(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001001060001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: January 12, 2017
• Document Release Date: August 31, 2010
• Sequence Number: 1
• Publication Date: November 20, 1984
• Content Type: MEMO

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CONFIDENTIAL
1a6
Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
20 November 1984
Contribution to Interagency Study on US-China Economic Relations
Summary
Since the Third Plenum of the 11th Central
Committee in December 1978, China has been engaged
in a process of economic readjustment and reform
that continues today. Beijing has turned away from
a philosophy of isolated self-reliancle to one of
expanding international involvement. In the closing
months of 1984, Beijing continues to 'promulgate new
policies that will, if effectively implemented, give
China a more open economy, with greater flexibility/
..----'--._ ' J
and responsiven
s
e
s to
The October Plenum
On 20 October 1984, the Third Plenum of the 12th Central
Committee gave China's economic reform program a sweeping
endorsement. According to the Plenum's "Decision on Reform of
the Economic Structure" and reports from other authoritative
sources, China plans to allow production and pricing of many
commodities according to supply and demands with a limited number
a
ressed to Chief, Development Issues Branch,
This memorandum was prepared by
Office of East Asian Analysis, with a contribution by Frederick
Surls, Department of Agriculture, in response to a request from
the Treasury Department. Questions and comments are welcome and
ma be
dd
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of goods under loose "guidance" plans and a'~~few key products
strictly controlled.) Beijing also will release control of
distribution of those goods not controlled by the state, so that
producers will be responsible for arranging both marketing and
transport of their goods. This also allows private transport of
agricultural goods, which may help alleviate regional shortages
and surpluses that have characterized China'!'s food distribution
system. Beijing also intends to make widerliuse of such economic
levers as taxes and interest rates to forcehente?rprises toward
greater efficiency and profitability, although windfall profits
will be discouraged by an "adjustment" tax., The mechanisms by
which price and other.financial reforms will be introduced have
not yet been explained.
Beijing is clearly sensitive to charges in the foreign press
that China is "going capitalist." The announcements of these
reforms have been carefully crafted to embed structural changes
within the context of socialism. The Central Committee Decision,
for example, stressed that China's productive forces are still
owned by the people and are therefore socialist, the only
difference from the past being that it is now "commodity
socialism." This is permissible, says the Decision, because the
state cannot collect, absorb, and act on the necessary
information fast enough to run the economy efficiently. It is
also notable that most of these reforms have been evolving for
several years--experiments in selected areas and in agriculture
began in the late 1970s. Perhaps the greatest significance of
the October party conclave is its endorseme,nt--long sought by the
reformist leadership--of a comprehensive package of economic
reforms. Endorsement does not equate to policy implementation,
however, and the-task of making the party's+proposals work
promises to be a difficult one.
Agriculture--The Centerpiece of China's Economic Reforms
Reform of China's agricultural production and marketing
systems began in 1978 and initially focused on increasing
production. The reforms were not a wholesale abandonment of
central government control over China's rural areas. Rather,
they were a combination of (1) better central planning,. (2) a
cutback in the extent of government intervention in and control
of routine decisionmaking, and (3) improved producer
incentives. The main elements of the program involved:
Prices--Government procurement prices for farm products were
increased substantially with a round of major price increases in
1 Among goods that will continue to be Stat'e-controlled are coal,
crude oil, electricity, steel, nonferrous metals, timber, cement,
selected machinery, grain, cotton, pigs, oiIlseeds. synthetic
fibers, newsprint, cigarettes, and tobacco.
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1979 followed by smaller increases for selected crops in later
years. Because of these changes, the average price paid by the
government for farm produce has escalated steadily, rising by
nearly 48 percent between 1978 and 1983.
Contracting with households--The largest share of production
activity was turned over by production teams to individual
households. Prior to 1978 income was only',weakly tied to
individual effort because of the egalitarian distribution
practices of production teams. Under the household contract
system now in place, farmers can see 'a direct link between their
efforts and the income they earn. This has led to greater work
effort as well as to better farm management.
