COMMUNIST CHINA'S ECONOMY CONTINUES TO DETERIORATE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A006400070004-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 19, 2016
• Sequence Number: 4
• Content Type: REPORT

Approved For Release 2006/10/12 : CIA-RDP79-00927A006400070004-3
Secret
DIRECTORATE OF
INTELLIGENCE
17fL_s
WEEKLY SUMMARY
Special Report
Communist China's Economy Continues Yo Deteriorate
Secret
17May1968
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SECRET
Over the past two years, the Cultural Revo-
lution has caused considerable damacre to every
sector of the Chinese Communist economy except
agriculture, and further difficulties are likely
in 1968. An above-average grain harvest in 1967
masked the effects of much of the economic loss
last year, but the harvest was a windfall at-
tributable entirely to excellent weather that al-
most certainly will not be repeated this year.
The internal disorders were also responsible for
a modest decline in foreign trade last year, and
trade in 1968 is expected to show a more pro-
nounced drop. The leadership in Peking continues
to be preoccupied with political problems and
internecine disputes rather than with the serious
efforts necessary to reinvigorate the economy.
No Easy Path to Economic Recovery
Peking's procrastination over
the strong measures needed to re-
vive the economy has not been a
result of its ignorance of the
necessity. The moderates under
Premier Chou En-lai, at least,
have been alert to malaise in the
economy from the time of the
earliest Cultural Revolution dis-
orders. It was presumably their
watchfulness and influence that
led to the curbing in 1967 of
political excesses that had caused
dangerous economic disruptions.
The current period of re:La-
tive calm has lasted six months,
suggesting that the leadership
as a whole may finally have ac-
cepted the lesson of repeated ex-
perience that prolonged turmoil is
not compatible with economic
viability. Willingness to main-
tain curbs on excesses, however,
Page 1
does not rectify damage already
done to the economy.
Restoration of orderly eco-
nomic work in a Communist state is
dependent on re-establishing dis-
cipline ever the population. Dur-
ing the course of the Cultural Rev-
olution, the party cadres running
day-to-day economic affairs lost
their authority and effectiveness.
With no one exercising firm con-
trol, workers neglected their work
and factory environments became
so disrupted that orderly produc-
tion was difficult or impossible.
Peasants, also under looser re-
straint, used their new leeway to
demand a larger share of the harvests
and to give increased attention to
private plots and marketing ac-
tivities.
So far, the regime has attempted
to regain control over the population
through a soft approach. The press and
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S:PECIAL REPORT :L7 May 68
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high officials have employed reason
and persuasion to herd workers and
Red Guards back to their posts or
home areas. Where the risk of pro-
voking defiance has not been too
great, economic sanctions such as
cutoffs of salaries and abolition
of free rail tickets have been
applied.
The regime probably considered
stronger measures impractical, if
only because the administrative
means to impose controls are lack-
ing. Many party cadres are ap-
parently still refusing to resume
their posts despite virtual pleas
from Peking. In any case, they
could not easily exact the former
obedience from the population.
Moreover, although army units are
present in most of the important
economic areas, they do not have
the numbers or the competence to
substitute for party cadres in
the exercise of professional and
disciplinary control over the
population.
Food and Agricultural Prospects
The Chinese have survived
the winter without a food crisis
despite difficulties in the pro-
curement and transport of the
autumn 1967 harvest. Food pros-
pects for the current year, how-
ever, are not as bright as a year
ago.
The 1967 grain harvest,
boosted by exceptionally good
weather, approached 200 million
tons, or about 10 million tons
more than 1966. It is apparent,
however, that the increase was
mostly dissipated to tide China
over a year of turmoil and that
not much surplus was left for 1968.
Page 3
Disorders affecting the country-
side--although mild compared with
urban disorders--permitted peasants
to divert much of the 1967 gain in
grain output to increased personal
consumption. In addition, popula-
tion increases absorbed another
4 million tons and an additional
million or so tons went to compen-
sate for a decrease in grain im-
ports.
Even with the very good na-
tional harvest, some regions barely
mane ed to get along over the winter.
in rtor China provinces, which is-
tori.cally require su lementary food 25X1
from the outside grain
rations during March and Apri in-
cluded corn and other "coarse" grains.
As had been indicated in the press
since autumn 1967, the regime pre-
sumably had been forced by impaired
ability to procure and distribute
food to cut back drastically on im-25X1
ports from other provinces.
many o the isolated localities
that had poor harvests in 1967 were -
left: mostly to their own devices by 25X1
the government. Food bureau
requently
a no food to distribute or to sell,
even at high prices.
