RISE IN COMMUNIST CHINA'S EARNINGS OF CONVERTIBLE FOREIGN EXCHANGE FROM HONG KONG

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002400020001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 9, 2016
• Document Release Date: February 8, 2001
• Sequence Number: 1
• Publication Date: September 1, 1965
• Content Type: BRIEF

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OF CONVERTIBLE FOREIGN EXCHANGE FROM HONG KONG
CIA/ RR GB 65-52,
September 196 El
RISE IN COMMUNIST CHINA'S EARNINGS
DIRECTORATE OF INTELLIGENCE
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WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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 Approved For Release 2001/03/16 :,CIA-~D 7E9T91003A002400020001-2
RISE IN COMMUNIST CHINA'S EARNINGS
OF CONVERTIBLE FOREIGN EXCHANGE FROM HONG KONG*
Since January 1964, Communist China's efforts to expand earnings
of convertible foreign exchange have been aided considerably by the
growth of its economic relations with Hong Kong. During the full two
years 1964-65 it is expected that foreign exchange earnings from Hong
Kong will have risen nearly 50 percent and, for the full year 1965, will
reach US $525 million to US $550 million. On the basis of present pro-
jections, this would represent about one-half of China's total earnings
of Free World currencies in 1965.
Favorable trade and financial transactions through Hong Kong have
contributed substantially to the buildup of China's holdings of both gold
and Western currencies, which are estimated to have risen from US $300
million at the end of 1964 to between US $400 million and US $450 million
by mid-1965. To a significant extent, China's efforts to expand its com-
mercial relations with Hong Kong have been prompted by the large deficits
it has incurred with Western nations. Since 1961 there has been a par-
ticularly compelling need to offset the deficits arising from the large
purchases of Canadian and Australian grain.
Two-thirds of the earnings from Hong Kong come from the export of
food, textiles, and other goods. The remainder come from non-trade
sources, such as profits from commercial enterprises in Hong Kong and
remittances of overseas Chinese made through Hong Kong banks. A
sizable proportion of Chinese commodity exports to Hong Kong are re-
exported to Free World countries whose importers make payments to
middlemen in Hong Kong. The expected 10 to 15 percent gain in earnings
in 1965 is attributable primarily to an increased demand for Chinese
foodstuffs and raw materials by Hong Kong's growing population; earnings
from non-trade sources may be slightly less than last year.
It is believed that China will experience further gains in foreign
exchange earnings from Hong Kong in the future, but the rate of increase
is not expected to approach that of the period 1964-65.
>,< This publication is concerned exclusively with Chinese trade and finan-
cial relations with Hong Kong and the remainder of the Free World.
China's trade with Communist countries is conducted on what amounts to
a barter basis, being financed through clearing accounts without exchange
of convertible currencies.
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1. Role in Total.Earnings, 1958-64
During 1958-64, Hong Kong was the source of $2. 2 billion, or 47
percent, of China's estimated total convertible currency earnings of
$4. 7 billion, as follows:
Communist China's Earnings of Convertible Foreign Exchange, 1958-61+
a. Excluding an estimated $700 million. of exports on clearing
account with Free World countries which did not involve the receipt
of foreign exchange..
Because Communist China's payments to Hong Kong are negligible,
practically all China's income from Hong Kong has been available for
financing imports from those Free World areas with which China ran a
trade deficit. Large trade deficits have been incurred with Western
Europe and, since 1961, with Australia and Canada. More recently,
Hong Kong earnings have contributed to the buildup in China's holdings
of gold and Western currencies, which are estimated to have risen from
US $300 million at the end of 1964 to between US $400 million and US
$450 million by mid-1965.
a. Earnings from Commodity Exports
Commodity exports to Hong Kong amounted to 40 percent of all
receipts from such exports by Communist China to the Free World dur-
ing 1958-64. An important component of the $1. 6 billion in trade earn-
ings from Hong Kong during this period was the reexport trade. At
least US $500 million, nearly one-third of the total trade earnings with
Hong Kong, was realized from Chinese goods that were reexported to
Free. World countries, particularly Malaya, Japan, and other countries
of non-Communist Asia. Importers in these countries, as well as
Chinese Communist export corporations, have long found it both con-
venient and profitable to deal through Hong Kong middlemen. Such
S-E-C-R-E-T
Billion US $
Hong Kong
Total Free World
Exports
1.6
4.0 /
Overseas Chinese remittances
0,4
0.1+
Other non-trade earnings
0.2
0.3
Total earnings
2.2
4.7
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middlemen are particularly useful because of their readiness to accept
bulk delivery of Chinese goods, which they then break up for distribu-
tion in job lots among a large number of small Asian import firms.