Reopening free markets--Initial steps'to reform the
marketing system opened up new distribution channels for
additional production by farm families. Between 1978 and 1983
the government expanded free market trade. These efforts were
limited--free market sales were only a small share of total
retail sales in 1983--but they nonethelessimade an important
contribution to increasing incentives and broadening the scope of
farm production.
.Specialization--Restoration and expansion of regional
specialization were also an important element of policies
introduced between 1978 and 1983. Steps to promote
specialization included encouraging the formation of specialized
households to concentrate on the production of a single crop or
product. These specialized households now"account for at least
10 percent. of all rural households. While'some of the increase
in specialization is the result of greater','freedom of choice for
farmers, an important part is because of better government
planning. The government has readjusted production and
procurement targets between regions and guaranteed food supplies
for regions and households that are specializing in production of
non-food items.
Production Up Sharply
China's recent-agricultural performance has given the
government the peg needed to justify its swing away from orthodox
Marxist economic practices. Between 1978 and 1983, the value of
farm output rose by 46 percent and per capita rural incomes
jumped by 121 percent after stagnating for,more than two
decades. The total value of agricultural output jumped 9 percent
in 1983, more than double the 4-percent goal set in the annual
plan. Grain production--the key indicator''--hit a record 387
million tons, and"will likely exceed 400 million tons this
year. China credits its experiment with market-oriented
practices for the recent agricultural gains, although better-
than-average weather conditions and price adjustments also played
important roles.
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Beijing is also touting the reforms for their impact on
rural employment. In pursuit of profits, an increasing number of
peasants have put down their plows to engage in either commercial
activities in the service sectors--opening' restaurants, repairing
shoes and clothing, cutting hair, etc.--or 'Iproduction of
handicraft items. Given the traditional labor surplus in
agricultural production, the government hasp welcomed the shift.
Beijing hopes by the end of the century to,'have about 40 percent
of its rural labor force employed in nonagricultural
production.
Industrial Performance--A Different Story
Output Up, Efficiency Down, Problems Mounting
China's industrial performance, when measured in terms of
total output, also appeared more than satisfactory. The total
value of industrial output rose a sharp 10 percent last year,
well ahead of-the planned 4-percent growth rate. But the overall
output figures belie the fact that, to date, industrial reform
has failed to meet its primary goal of increasing efficiency.
Neither the productivity of labor nor the efficiency with which
capital is used have been raised significantly.
Indeed, both the pace and the direction of industrial growth
in recent years have been dictated more by the readjustment
policies of 1979 than by industrial reform. Like the bulk of
economic programs instituted prior to 1980,', readjustment
attempted to change the composition of national income without
altering the underlying system of direct central government
control. Whereas high rates of investment--especially in heavy
industry--were favored during most of the previous decade, under
readjustment Beijing attempted to scale back the rate of
investment in favor of consumption. The composition of
investment was also-altered to benefit light industry.
The sharp improvement in urban consumer welfare that is now
apparent in China. is also largely attributable to readjustment,
not reform. Although the bonus system that was introduced under
the reforms put more cash in the hands of consumers, it was the
readjustment's emphasis on light industry that began actually
making consumer goods available.
The energy sector provided Chinese policymakers with what
was perhaps the most pleasant surprise of 1983. Primary energy
output rose 6.7 percent, the fastest pace in five years. When
energy saving measures are included, the gain exceeds 9
percent. A new incentive system which allowed producers to
market above-quota production at higher prices had a major impact
on the production of coal--China's largest energy source--and
probably boosted oil output as well. A newly instituted tax on
energy consumption probably contributed to energy savings.
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Performance in the transportation sector has been
satisfactory, given the meager investmentithat Beijing has
devoted to it over the past few years. The 7.6-percent increase
in goods transported last year came mainly from improved
management of existing facilities.
The Other Side of Reform--Mounting Problem's
Progress in furthering reform has been slo.w--in part due to
a host of problems that emerged or were exacerbated by the new
policies. In many cases, the problems wer'~e reflections of
ideological confrontations between advocates of the rigid
Maoist policies prjacticed in China during', 1965-76, and those
favoring the more market-oriented approach introduced by Deng
Xiaoping and his colleagues since 1978.
