THE CHALLENGE CHINA FACES: IDENTIFYING RESOURCE CONSTRAINTS ON ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00794R000200850001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: May 17, 2011
• Sequence Number: 1
• Publication Date: August 1, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Directorate of
Intelligence c
on Economic Growth
The Challenge China Faces:
Identifying Resource Constraints
EA 86-10035
August 1986
Copy 2 6 7
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Directorate of Secret
Intelligence
The Challenge China Faces:
Identifying Resource Constraints
on Economic Growth
An Intelligence Assessment
Division, OEA,
This paper was prepared by China Division, Office
of East Asian Analysis. Comments and queries are
welcome and may be directed to the Chief, China
Secret
EA 86-10035
August 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 _
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
The Challenge China Faces:
Identifying Resource Constraints
on Economic Growth
Scope Note This paper identifies potential constraints to China's economic develop-
ment and offers a sense of the sweeping challenge Beijing faces. As an in-
ventory of problems lurking in China's future, the paper's tone is necessar-
ily negative. It speculates on how those constraints may slow China's
advancement. It does not attempt to measure their precise impact or even
predict China's ability to overcome them. More detailed assessments of the
constraints, their impact, and China's chances of resolving them will be the
subject of future research.
Secret
EA 86-10035
August 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 -
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
The Challenge China Faces:
Identifying Resource Constraints
on Economic Growth
Key Judgments Although China's reform program has resulted in impressive accomplish-
Information available ments and its goals for quadrupling output between 1980 and 2000 are
as of 19 June 1986 attainable, we expect significant resource constraints to develop over the
was used in this report.
next 15 years and to challenge Beijing's ability to achieve qualitative
targets. Though typical of the problems with resources, people, and
technology absorption that face any developing economy, these challenges
may be particularly daunting to China because of its size and its ambitious
timetable.
Beijing's plans through the end of the century and beyond will impose
competing demands on China's infrastructure, industry, financial re-
sources, social services, management, and education:
? The transportation system is already overburdened, and, even with
improvements, it will probably fall far short of needs for domestic
distribution of goods. Problems moving freight will inhibit domestic
commerce and foreign trade.
? Railroad shortcomings will hinder deliveries of coal-which accounts for
more than 70 percent of China's energy-and will hurt China's attempts
to increase energy output. Energy shortages idle 30 percent of industry
now, and by the end of the century demand could be twice available
supplies.
? China lacks the communications systems necessary to support computer
networks, industrial interfaces, and education; progress in improving
civilian communications will be slow.
? Water supplies are already inadequate for industrial and human needs;
water and air pollution go untreated and will worsen, threatening both
human health and those industries that require clean supplies for their
processes.
? China lacks the business environment-such as laws and legal services,
product research, and marketing-as well as the streamlined decision-
making and management criteria that would encourage the entrepre-
neurship and risk taking that help developing economies make rapid
strides.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
? Until the education system can supplement narrow, applications-oriented
training with broader programs for planning and managing, improve-
ment in the business environment will be slow and will probably divert
technically qualified Chinese from industries where their skills are
needed.
? The role of the factory and the party-longstanding institutions in
Chinese industry-will have to change to support quality, efficiency, and
profits.
? China will face critical challenges in the absorption of technology and
labor. Workers must be trained to use modern technologies effectively,
and the unemployed and underemployed must be directed to new jobs to
avoid a potentially serious social problem.
? Financial needs will be enormous-exceeding $1 trillion-and China will
look to the West to provide low-cost loans, increase direct investment,
import more Chinese goods, and use more Chinese services.
In our judgment, although Beijing has acknowledged each of these issues,
the leadership has taken little action to forestall the cumulative effects of
these shortcomings, and may be forced to pare plans for qualitative
improvements in industry and society. Disruptions from these problems will
drive national economic policy making. Impatient localities will probably
try to improve their economies and services on their own, and this may un-
dermine national plans for integrated energy, transportation, communica-
tions, and industrial systems. Interregional tensions stemming from un-
equal rates of development could become more contentious as the gaps
between rich and poor grow. We believe, however, that Beijing will remain
committed to its reform program and that it will turn outward for solutions
to its problems.
