
Actual
Sales
Planned Actual
Sales Sales
Planned
Sales
Actual
Sales
Planned
Sales
Actual
Sales
Planned
Sales
Actual
Sales
Planned
Sales
Actual
Sales
Private industry
and commerce 2/
184
320
394
270
244
14o
139
75
81
Peasants 12/
18
180
140
180
135
190
138
200
217
State
employees 2/
30
100
246
150
195
230
244
280
260
All others d/
28
56
45
40
86
45
92
Total
260
600
836
600
619
600
607
600
650
625
790
a. After 1955, when nearly all industry and commerce had become socialized, this category represented former
private businessmen receiving "fixed dividends" on the assets that they had contributed to joint state-
private enterprises plus some 3 million small traders and peddlers throughout the country.
b. This category represents the rural areas.
c. The category state employees includes industrial and commercial workers employed by state enterprises
and working personnel of government administrative organs and cultural and educational agencies.
d. The category all others includes the armed forces and the urban population not otherwise accounted for.
In the 1954 and 1955 planned sales figures, this category is included in the category state employees.
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Table 2
Scheduled Debt Service on Chinese Communist Domestic Bonds
1954-68
Million Current Yuan
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
Principal
repayment
57.0
136.0
73.3
145.9
178.3
260.1
291.1
363.7
396.2
298.0
328.4
391.9
337.4
248.5
158.0
Interest
6.0
38.0
57.0
78.3
98.5
92.9
85.7
77.1
65.8
61.0
55.4
48.6
51.9
47.9
63.2
Total
63.0
174.0
130.3
224.2
276.8
353.0
376.8
440.8
462.0
359.0
383.8
440.5
389.3
296.4
221.2
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Table 3
Estimated Allocation of the Chinese Communist Budget Account for Expenditures on Loans
1954-60
Million Current Yuan
1954
1955
1956
1957
1958
1959
1960
Planned Expenditures on Loans
210
626
750
829
1,031
1,100
1,200
Less:
Repayment of Principal on Public Bonds
(subaccount 1)
57
136
73
146
178
260
291
Payment of Interest on Public Bonds
(subaccount 2)
6
38
57
78
99
93
86
Obligation Expenditures (subaccount 5)
120
120
120
120
120
Total deductions
63
174
250
344
397
473
497
Available for Payment on Foreign Loans
147
452
500
485
634
627
703
Of which:
Payments on Principal (subaccount 3)
102
392
432
423
579
581
666
Payments of Interest (subaccount 4) 2/
45
60
68
62
55
46
37
Net cumulative debt to the USSR (as of 31 December)
3,394
4,659
4,344
3,945
3,366
2,785
2,119
a. The Chinese Communists reported that the interest rate on the 1950 loan from the USSR was 1 per-
cent per year. Other Chinese statements have referred to interest rates of 1 to 2 percent per year
on loans from the USSR. In this estimate the interest rate is assumed to average 1.5 percent for
the balance of loans outstanding. Interest payments are calculated on the assumption that one-half
of annual loan receipts and one-half of annual loan repayments are subject to the interest rate of
1.5 percent.
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APPENDIX B
SOURCE REFERENCES
1. State, Hong Kong. Current Background, no 464, 5 Jul 57.
2. Ibid., no 336, 14 Jul 55.
3. State, Hong Kong. Survey of China Mainland Press, no 975,
25 Jan 55.
Ibid., no 1452, 17 Jan 57.
Ibid., no 1463, 5 Feb 57.
State, Hong Kong. Current Background, no 562, 27 Apr 59.
Ibid., no 464, 5 Jul 57.
Ibid., no 493, 17 Feb 58.
Hollister, W.W. China's Gross National Product and Social
Accounts, 1950-57, The Free Press, Glencoe, Illinois, 1958.
4. State, Hong Kong. Current Background, no 336, 14 Jul 55.
Ibid., no 392, 26 Jun 56.
Ibid., no 464, 5 Jul 57.
Ibid., no 493, 17 Feb 58.
Ibid., no 562, 27 Apr 59.
Ko Chih-ta. China's Budget During the Transition Period,
Peking, 1957.
5. Chung-yang ts'ai-cheng fa-k'uei hui-pien (Compendium of
Financial Decrees and Regulations, 1956), Peking, 1957.
6. State, Hong Kong. Survey of China Mainland Press, no 1114,
19 Aug 55.
Ibid., no 1445, 8 Jan 57.
Gt Brit, BBC. Summary of World Broadcasts, no 358, London,
5 Mar 59.
7. Kuan Ta-tung. The Socialist Transformation of Capitalist
Industry and Commerce in China, Foreign Languages Press,
Peking, 1960.
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