But economic reforms also were threatened by a series of
real financial problems that accompanied djecentralization of
economic decisionmaking. The fiscally conservative government
has had to reconcile itself to 5 consecutiye budget deficits
totalling about 55 billion yuan. Treasury bonds have been used
to help finance the deficit without totally resorting to the
inflationary printing of money; however, Beijing is growing
increasingly concerned about its ability to balance revenues and
expenditures.
On the revenue side, budget shortfalls stemmed in part from
the decision to hold the line on production of heavy industrial
goods--the major revenue generator. When ',heavy industrial output
levelled-off in 1980 and then declined in '1981, revenues
suffered. Beijing's efforts to spark productivity by allowing
enterprises to retain a significant portion of their profits also
Even successful agricultural reforms compounded financial
problems on the expenditure side. Procurement prices for
agricultural products were increased sharply beginning in 1979 to
boost rural incomes, while consumer prices for those products
went relatively unchanged. The result of l,these and other pricing
problems was a huge gap requiring more than $70 billion in price
subsidies between 1979 and 1983. Price subsidies alone took
nearly one-fourth of total state revenue in 1983.
The devolution of decisionmaking authority to lower levels
also threatened to untrack China's high-priority infrastructure
investment program. Enter-prise managers, using their new
authority to make capital investment decisions, ignored
government pleas to hold the line on industrial investment;
between 1979 and 1982, extrabudgetary investment in capital
construction more than doubled. The increase not only drained
funds needed to carry out the infrastructure investment program,
it also left China short of cement, glass,, and other construction
supplies needed to upgrade existing facilities and
infrastruture. Furthermore, when operational, many of the
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projects absorbed raw materials needed by larger, more efficient
state-run enterprises.
Pushing Ahead With Reform--The 1984 Policy;, Shift
Unwilling to accept continued stagnation, the leadership
decided to press ahead with its new policies. In January,
Beijing issued Central Document No. 1, a comprehensive summary of
all the rural reform measures, for study by provincial and local
leadership. In April, the State Council issued new regulations
lifting--at least for selected enterprises--a cap imposed only a
year earlier on bonuses. New regulations also permitted
factories and commercial enterprises to experiment with new wage
programs. In May, the, "Provisional Regulations on Greater
Freedom for State-Owned Industrial Enterprises" were published,
permitting enterprises to:
-- Produce whatever goods are in short supply after
fulfilling state plans for their normal output.
-- Set retail prices for industrial machinery and other
means of production within a range of 20 percent
around the state price.
-- Decide what share of their income will go to
production, expansion, reserv.es, and bonuses.
-- Lease or rent equipment as long as proceeds go to
upgrade existing facilities.
-- Recruit technical specialists directly and develop
pay standards.
Although many of these measures were little more than
restatements of policies Beijing had experimented with during the
previous three years, they signaled a renewed commitment to
industrial reform.
Zhao's government work report at the May session of the
National People's Congress gave official confirmation to the
policy shift. In addition to reviewing and praising various
foreign and domestic policies, Zhao spoke forcefully and at great
length on the "urgent" need for urban reform. Specifically, Zhao
called for: j;
-- Implementation of the second stage of China's tax
reform program to give enterprises even greater
financial autonomy.
-- Experimental restructuring of the managerial system
in the construction industry, replacing financial
appropriations with bank loans, using public bidding
procedures to issue contracts,~!and revamping the
material distribution system to alleviate shortages.
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-- Better utilization of educated technicians in
planning and management of the industrialization
process.
-- Reform of the commodity circulation system to
facilitate the flow of goods between town and
country, and the exchange of goods between different
regions.
By late June, the China Daily was printing articles
advocating such market-oriented practices as forcing state banks
to. compete against each other for deposits Iand loan business and
allowing domestic enterprises to issue stocks, bonds, and other
securities. A Shanghai official at about the same time argued
that China should expand its financial markets to allow secondary
trading of enterprise-issued notes.