Indeed, China's reforms and development will offer many opportunities for
Western industries, academics, lenders, and governments to offer equip-
ment, expertise, money, and advice. US firms have been more willing than
others to transfer know-how as well as equipment and, therefore, may be
competitive in the China market; however, other nations offer better
financing and could thereby undercut US sales.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 _
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
China also will strengthen as an exporter, competing primarily with
industrializing nations and with declining industries in the United States
and other developed countries. Chinese competition probably will prompt
calls for greater protection of US industries, guaranteed access for US
firms in the China market, and assistance to compete against China in
third-country markets. At the same time, China will continue to demand
greater market access in the United States and balanced bilateral trade,
suggesting that trade friction will be a key characteristic of US-Chinese re-
lations through the rest of the century.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
Key Judgments
Resources: Limited Supply, Immeasurable Demand 1
The Need To Upgrade an Inadequate Infrastructure 2
Massive Transport Needs 2
Energy Shortfalls 2
Water: The Forgotten Utility 3
Inadequate Communications 3
Trade: Export Promotion for Revenues 4
People Problems: Too Many Folks With Too Few Skills 4
Decisionmaking: Everybody Wants To Get Into the Act 5
The Education Gap 6
Management Shortfalls 6
Achieving Progress and Coping With Its Fallout 6
Absorbing Technology: Now That We've Got It, What Do We Do? 7
Absorbing Excess Labor: Now That We Don't Need It, What Do 7
We Do?
The Price of Industrialization: Pollution Takes Many Forms 8
Turning Westward To Meet the Challenge 8
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
The Challenge China Faces:
Identifying Resource Constraints
on Economic Growth
Resources: Limited Supply,
Immeasurable Demand
temic shortcomings become more limiting.
China has undertaken ambitious economic reforms,
the scope of which is unprecedented in Chinese
history (see inset). We have been surprised by the
degree of success Beijing has achieved in the face of
both political and economic obstacles. In our judg-
ment, much of China's rapid growth in recent years
has come as a result of both increased efficiency and
fortuitous circumstances. Although the Chinese have
been versatile and resourceful in coping with the
obstacles to economic development, we believe that
sustaining growth will become more difficult as sys-
economic growth.
We believe China's ambition to quadruple 1980 out-
put by the end of the century is well within reach. But
we are less certain about Beijing's ability to advance
toward other, more qualititative goals. Leaving aside
political problems and social costs, we believe there
are significant resource constraints on China's future
China has limited capacity at best.
China's plans for the next 15 to 20 years place
competing demands on virtually every facet of the
economy. The total requirement for industrial raw
materials, services, skills, and financing will prove
awesome. China will need such construction materials
and supplies as cement, lumber, fabricated metal and
pipe, glass, plumbing, and elevators-already in short
supply-for new industrial and residential buildings.
Factories producing high-technology goods or prod-
ucts with strict quality control specifications will
require specialized instruments, automated equip-
ment, and environmental monitoring and cleansing
equipment to keep production facilities free of con-
tamination. New or upgraded industries will call for
reliable supplies of nonferrous metals, steel alloys,
composite materials, and other substances for which
The Scope of Reform Objectives
The reform program engineered by Deng Xiaoping
and his proteges embraces broad targets guided by
Zhou Enlai's 1975 proposal to modernize industry,
agriculture, science and technology, and defense.
According to press and commercial sources, lower
level Chinese planners, policymakers, and academics
identify more discrete tasks such as:
? Improve the standard of living:
- Offer better and broader educational
opportunity.
- Build more and better housing.
- Market more and greater varieties of food and
other consumer goods.
? Increase the quantity and quality of industrial
output:
- Improve productivity and quality control.
- Manage factories more effectively.
- Develop industrial specialization.
- Upgrade industrial technology.
- Match Western production capabilities in se-
lected goods.
? Earn more foreign exchange:
- Expand exports.
- Offer more international services.