In a speech on 2 February to
representatives of various economic
ministries, Chou En-lai took a
sober view of crop prospects for
1968. He said that supplies of
chemical.fertilizer and other in-
dustrial commodities that support
agriculture will decline further
in 1.968. Moreover, he alluded to
the failure of the Ministry of
Agriculture to provide leadership
over farm work during the past two
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SPECIAL REPORT 17 May 68
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years, and did not offer any hope
of an improvement in leadership
this year.
Without improved controls and
with declining industrial support,
the 1968 crops would need better
weather than 1967--an extremely
unlikely occurrence--simply to
match 1967's output.
If an exceptional performance
is made in any part of the agri-
cultural sector, it will probably
be on the private plots. The gov-
ernment, however, would find it
particularly difficult to estimate
the size of or to collect from
private plot output, and gains
would probably go mostly to in-
creased peasant consumption and
to boosting supplies for the free
market.
Industry Hurt Most by
Cultural Revolution
Chinese industrial workers,
despite their preferred status
in a Communist society, have ap-
parently accumulated serious griev-
ances. Vociferous demands during
the past year for higher wages,
more benefits, and changed hiring
practices have forced the govern-
ment to promise concessions "when
the Cultural Revolution is com-
pleted." So far, however, the
demands have been put off, and
continued worker dissatisfactions,
coupled with the presence of
trouble-making Red Guards in
factories, have sustained a mod-
erate level of disorder.
A precise estimate of in-
dustrial losses in 1967 is not
possible, but total industrial
output probably fell at least 10
percent compared with 1966. De-
clines of 10 to 20 percent hit the
coal, cotton textile, and iron and
steel industries. Also lost was
the 5 percent or so increase in
over-all output that would probably
have come without the Cultural Rev-
olution.
Small plants producing simple
industrial products and consumer
goods suffered the largest declines,
and some were totally shut down for
substantial periods. Without any
protection from the government, the
small plants fell prey to every
civil disturbance and were the
first to be affected when shortages
of fuel, raw materials, and electric
power developed.
The defense industries also
have been substantially disrupted.
In an address on 17 January 1968 to
representatives of the defense pro-
duction ministries, Chou En-lai
rhetorically asked, "How many'of
the production targets did you ful-
fill last year? You know full well."
He complained that the three-sided
alliances of army, party cadres, and
Red Guards--the main device for sup-
pressing contention in factories--
had been formed only in the Sixth
Ministry of Machine Building, which
is engaged in shipbuilding. Steps
toward alliances had been begun but
were not yet completed in the min-
istries responsible for land arm-
aments, aircraft, and electronics.
No steps, Chou said, had yet been
taken in the Seventh Ministry of
Machine Building, which performs
missile work.
The impact of industrial
losses in 1967 has so far not been
great, but it may be compounded in
coming months. The consumer-goods
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SPECIAL REPORT 17 May 68
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shortages that developed in
many of the large cities were of
little consequence to the govern-
ment and did not change conditions
very much for the average Chinese,
particularly not for the peasant.
Shortages of fuel caused some
hardship to civilians in the north
where winter heating is required,
curtailed many industrial opera-
tions, and affected fulfillment
of export commitments in small
ways.
Wage costs to the government
appear almost certain to rise.
The official promises of "reforms"
and "adjustments" refer to many
practices increasingly used in
recent years to'reduce the na-
tional wage bill at the expense
of the workers. Intense worker
dissatisfaction seems to have been
stimulated by piecework and time-
rate payments, by temporary and
contract hirings, and by the fir-
ing of old workers on the verge
of retirement eligibility. Un-
less the regime is prepared to
adopt harsh repressive measures,
some of these practices will prob-
ably have to be at least relaxed,
at considerable money cost to the
government.
Transport Problems in Hand
There has been a gradual re-
establishing of order on the rail-
roads--and presumably on other
transport systems as well--since
late 1967. Occasional short in-
terruptions still occur because
of large-scale disorders, but
railroad troubles have generally
been reduced to uncertainties
over scheduling, some mix-ups in
national rail-car distribution,
and some restrictions on service.
Currently, the railroads are
probably carrying the lightest
loads in some time.
that there
is a continuing shortage of fuel
and of some industrial products--
mostly consumer goods--in large
cities. These shortages may be
partly a result of persisting trans-
port inadequacies, but declines in
output of the goods probably bear
most of the blame.
The railroad organizations
themselves appear to be in com-
paratively good order. According
to the press, most if not all
of the major railroad bureaus
have successfully established
"three-sided alliances."
Rail shipments of aid to
North Vietnam from and through
China are believed to be pro-
ceeding without serious hin-
drance. Even during the most cha-
otic periods of the Cultural
Revolution, these shipments prob-
ably were affected only, in minor
ways.