Perhaps most notable was the emergence of a host of articles
advocating an early resolution of the price question. Prior to
this time--despite the view widely held byl~Western and Chinese
economists alike that the entire experiment with market tools
could not succeed within the framework of China's irrational
prices--only the most vocal advocates of economic reform had
suggested moving quickly to tackle the potentially explosive
issue of price reform. Ultimately, price reform became one of
the key features of the October Plenum decision discussed
above.
Trade and Investment Ties
In the international arena, too, China's policies have
evolved from isolation to involvement. China's door, still
locked tight as recently as nine years ago, has swung wide open
in recent years, as thousands of Chinese students have continued
their studies abroad and foreign investors and technicians have
been welcomed to China. 'Beijing now has formal links with such
international economic institutions as the World Bank, IMF, and
the Multi Fiber Arrangement and is moving toward membership in
the Asian Development Bank and GATT.
Foreign Investment
Beijing's past progress in attracting foreign investment has
been slow, in part, because of an uncertain commitment among
Chinese leaders and planners on the extent' of incentives that
should be offered to foreign companies. Other obstacles to
success included China's inexperience; its'need to develop
credibility in relationships with foreign businessmen; its lack
of adequate infrastructure; problems with labor productivity and
wages; and the lack of detailed re ulations on taxes and
remittances of profits.
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Now China is becoming more active i,n the world economic
scene, expanding its trade and investment linkages and
participating more in international economic organizations. Its
higher profile has attracted the interest of foreign firms and
forced, albeit very slowly, Chinese accommodations to standard
international business practices. We believe a prime area of
potential trade growth over the next decade will be that evolving
from direct ties between foreign and Chinese firms, such as joint
ventures, co-production, and cooperative project development.
The.se arrangements generate both imports--technology, materials,
and equipment--and exports. Much of recent' sustained export
expansion can indeed be traced to ties with foreign firms,
particularly compensation trade links established in the late
1970s. For example, Chinese pharmaceutical exports have grown
from $4.7 million in 1979, when several pharmaceutical ventures
were established, to $25 million in 1983, an average annual
increase of more than 50 percent.
Over the past five years the Chinese have undertaken several
steps to increase foreign participation in their economy through
trade and investment:
-- Opened 19 coastal sites (14 just this year) to
foreign investment, offering more liberal business
terms than offs red elsewhere in China.
-- Passed laws governing taxation,' liability, patent
protection, trademarks and investment procedures for
foreign firms.
-- Expanded the array of products of joint Chinese-
foreign firms that may be marketed within China.
-- Held many investment conferences to publicize
hundreds of projects for which the Chinese want
Western technology, equipment, capital, management,
and marketing.
-- Negotiated tax, investment, and, other cooperation
accords with several countries to clarify such issues
as expropriation policy, arbitration procedures,
repatriation of profits, and labor compensation.
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By the end of 1983 there were 1882"equity" and 1,047
"contractual" joint ventures in China. In addition there were
18 cooperative projects for exploration for' and exploitation of
offshore oil. We estimate.that at yearend 1983, total paid-in
foreign investment on these three forms of ?direct investment
amounted to approximately $1.5 billion. Of that total about $380
million is located in the four Special Economic Zones, with the
bulk in Shenzhen, on the Hong Kong border.; If licensing
agreements, processing and compensation trade, and wholly-owned
foreign subsidiaries are included in the totals, in accord with
Chinese practice (as -shown in the tabulation below), total paid-
in foreign investment amounted to $2.3 billion through the end of
2 From a Western viewpoint, both forms of joint ventures, as well
as joint oil exploration agreements and who!',lly-owned foreign
subsidiaries, are considered direct foreign' investment. In our
balance of payments estimates, other forms of business
arrangements, such as licensing, processing'',, and compensation
trade agreements, are not treated as foreign investment since no
foreign claims on real assets located in China exists. The
Chinese, however, use the term "foreign investment" loosely to
refer to all forms of foreign participation, even including loans
to Chinese enterprises. The Chinese.appear'to use the term
"cooperative production agreement" synonymously with contractual
joint venture. From a Chinese legal viewpoint there are three
chief distinctions between contractual and ;equity joint
ventures. Equity joint ventures:
(1) fall under the Joint Venture Tax I;law (a flat 33 percent
tax), whereas contractual ventures are taxed on a graduated basis
under the Foreign Enterprise Income Tax; "
(2) share profits in proportion to equity participation,
whereas contractual joint ventures share profits according to a
ratio agreed to in the contract;
(3) form new legal entities with their own boards of
directors, whereas contractual joint ventures are managed
directly by their parent corporations.