The Chinese, moreover, face costs-pollution, labor
displacement, lifestyle changes, regional polarity, and
social frictions-for which their own assessments
suggest they may not be fully prepared. Further
beyond Beijing's control, the strength of the world
economy will influence China's trade, the willingness
of foreigners to invest in China, and the availability of
Secret
EA 86-10035
August 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
international financing. Problems-with inputs, peo-
ple, and absorption-typify those facing any develop-
ing economy, but China in particular may find them
daunting because of its sheer size and its ambitious
timetable. Economic planners and policy makers will
be especially concerned if regional disparities in
growth undermine their attempts to develop national-
ly integrated networks of industries and services and
heighten tensions between have and have-not sections
of the country.
The Need To Upgrade an
Inadequate Infrastructure
Chinese planners and policymakers readily acknowl-
edge that China's development plans are hostage to its
infrastructural weaknesses.
Massive Transport Needs. Inadequate transport facil-
ities-especially in the highway sector-will be a key
restraint to growth over the remainder of the century,
restricting China's international trade as well as its
domestic distribution of goods. China needs to expand
its highway sector for short-haul freight, thereby
freeing the overburdened rail system for long-
distance requirements. Moreover, attempts to develop
industrial specialization and new suburban or rural
population centers-requiring timely delivery of parts
and supplies-will heighten demand for dependable
intercity trucking. But that will siphon petroleum
products from exports and highway construction ma-
congestion. For some products, air freight may be an
alternative, but China would have to upgrade its air
cargo capacity
Energy Shortfalls. The transport situation also will
hamper China's attempts to meet energy demand; rail
freight capacity is inadequate to move coal-which
accounts for 40 percent of rail freight-from the
mines to power plants, leaving 54 million tons (more
than 5 percent of output) stockpiled at mines last year.
According to press reports, transportation authorities
plan to spend about $21 billion on railroad moderniza-
tion efforts over the next five years, mainly to increase
coal-carrying capacity.
Press) also report that as much as 30
percent of China's industrial capacity is idled by
shortages of electricity,2 and Chinese experts estimate
that, by the end of the century, demand could be
twice available supplies. Chinese planners'call for
more coal-fired power plants at mines to reduce coal
transportation requirements, new hydroelectric sta-
tions in the southwest with long-distance transmission
lines to deliver electricity, and substantial increases in
energy efficiency effected through replacement of
antiquated power-generating and power-consuming
equipment.
We do not expect China to meet its energy goals.
Coal, which now fuels 70 percent of China's electric-
ity production, is slated only to double in output, while
electric power is to quadruple. And to build the new
plants and equipment needed will require staggering
25X1
terials from other important projects.
Beijing's plans for highway construc-
tion call for the provinces to assume responsibility,
and the central government to fund only 20 percent or
less; we believe this is a serious flaw. In the past,
provinces have preferred to devote their resources to
the development of industries that expand their tax
base rather than to expensive but nonremunerative
services.
Inadequate inland distribution systems also will cause
freight. storage problems and continued port conges-
tion, especially if Chinese traders try to quadruple
trade, as Beijing Plans. And although China is under-
taking an extensive expansion of port facilities, con-
tinuing silt problems-which restrict port access to
medium size oceangoing vessels-will exacerbate
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 -
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
investment and absorb extraordinary construction and
industrial resources; in our judgment, for example, to
install the necessary long-distance, high-voltage pow-
er transmission lines alone could exhaust China's
copper and aluminum production. In addition, con-
struction of new coal mines and hydropower plants
should be under way if century-end targets are to be
met, but, according to Embassy reporting,
budget concerns and bureaucratic infighting are de-
ferring projects, making those targets increasingly
Telephones as Luxury Goods
China's telephone system is woefully inadequate.
Switching and lines are generally archaic and, as
travelers can attest, service is mediocre to poor, but
the most telling and visible indicator of problems is
the simple lack of telephones. Shanghai, for example,
receives 5,000 requests monthly for telephones, but
installs only about 17,000 per year. Nationwide,
China installed 1.3 million telephones in 1981-85, or
260,000 units yearly, bringing the total inventory to
5 million. By 2000, the leadership's plan calls for 28
million new installations-a total of 33 million
phones-or nearly 2 million yearly, representing a
tremendous amount of equipment, money, and skilled
unattainable.
awareness of the need for conservation.
and to take such corrective action as encouraging
local watershed management and increasing public
Water: The Forgotten Utility. We believe water sup-
plies will be another major problem for China's
industrial modernization. Water availability is al-
ready a concern; the water table in many urban areas
has become dangerously low, even causing subsidence
in some locations-Tianjin has dropped more than six
feet since 1959, according to Chinese press reports.