Moreover, Hong Kong as a major entrepot offers extensive commercial
and financial services.
b. Earnings from Non-Trade Sources
The estimated US $600 million in non-trade earnings from Hong
Kong in 1958-64 accounts for an overwhelming share of the total of
such receipts-from Free World countries, estimated at US $700 :mil-
lion. The remittances of US $400 million from overseas Chinese made
up two-thirds of the non-trade receipts from Hong Kong. The remain-
ing US $200 million of non-trade foreign exchange receipts from Hong
Kong represented profits from China's banking and commercial interests
there and other miscellaneous income.
c. Hong Kong as Middleman
Hong Kong's importance as a middleman is evident not only in
trade but also in other financial transactions with the West. In fact,
of the total US $2. 2 billion in foreign exchange which Hong Kong trans
ferred to China during 1958-64, as much as US $700 million to US $800
million actually originated outside the crown colony. Besides the US $500
million realized from reexports, a large part of overseas remittances
came from Chinese in other countries and was first transferred to
Chinese banks in Hong Kong. In addition, other earnings on non-trade
account, probably amounting to at least US $100 million, also originated
outside Hong Kong.
2. Current Trends
Current evidence suggests that Communist China's foreign exchange
earnings from Hong Kong may rise by 10 to 15 percent in 1965, to atotal
of US $525 million to US $550 million, or about one-half China's total
anticipated earnings of Free World currencies. In 1964, China received
about US $475 million from Hong Kong -- nearly 30 percent above the
preceding year. Trade returns for the first half of 1965 indicate that
commodity exports to Hong Kong for the full year will grow by 20 to 25
percent, compared with an increase of 33 percent last year. The gains
are especially pronounced in food and textiles, presumably because of
an increased demand by Hong Kong's growing population and industries
for Chinese foodstuffs and raw materials.
S-E-C-R-E-T
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Remittances of overseas Chinese through Hong Kong in 1965 appear
to be holding their own. Data on China's non-trade earnings in Hong
Kong, excluding remittances, show a small absolute decline during the
first six months of 1965. One possible explanation is that the rapid
growth of these earnings in 1963-64 resulted from intensified efforts by
Peking to maximize its foreign exchange acquisitions, including foreign
currency held by Chinese-controlled enterprises in Hong Kong; having
depleted this source for the time being, the Chinese Communists might
be expected to suffer a decline in these earnings in 1965.
3. Prospects
For several years to come, Hong Kong clearly seems destined to
remain the single most important source of Communist China's earnings
of convertible foreign exchange. Its major role as a middleman in
Chinese trade and other financial transactions with the Free World
appears assured so long as its political status is undisturbed. Hong
Kong will remain an important market for Chinese exports because of
its dependence on the mainland for food and specialty products for its
overwhelmingly Chinese population as well as because of its need for
raw materials for fast-growing industries. Furthermore, the relative
affluence of the Hong Kong population enables its Chinese citizens to
continue making large remittances to relatives on the mainland. As
China's trade with the Free World continues to grow, Hong Kong will
remain the most important single source of earnings, but its relative
importance will gradually decline.
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Analysts:
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Std/A/DS Distribution of Current Support Brief No. 65-52, Rise in
Communist China's Earnings of Convertible Foreign Exchange From
Hong Kong --- September 1965 (SECRET)
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 Approved For Release 2001/03/16
Project No. 36. 5272
P79101003A002400020001-2
Report Series CIA/RR CB 65-52
Title: Rise in Communist China's Earnings of Convertible Foreign Exchange
From Hong Kong (SECRET)
Responsible Analyst and Branch
T/TF
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