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Chinese Data on Direct Foreign Investment
(Million US$; yearend)
Pledged Paid-in
Type 1981 1982 1983 1982 1983
Total 2,846 4,958 6,600 1,769 2,345
Equity Joint Ventures 88 141 340 103 166
Contractual Joint Ventures 1,800 2,726 2,900 503 730
Joint Oil Exploration 398 999 2,000 486 651
Compensation Trade 460 725 'I 930 413 542
Other Businesses (a) ... 367 420 237 254
(a) Including wholly owned foreign enterprises and licensing agreements.
US Investment in China
US firms have established nearly two dozen joint ventures,
one wholly owned subsidiary, and countless lcooperative
arrangements (licenses, compensation trade,!I assembly or
processing accords, buy-back deals) in China since 1979.
According to the Ministry of Foreign Economic Relations and
Trade, US investment in equity joint ventures was $85-to-90
million at the end of 1983. In addition, US firms are involved
extensively in China's search for offshore oil, with contracts
costing US companies about $300 million. Together with
cooperative arrangements, we estimate that US investment in China
now totals as much as $500 million dollars. By contrast,
Occidental's 1984 contract to develop coal mines at Ping-sue
will cost the participating US firms about $350 million.
Foreign Debt and Finance
As of June 1984, China had accumulated $16.5 billion in
foreign exchange reserves. In addition, the Chinese have used
very little of the $27 billion in commercial and government-
supported credit lines they arranged in 1979 (see table 2).
Fiscal conservatism and cutbacks in capital expenditures, rather
than the previous ideological aversion to foreign debt, have left
little need for these loans. Further, Beijing's economic
development plans are based on the assumption that foreign--and
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especially US--firms perceive China as an untapped market with
great growth potential; by enticing firms to assist Chinese
enterprises in exchange for products. China hopes to modernize
its industries at a minimum cost.
China's current outstanding debt of $5.7 billion is a
mixture of commercial and official loans, with a wide range of
maturities. For the past three years commercial borrowing has
been cut back sharply and it now accounts for less than one-
fourth of total debt. China is seeking only concessionary loans
and will avoid incurring commercial debt for all but short-term
trade financing.
During 1983, Beijing and Tokyo concluded an agreement
extending $2 billion in Overseas Economic Cooperation Fund loans
to cover seven major development projects in China. The loans
can be drawn over the next five years, carry a 3.5 percent
interest rate, and allow repayments over 20 years, following a
10-year grace period. Earlier this year Tokyo also agreed to
extend another $2.6 billion in Export-Import Bank resource
development loans to cover oil and coal development projects.
The new loans will carry interest rates of 7.1 to 7.3 percent.
This compares with the 6.25-percent rate on' a $2 billion line-of-
credit that Japan Ex-Im provided in 1979.
The Chinese also obtained $1.9 billion in commitments from
the World Bank to cover 18 projects, energy, communications, .
agriculture, education, and medicine. Of the total, the IBRD has
contributed $1.2 billion and the IDA has contributed more than
$700 million. Only a small fraction of the loans have been
drawn. While these loans might appear, at;first glance, to
"crowd out" commercial lending, this probab'lly is not the case,
since most of them are for infrastructuralprojects that do not
provide high or immediate returns and thus ,would not be
attractive to commercial lenders.