One Chinese expert estimates that water consumption
needs in 2000 will exceed 725 billion cubic meters,
with a supply of only 650 billion. Without massive
conservation efforts and investment in water treat-
ment plants, China will have inadequate water to
meet industry and public needs. Yet Beijing is only
beginning to recognize the magnitude of the problem
Inadequate Communications. China will need more
and improved communications services to meet ad-
ministrative, commercial, and social needs: data com-
munications for computer networks used in state
planning, transportation, energy, and other sectors;
telephone and telex services to link factories, suppli-
ers, and markets; and broadcast facilities to expand
educational services. China's inadequate telecom-
munications services are based on largely outmoded
or obsolete equipment. The increase in demand far
outstrips growth in services, and that situation is
unlikely to change for a long time; China is still trying
to meet basic telephone service demand, for example
(see inset). China's efforts to develop a fiber-optic
labor that China may not be able to muster.
network will probably improve some intercity commu-
nications, but we anticipate that problems in produc-
tion and installation will prevent completion of a
nationwide system within the next 10 years.
Problems With Business Services
To facilitate the development of a modern economy,
China needs to develop business services that facili-
tate day-to-day operations and provide a standardized
system on which businessmen can rely. Beijing knows
that such services are not widely available in China
and that their absence slows the economy and weak-
ens business confidence. Consequently, to enforce
accountability and to assure investors of a sound
business environment, China is evolving a legal frame-
work covering contracts, investment safety, and other
issues. Current laws are often vague, but Beijing is
issuing clarifying regulations and new, more explicit
laws as it becomes aware of needs.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 -
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
China also must further develop its insurance, com-
puter software,' engineering, product research, mar-
keting, and other industries over the next 15 years.
Because these services are not capital intensive, we do
not expect them to be a major financial burden, but
their shortcomings could curb risk taking, new prod-
uct development, and industrial modernization, and
thereby interfere with growth. In addition, they will
create conflicting demand for China's technical and
business graduates whose skills will also be needed in
the industrial sector.
Finances: Needs Versus Realities
A key concern for Beijing will be financing its
modernization and growth, but, we believe that, un-
less international financial markets tighten, China
should be able to find funds if it is willing to acce t
lenders' terms.
China's cumulative
investment needs for the 10-year period from 1985 to
1995 will exceed $1 trillion, outpacing savings by
some $160 billion. In the past, China has been
reluctant to turn abroad for funds because it wants to
avoid dependence on foreign sources for commercial
loans at nonconcessionary interest rates. However, we
anticipate that its needs will force a rise in China's
borrowing levels through the remainder of the centu-
ma in 1986-90 will nee $50 billion from
oreign sources to maintain planned 7-percent annual
growth. Western bankers view China as a low-risk
borrower and appear willing to provide considerable
funding
Trade: Export Promotion for Revenues. China also
hopes to finance modernization through exports, not
only of goods, but also of services. Indeed, without
these sources of foreign exchange, China will be
unable to fund the technology and equipment imports
it needs to upgrade industry. We anticipate that
China will encounter considerable resistance as it tries
to expand its role in international export and service
markets over the next 15 years. Increasing protection-
ism in the West and a sluggish oil market are limiting
export growth. The quality of many Chinese-manu-
factured goods-the most likely growth sector for
trade-is inadequate to ensure strong sales in devel-
oped nations, and less developed countries do not have
the financial resources to buy enough from China to
raise export revenues significantly. China will proba-
bly earn more foreign exchange through its develop-
ment of international services, which, according to the
State Statistical Bureau, earned $890 million in 1985.