Foreign Trade Decline
The value of China's foreign
trade in 1967 declined for the
first time in five years. The
balance of payments with the free
world showed a $55-million defi-
cit in contrast to the $155-mil-
lion surplus of 1966. Peking
apparently was caught between a
decline in domestic output of
some export goods and a generally
undiminished requirement for
imports.
The one large decrease pos-
sible in imports was grain, where
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Communist China
1966
Total $4.3 Billion
$1.1 Billion
Communist
$1.3 Billion
Underdeveloped
Free World
(including
t Hong Kong)
$1.9 Billion
Developed
Free World
Hong Kong
Communist China's Top Ten Trading Partners, 1966-61
Developed
1966
Percent of Total
1
967 al
Percent of Total
Million US $
All Countries
Million US $ All Countries
Total Ten Major
Countries
2,600
61
Total Ten Major
Countries
2,519
60
Japan
622
14
Japan
558
13
Hong Kong b/
380
9
Hong Kong b/
321
USSR
320
7
West Germany
292
West Germany
217
5
USSR
255
Canada
214
5
Australia
231
Malaysia and
Singapore
190
4
Malaysia and
Singapore
228
United Kingdom
177
4
United Kingdom
201
Cuba
170
4
France
146
France
160
4
Cuba
144
North Korea
150
3
Italy
143
a. Preliminary estimates.
b. Net of entrepot trade with third countries.
90631 5.6$ CIA
Foreign Trade
1961
Total $4.2 Billion
$1.2 Billion
Underdeveloped
Free World
including
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$85 million was saved compared
with 1966 by reducing purchases
to some 4.7 million tons, about a
million tons less. This saving,
however, was more than offset by
the effects of Peking's spring
campaign against the Hong Kong
authorities. Trade both ways
with Hong Kong fell by about 15
percent to $340 million, but al-
most all of this drop comprised
Chinese exports.
The value of total Chinese
imports during 1967 actually in-
creased by one percent despite
the reduction in imports of grain.
Steel and chemical fertilizers
increased by 22 and 20 percent,
respectively, at least partly
because of need to supplement
sagging domestic output. Chou
En-lai has stated that total
chemical fertilizer availability
in 1967 declined, the increase
in imports notwithstanding.
Total Chinese exports in
1967 fell by 6 percent. Textiles
declined by about 8 percent even
though Peking seems to have made
the decision to make domestic
consumers absorb the loss in out-
put rather than exports., Ex-
ports of foodstuffs declined
about 6 percent, perhaps; partly
because the government found it
more difficult than usual to
procure the needed foods from
the peasants.
At the end of 1967, China
still had at least $600 million
in gold and foreign exchange
holdings, an amount judged ade-
quate for emergency requirements.
Peking was able to muster enough
Western currency to buy about
$50 million worth of gold follow-
Page 7
ing the British devaluation in
November 1967, and in addition,
was able to conserve some foreign
exchange by invoking a time-
payment clause for grain from
Australia.
Trade with the free world
in 1967 declined less than trade
with Communist countries, raising
its share of total trade to 75
percent. Exports to Western Europe
and Japan declined by $65 million.
Imports of several steel mills
and petro-chemical plants con-
tinued, but their construction was
slowed by Red Guard obstructions
at the building sites and by po-
litical persecution of Western
personnel, including the arrest
of two West German engineers in
Lari-chou for "espionage."
The free world continued to
supply imports important to the
military-industrial base. A
group of Japanese firms used an
elaborate scheme to slip equip-
ment piecemeal into China over
an 18-month period to complete
a silicon plant that enhances
China's electronics capability.
Imports of free world machine
tools tripled in the first half
of 1967 over the same period of
1966; imports of electronics
equipment, metals, and scien-
tific instruments of importance
to the weapons program also in-
creased in 1967.
Trade with Communist coun-
tries in 1967 fell by about $95
million to a new low of about
$1,040 million. During the year,
Sino-Soviet relations were fur-
ther exacerbated by Chinese
harassment of Soviet merchant
seamen in Dairen and Canton and
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SPECIAL REPORT 17 May 68
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by at least one case of mutual
retaliation when, in September,
the Soviets banned Chinese pork
for "health" reasons and the Chi-
nese refused to accept petroleum
and machinery shipments. Trade
with Eastern European countries
fell slightly in 1967 and only
one of the three new trade agree-
ments signed so far calls for
increased trade in 1968.
Chinese exports to the de-
veloping nations of the free
world in 1967 reached about $540
million, up from $525 million in
1966. Imports from them, how-
ever, dropped more than 25 per-
cent to about $285 million. Pri-
marily, the drop reflected the
absence of g in imports from
Argentina.
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Page 8 SPECIAL REPORT 17 May 68
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