We expect China to continue financing '', its development very
conservatively. Beijing expects to begin uising its reserves more
heavily and will continue to rely on compensation trade
mechanisms as much as possible to cheaply acquire advanced
foreign technologies and equipment. When foreign financing is
required, we expect Beijing to seek concessionary loans on.the
basis that China is a poor country and therefore deserves
preferential treatment.
Trade Trends
In the five years from 1979 to 1983, total Chinese two-way
trade grew at an average annual rate of nearly 11 percent, while
US-China trade averaged a robust 17.5 percent per year. Total
Chinese exports have led trade expansion with an average annual
growth of 15 percent. Expansion of sales to the US doubled that
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pace, however, primarily because of nearly 40 percent average
annual growth in exports of textiles and apparel. The United
States accounts for about 10 percent of China's total trade.
The transition phase that the Chinese, trade structure is
undergoing makes estimates of China's trade for the rest of this
decade difficult. The key factor that will affect trade is
China's progress implementing the reforms'' recently introduced or
currently under consideration. The decenfraliration of foreign
trade, opening of domestic markets to joint venture products, and
other changes could have significant positive impact on total
trade if the reforms-work as well as those implemented in
agriculture over the past few years. Chin,,a's leadership has
proposed 7-to 8-percent annual growth for the domestic economy
during the Seventh Five-Year Plan (1986-90) and plans to
quadruple total trade by the end of the century imply about 8
percent average annual growth in trade. If average annual
increases in actual merchandise trade fall within this 7-to-8
percent range, then the total would be aboiut $70-75 billion by
1990. At least half of that amount would be exports, primarily
because:
China strongly wishes to avoid trade deficits;
Strong export growth of recent"years will moderate as
international trade protectionism limits primary
markets for China's largest export products.
Beijing could reduce imports if necessary to maintain
balanced trade.
We believe these totals are conservative estimates of trade
growth, however, and that the actual levels of trade would rise
further if reforms are successfully implemented.
Nonetheless, based on these projections and assuming the
United States continues to account for 10 to 12 percent of
China's total trade, then US-China trade by 1990 would reach $7-9
billion. Because China is trying to reduce its dependence on
OECD markets and because we expect export growth to moderate, we
estimate that China's exports to the United States will remain at
a level that averages 10 percent of total exports (about the same
share as 1982-83); that would amount to $4-4.5 billion by 1990.
Similarly, with China seeking alternative suppliers, we expect
the US share of total imports to fall far below the 20 percent
level of 1981 and perhaps to approximate the 12 percent level of
1983, which would mean $3.3-3.6 billion in Chinese imports from
Outlook for China's Imports
China's interests in industrial advancement and export
development will stimulate new import patterns. During the next
few years we expect capital goods and software--designs,
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blueprints, training--to constitute a greater share of Chinese
imports, while the share taken by agricultural products ebbs.
Software fees are not itemized in trade statistics, but we
estimate that expenditures for software exceeded $2 billion last
year.
China has more than 300,000 industrial enterprises that need
at least some capital improvements and massive infrastructural
development. More than $16 billion in foreign exchange reserves
and, additional billions in untapped foreign loans have long
suggested an imminent groundswell in capital imports. However,
Beijing is wary of another massive surge in plant and equipment
purchases like the 1.978 binge that led to contract cancellations
and embarrassment. Thus emphasis for the rest of this decade
will be on projects to upgrade existing factories, especially
with foreign investment and advice or under the auspices of
Western assistance programs. China significantly stepped up
imports of industri-al supplies and capital goods in 1983 and we
expect imports to further accelerate this year, perhaps by 25 to
30 percent, then to moderate in the last half of the decade.
Import gains can be expected in such industrial materials as
lumber, nonferrous metals, fertilizers., and plastics. Among
capital goods, products for the transportation and energy sectors
will lead import growth, particularly aircraft, trucks,
locomotives, power plant equipment, oil drilling gear and mining
equipment. China will also continue to seek out used plants and
equipment such as the Kai ant being relocated to
Beijing from California.