Beijing is pressing its merchant fleet, labor exports,
overseas construction contracting, and other sectors to
raise revenues. However, China's success with service
exports will depend largely on the state of the world
economy; for example, demand for overseas Chinese
labor and construction is largely in the Middle East
and has declined in reaction to falling oil prices.F_
People Problems: Too Many Folks
With Too Few Skills
A key factor affecting the demands that will be made
on China's resources is population growth and dispers-
al. Beijing is pressing rural communities to establish
industrial facilities that would absorb excess labor
from agriculture.' Planners hope that, as a result, new
towns will develop and prevent unmanageable migra-
tion to already overcrowded cities. As these towns
evolve into small cities, new demands will arise for
energy, transportation, and services, in addition to the
resource demands imposed by the development of
additional industry. Moreover, although their share of
the total population will drop, the number of very
young and very old Chinese will rise by 2000, accord-
ing to studies by the US Bureau of the Census, and
the need for social services-schools, housing, medical
care, food, transportation-to support the nonworking
population will grow.
' Over the past several years, China rapidly developed rural indus-
tries that in 1985 accounted for two-thirds of the gross output of the
25X1
25X1
25X1
25X1
25X1
25X1
25X1
LDAI
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
Decisionmaking: Everybody Wants
To Get Into the Act
China's economy seems at times to function in spite of
the bureaucracy that runs it, suggesting that a failure
to streamline decisionmaking may inhibit but not
undermine growth. Nonetheless, although markets
regulate more goods each year, the central and local
governments still manage huge sectors of the economy
and monitor others, and the overlap in responsibilities
is debilitating. For example, squabbles between the
Ministry of Nuclear Industry and the Ministry of
Water Resources and Electric Power over the devel-
opment of China's civilian nuclear energy program
have confused Western vendors and delayed progress
on planned construction, perhaps by several years. But
Clearly, one resource China does not lack is people.
As a resource, however, the critical aspect is the
severe shortage of talent willing and able to drive
Beijing's modernization programs. But sociopolitical
factors have inhibited the development of skilled
decisionmakers, entrepreneurs, managers, and techni-
cians, and the institutional framework that brings
their abilities together into a smoothly functioning
system. The legacies of the Cultural Revolution' and
the Soviet-style planning bureaucracy China adopted
in the 1950s-with its overlapping responsibilities and
its need for consensus before action-have slowed
implementation of Beijing's plans. For example, the
Three Gorges hydropower project-proposed in the
early 1950s to alleviate electricity shortages-is still
under debate among national, provincial, and local
authorities in spite of the urgent need for power.
the leadership has also not been pleased with the
effect of market forces without central guidance; in
1984 Beijing decentralized trade and encouraged
exports, but the resultant competition among new
trading firms drove Chinese export prices down, forc-
ing the government to restore some controls.
6 The Cultural Revolution (1966-76) featured violent repudiation of
education and technical competence. Bureaucrats, factory manag-
ers, academics, and technicians alike were persecuted. At least a
full decade of training and development was lost. Moreover, some
individuals affected by the torment of that period have been
reluctant to embrace the new leadership's reform program for fear
Beijing has begun appointing so-called Leading
Groups to bring together the involved bureaucracies
and develop cohesive policies. We are skeptical that
Leading Groups will solve the problem, however. To
date, a variety of Leading Groups have emerged to
oversee such issues as energy demand and supply and
science and technology policy. But the memberships
often feature the same leaders, suggesting that some
key figures are involved in too many bodies to be
effective. Moreover, the proliferation of Leading
Groups suggests that they may be better at highlight-
ing problems than at implementing solutions and may,
in fact, be little more than an added layer of bureau-
cracy. Indeed, some groups do not include all of the
actors necessary to be effective. For example, the
group for electronics development does not include
representatives from Shanghai, the site of important
electronics industries and a major competitor with the
rest of the country for electronics resources and
imported technology.
Another mechanism introduced to improve industrial
management and decisionmaking is horizontal inte-
gration-the breakup of fully self-reliant factories
into independent producers of parts, subassemblies,
and finished goods to increase specialization, efficien-
cy, and quality control. Chinese academics writing
over the past two years have criticized vertical deci-
sionmaking as a top-down command system that
functions without regard to needs, resources, or abili-
ties. On the other hand, supporters of horizontal
integration say it permits factories to assess demand
and determine output; encourages industry and re-
searchers to work together to develop new products;
and limits government resource management to issues
too large or commodities too scarce for independent
market methods to satisfy national needs. In our
judgment, however, the introduction of horizontal
management is premature; the transportation and
communications systems are not prepared to support
the added burden; and most Chinese factory manag-
ers lack the skill to analyze markets and make
production decisions on the basis of their analysis. For
example, a recent Embassy report of a Chinese
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
industrial survey suggests that some manufacturers of
finished goods have pared output in response to lower
demand, but that parts suppliers have not, resulting in
costly and wasteful inventory buildups.
The Education Gap
A more critical shortcoming of China's program is
education. Beijing only recently mandated nine years
of education for all Chinese. But press articles and
other public sources suggest that reform programs,
especially in rural areas, may have resulted in a
shorter average education because families prefer to
have their children in the fields or shops helping to
earn a living.
According to a study by the World Bank, China's
advanced education programs tend to focus on narrow
applications, with few institutions offering liberal arts
programs. On the face of it, that should be helpful in
filling China's need for specialists and technicians.
But China also needs people who are more broadly
educated, who can think abstractly, who have fore-
sight and can plan projects and see them to fruition,
and who can become the industrial and political
leaders of tomorrow. Western observers see a genera-
tion of leaders in their seventies and eighties now
passing the torch to men and women in their fifties.
The follow-on generation of 30-to-40-year-olds were
scarred by the Cultural Revolution, however, and,
though we are unsure of the long-run impact, the
disruption in their educations certainly undercut their
opportunities to develop qualifications for positions
that could put them in contention for future leader-
ship roles.
Management Shortfalls
If-as Beijing expects-initiative, innovation, and
profit motivation are to be important sources of
economic growth and development, then China has a
formidable chore ahead retraining managers for its
400,000-plus enterprises and bureaucracies. China's
needs are wide ranging, from a consistent accounting
system to new attitudes. For example, many Western
observers expect China-because of its centralized
economy-to have a well-developed statistical system
for reporting production and imposing quotas. But
management instructors at the Dalian Training
School, a US-backed joint program to train Chinese
factory managers in Western techniques, have found
their Chinese students unable to conceptualize bal-
ance sheets, production costs, depreciation, and other
standard accounting methods. Beijing apparently has
accepted the need to adopt at least some Western
accounting practices; a recent press article announced
that China would attempt to train 10,000 certified
accountants by the end of the century. The article
failed to note, however, that China lacks procedures
as well as personnel.
To professionalize its industrial leadership, China has
imposed new requirements for factory managers, in-
cluding courses and examinations. But a key element
in successful industrial reforms will be much more
difficult to achieve. In our judgment, Beijing must
determine-and probably redefine-the role of the
factory, and that will require some major changes of
attitudes:
? Plant managers once considered successful for
meeting quantitative goals must adjust to new crite-
ria demanding quality, innovation, marketing skills,
and profits.
? Although reforms have nominally reduced the role
of the party, the central authority at many enter-
prises is still the party secretary, and key decisions
are still based on party line rather than on the
factory's business environment.
? Enterprises will have to consider trimming their
25X1
9
work forces- em- 25X1
ployment levels of three to five times what would be 25X1
necessary to run an enterprise efficiently.
25X1
Achieving Progress and Coping With Its Fallout
Implementing reforms has been and will continue to
be awkward for Beijing because the results-some-
times unanticipated-pose philosophical as well as
practical dilemmas. The introduction of such reforms
as free markets for some goods, for example, evoked
Western claims that China was adopting capitalism,
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
The Sociopolitical Role of the Factory:
Another Constraint?
of its other social roles as well.
Factories in China have considerable responsibilities
beyond simple production of goods. They provide
employees with a full range of social services such as
housing, medical care, and child care. Because fac-
tories generally do not fire unneeded employees, they
provide a de facto social security system as well.
According to Embassy reporting, Beijing will begin
this summer to introduce a social safety net including
retirement and unemployment benefits that will re-
lieve factories of some of the burden. However, to
improve efficiency over the next several years, fac-
tories also may press the government to assume more
diminution of that role would cause friction.