Other categories with significant potential for US exports
to China are high technology and weaponry. China prefers to
acquire manufacturing capabilities in these sectors and is
subject to export controls on certain technologies. Prospects of
prolonged negotiations and approval processes dictate against
substantial increments in the value of US-China merchandise trade
from these sectors during the rest of the 1980s.
Favorable weather patterns have led to four consecutive
years of bumper harvests, reducing the overall need for imports
of agricultural commodities." Furthermore, the Chinese are
reducing acreage sown to foodgrains in order to increase the
output of such commercial crops as cotton, soybeans, and
oilseeds. These adjustments are having a major impact on China's
agricultural trade. Last year, for example, China cut back
substantially on cotton imports and actually began exporting raw
cotton for the first,time.
Prospects for China's Exports
China's early forays into export expansion have focused on
improving, packaging, and marketing traditional light industrial
products. Early 1984 trade statistics suggest a growing export
capability in such product groups as toys, collectibles (coins,
antiques), housewares (wicker, china, plasticware), processed
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I.ui r IuCIV 11ML
foods, and chemicals. The Chinese, especially through joint
foreign-Chinese firms, are actively searching for additional
marketing opportunities.
Certain agricultural products may offer export
opportunities. If Chinese exporters can meet international
quality and other standards, then within the next few years China
could emerge as an important exporter of raw cotton, and could
increasingly compete with US suppliers of cotton., soybeans, and
corn to Japan and other major Far Eastern markets. However, we
believe that, together with fluctuations in future weather-
related growing conditions, the needs of China's growing
population will work, against large-volume exports of unprocessed
China's long term economic plans apparently include
substantial growth in machinery and equipment exports as well.
Beijing already exports such machinery as basic machine tools and
small hydropower generators. Various ministries, corporations,
factories, and provinces have developed atl;least tentative plans
to upgrade their manufacturing facilities and to improve output
quality in order to become competitive within the next five to 15
years in such diverse products as machine tools, chemicals, and
process controls. China is pushing electronics development in
particular, driving to double by 1990 the output of
semiconductors, communications equipment, computers, and consumer
electronics for. both domestic use ;and export.
We believe the Chinese will not be able to absorb
technologies fast enough for finished manufactures to become a
significant share of exports within the next decade. China's
ability to absorb technologies has been circumscribed by such
factors as a shortage of skilled personnel,' lack of incentives
for plant officials and, planners, and poor !planning and
prioritization. We believe that Chinese industries will progress
technologically, but their average technical level will continue
to lag that of the developed world.
It is likely, however, that China will substantially expand
component assembly operations under the auspices of Western
firms. Machine tool sales probably will increase, particularly
those tools that are of relatively uncomplicated designs and
require predominantly hand machining and assembly. Exports of
such small manufactures as hand tools, spade parts, and
industrial fasteners also are likely to show rapid growth. Some
of these products could displace the sales iof US firms, but no
more so than similar exports already minqll~ from Pakistan,
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SUBJECT: Contribution to Interagency Study on US-China
Economic Relations
Distribution:
,Department of the Treasury
1 - Mary Yee, Office of East-West Economic Policy, Room 4426
Department of Commerce
1 - Christine Lucyk, Office of PRC and Hong Kong, Room 2317
Department of State
1 - Howard Lange, Office of Chinese Affair,;s, Room 4318
Department of Agriculture
1 - Richard Blabey,,Foreign Agriculture Service, Room 5546,
South Building
1 - Frederick Surls, Economic Research Service, Room 350,
GHI Building
Office of the US Trade Representative
1 - Bill Triplett, Room 422, 600 1-7th St. N.W., Washington, D.C.
Export-Import Bank
1 - Howard Turk, Room 1112
Central Intelligence Agency
- D/OEA (4F18)
- Chief, China Division
- C/Production/OEA (4G48)
- Ch/DEF
- Ch/DOM
- Ch/FOR
- OCO/IMB/CB (7GO7)
1 - C/PES/DDI (7F24)
1 - OCR/ISG (1H18)
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