Redefining the functions of factories may change
their political role as well, which may cause tension
between factory management and party officials. The
party has long been involved in factory management
and used meetings of the work force to foster and
enforce party policies. Beijing has called for a lower
party profile at the factory level, however, to permit
economic forces to drive decisionmaking. But because
party officials may view their role at the enterprise
level as their main source of power, we expect that
claims that Beijing found embarrassing. The leader-
ship is sometimes hardpressed to justify its policies
within the framework of its political heritage. "Social-
ism with Chinese characteristics" has been only
murkily defined, leaving vague the role of traditional
Communist or socialist institutions such as the party,
the planning process, and state-set prices. The practi-
cal issues-technology absorption, unemployment,
and social and resource pollution-however, could
undo much of the progress China has made.
disproportionately large share of Chinese are
term concerns.
At the core of many of these reported inadequacies
are a lack of training for labor and management and
weaknesses in the industrial structure-both long-
trained not by vocational schools but by their fac-
tories, where they are given very narrow instruction
on particular tasks, with no attempt to promote
understanding of their jobs in the context of the whole
product or the factory's production to instill pride and
motivation. Without these, we doubt that Chinese
workers will have the ability to understand new
technologies, and, thus, absorptive capacity will con-
tinue to be weak.
Absorbing Technology: Now That We've
Got it, What Do We Do?
Statements by Chinese officials
make clear that
China has deep-rooted problems using advanced
equipment and technology in civilian applications.
Stories of poorly maintained, incorrectly operated, or
Beijing is aware-as indicated by
official press articles calling for improvement-that
technology absorption is one of the most critical
challenges China faces. Until workers can use modern
technologies effectively, we believe-on the basis of
the experiences of other developing nations-that
China's economic modernization plans will be ham-
pered.
Absorbing Excess Labor: Now That We
Don't Need It, What Do We Do?
And if China successfully introduces advanced tech-
nologies and more efficient machinery, what happens
to displaced unskilled and semiskilled laborers? The
Chinese acknowledge that unemployment is an issue
in large urban areas such as Shanghai, where rising
crime is frequently attributed to street gangs of
jobless youths. According to the US Census Bureau,
at least 10 million jobs must be created annually
through 2000. Moreover, the Census Bureau has
identified a striking discrepancy between Beijing's
planning for urban population growth and for urban
employment, with jobseekers far outnumbering job
creation.
25X1
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
According to China's State Statistical Bureau, at
yearend 1984 China had 3.5 million persons "await-
ing employment." More than 63 million worked in
industry, of whom nearly one-third were in the ma-
chine-building sector, where underemployment is re-
ported to be high.
unemployment and underemployment in
machine building is growing rapidly because factories
are having trouble developing new markets.
1.5 million defense workers have
been put on half pay because their factories cannot
adjust to new demands to produce civilian goods.
Taking all these factors into consideration, we expect
that unemployment and underemployment will be a
major concern for Beijing over the next 15 years and
that this could be a disruptive social issue.
The Price of Industrialization: Pollution
Takes Many Forms
China's campaign against spiritual pollution' reflect-
ed the leadership's somewhat schizophrenic attitudes
toward the balance of Western and socialist influ-
ences, and greater involvement in the international
economy will heighten the tension. Environmental
pollution will be of greater importance to industry,
however. Already short of water, China persists in
managing its water supplies cavalierly, dumping un-
processed human and industrial wastes indiscrimi-
nately. Beijing is becoming more aware of the prob-
lem; a recent China Daily article, for example, urged
purification of industrial waste water and domestic
sewage for reuse and protection of water resources
from pollution. But we have no evidence that Beijing
has established a policy on water use and pollution or
has tried to protect industrial and drinking water. We
believe China's water resources will become an alarm-
ing social and economic issue by the end of the
century-and probably earlier-and that Beijing will
have to begin construction of water treatment plants
on a massive scale.
' Building on remarks made by Deng Xiaoping in September 1983,
conservative party propagandists initiated the anti-spiritual-pollu-
tion campaign, ostensibly to attack corrosive aspects of Western
"bourgeois" culture. As it gained momentum in late 1983, conser-
vatives used the campaign to criticize elements of Deng's reform
program. Alarmed at this development, Deng cut off the campaign
in early 1984, silencing conservative critics and at least temporarily
forbidding the use of the term "spiritual pollution" in the official
media. The episode demonstrates the continuing volatility of the
Air pollution will similarly test Beijing's ability to
marshal resources to treat a major national problem.
In spite of China's best efforts to diversify energy
sources, coal will continue to be the primary fuel for
industry. Conversion of urban households to gas, if
accomplished, would stanch a major source of air 25X1
pollution, but power plants and industry would contin- 25X1
ue to belch smoke. Diplomats who 25X1
have lived in Chinese cities, especially Beijing, specu- 25X1
late that winter air 10 years from now will be all but 25X1
unbreathable, indeed nearly solid with particulates, if
action is not taken now. Chinese officials, though they
acknowledge the problem, have done little. Some
factories are experimenting with solutions. 25X1
certain factories 25X1
have installed water and exhaust filtration systems.
Because Beijing's industrial policies often evolve from
the actions of advanced factories, we believe Beijing
may within the next few years laud these enterprises
and press others to emulate them.
At present, our best guess is that Beijing will muddle
through the next 15 years using a crisis management
approach to ameliorate-but not eliminate-major
bottlenecks as they threaten to hobble the economy.
We believe, however, that Beijing will remain com-
mitted to reform and will turn increasingly outward
for solutions, seeking technological, managerial, and
financial assistance from the West.
Clearly, China's development plans leave no sector
untouched, offering many commercial opportunities
for US and other Western firms, as well as openings
for cooperation on a government-to-government basis.
In fact, we believe that China must become further
integrated into the world economy for its moderniza-
tion program to work, and that imports of technology
and materials as well as massive foreign credit will be
necessary.
US firms could be of critical importance to China if
they can gain and take advantage of market access. In
particular, US firms have high potential for commer-
cial links in energy-including coal, oil, hydropower,
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4 _
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
for increasing exports
power transmission, and conservation; satellite and
fiber-optic communications systems; transportation
systems and such sectors as road building; pollution
control systems; quality control systems, electronics
equipment and software, and new building materials.
China also could use US expertise in such services as
insurance and accounting. Finally, US firms could
assist China in developing packaging and promotion
have been reluctant to do so for fear of
creating competition for their own industries. Howev-
er,Dothers offer low-cost financing for
many comparable or superior technologies, thus un-
dercutting US competitiveness. Moreover, as the turn
of the century approaches, greater competition will
come from West European nations, Brazil, South
Korea, and other countries now emerging as interna-
tional economic players. If the United States can
assure its firms of equal opportunity in the Chinese
market, then we believe that many US firms could
conti rofit from China's development plans.
production capacity. Some nations
The United States now competes primarily with Ja-
pan and West Germany for sales of capital goods to
China. To date, according to industry and diplomatic
reports, US firms have been more willing to offer
China production technology as well as equipment,
thereby helping the Chinese purchaser to develop
Beijing also will probably look to the West to provide
more low-cost financing than will be available. Those
countries that can provide concessionary financing to
back their exporters will be in a favorable competitive
posture; those offering development loans at low
interest rates will similarly benefit, especially if the
loans require the recipient to buy that country's
products for the development project. Because
China's thirst for low-cost financing and for imports
that require little expenditure of foreign exchange is
25X6
25X6
seemingly limitless, we expect to see increasing use of
unconventional financing methods and compensation
trade to enter and remain in China's markets.
At the same time, as the Chinese economy strength-
ens, we envision China's becoming a market force
competitive primarily with today's industrializing na-
tions-Brazil, Taiwan, South Korea, for example-
and posing a threat to firms in declining US indus-
tries, such as furniture, metal products, and consumer
electronics. The result will be new demands by US
industry for protection from less expensive imports.
Moreover, China hopes to increase substantially ex-
ports of agricultural and other products that would
compete directly with US goods in third-country
markets. US policymakers can expect, then, contin-
ued conflicting demands from exporting industries
that want guaranteed access to the Chinese market,
exporting industries that want assistance to compete
against China in other markets, and domestic indus-
tries that want to prevent Chinese access to the US
market. In addition, China will continue to demand
market access and a bilateral trade balance, suggest-
ing that trade friction will be a key characteristic of
US-Chinese relations at the turn of the century.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200850001-4