CHINA'S FOREIGN TRADE IN 1985 AND PROSPECTS FOR 1986

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP11S00229R000202110001-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: October 12, 2011
• Sequence Number: 1
• Publication Date: March 28, 1986
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
28 March 1986
China's Foreign Trade in 1985 and Prospects for 1986
Summary
Over the past year, Beijing has tightened its control of the foreign
trade apparatus, largely in response to declining foreign exchange reserves
and a sharply rising trade deficit. High demand in China's industrial sector,
however, will keep imports high, while increasing protectionism in the
West will continue to dampen export growth. Moreover, lower prices for
petroleum and petroleum products--which represent approximately
one-fifth of the country's export revenues--will decrease Beijing's foreign
exchange earnings. In an effort to narrow its trade deficit, we believe
Beijing will continue to exert more control over its foreign trade as a
means of reducing imports in the face of expected low export growth. We
believe, however, that the impact on US exports to China will be marginal.
I
This memorandum was prepared by I (Office of East Asian Analysis.
Information available as of 28 March 1986 was used in its preparation. Comments and
queries are and may be directed to the Chief, China Division, OEA,
25X1
25X1
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After more than five years of progressive liberalization of many foreign trade
practices, over the last year Beijing has begun to reimpose selected central controls
over foreign trade. The reassertion of control by the Ministry of Foreign Economic
Relations and Trade (MFERT) is apparently in response to a 25-percent decline in foreign
exchange reserves between September 1984 and September 1985, and to the
leadership's concern about a growing trade deficit. Although Beijing's current level of
foreign exchange reserves is sufficient to cover three months' imports, Chinese officials
prefer to maintain a five-month foreign exchange reserve cushion.
One Step Back for Decentralization
Recentralization began with MFERT regaining control over the establishment of
new trading organizations. China's open-door policy had given rise to a proliferation of
import-export companies, many of which lacked the necessary skills for conducting
trade. As a result, foreign and domestic traders encountered considerable confusion.
Moreover, the competition among the many Chinese entities--both national and
provincial--authorized to trade had initiated a price war, driving down the prices of
China's exports and dampening foreign exchange earnings. Under the new guidelines, a
new organization may be approved only if its business scope does not overlap existing
companies and the new firm has qualified personnel.
In another move to strengthen management over foreign trade, last spring MFERT
implemented a system of licensing imports and exports. Initially export licenses were
required for 30 products; later the list was trimmed to 15 key export products. Last fall,
however, Beijing broadened its export license requirement to 151 items, covering almost
every major product the country exports. Import licenses were also imposed to dampen
the flow of incoming goods--many of which China could produce domestically--and to
conserve foreign exchange. In addition, in the past year Beijing announced changes in
its customs regulations--increasing some tariffs to protect infant industries from
imports, reducing import duties on some goods including raw materials and
high-technology items, and abolishing nearly all export duties. These measures will help
reduce the variation in local assessments of duties and licenses, which had caused
confusion among foreign traders.
Despite these measures, China posted a record $14.9 billion trade deficit last
year, according to Chinese customs statistics. Imports soared more than 50 percent in
1985 as rapid industrial growth and high consumer demand--sparked by an increased
money supply--led to sharply higher purchases of raw industrial materials and
consumer durables. Although petroleum export revenues increased, earnings by other
major exports--such as textiles and apparel--were sharply lower and, according to
Chinese data, overall export earnings rose by only 6 percent.
The Search for New Export Markets
Developing New Partners. While Beijing recorded only a marginal increase in
exports to its major trading partners (Hong Kong, Japan, and the United States), its
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exports to the Soviet Union, Latin America, and Eastern Europe showed substantial
increases. We estimate that exports to the Soviet Union increased more than 35
percent over 1984, along with an additional 22-percent increase in goods to Eastern
Europe. Exports to Mexico and Chile more than tripled in 1985, reflecting Beijing's
strong interest in developing ties to Latin America.
Hong Kong continues to be China's largest export market, accounting for more
than one-fifth of China's total trade. Beijing has actively pursued closer economic links
to promote the territory's stability and prosperity. Moreover, China is particularly in
need of a host of services that Hong Kong can provide--financial, trade, and shipping.
Earlier this year, Hong Kong opened an office in Beijing to further promote trade--its
first official representation in China--with a second office scheduled to open in
Shanghai before yearend.
Moving Into New Commodities. Although grain output fell 7 percent, China
became a net exporter of grain last year, almost tripling grain export levels to over 9
million metric tons. Imports--15 percent of which were from the United States--totaled
about 5.4 million metric tons. Corn constitutes nearly half of China's grain exports with
the balance in soybeans and rice. Sales to Hong Kong, the Soviet Union, West Germany,
the Philippines, and Singapore account for more than half of China's grain sales.
Although revenues from exports of petroleum and petroleum products jumped 25
percent in 1985, Beijing's search for new export markets will intensify this year as China
feels the effects of lower oil prices. For the past six years, petroleum and petroleum
product exports have accounted for roughly one-fifth of total export earnings,
amounting to nearly $6.4 billion in 1985. If Beijing carries out its promise to hold oil
export volume at the 1985 level in support of OPEC's attempts to shore up oil prices,
China could lose at least $1.6 billion in foreign exchange earnings this year.'
For the next few years, we expect manufactured goods to provide the largest
source of export growth as the Chinese substitute sales of processed goods for raw
materials wherever possible. In addition to the higher value-added earnings that
processed goods command, this strategy is also directed toward compensating for the
increase in volume quotas developed nations impose on imports from China. The
Chinese are also attempting to increase their gains from trade by moving into exports
that reflect their comparative advantage in labor-intensive manufactured goods. For
example, earlier this year, Beijing announced its plan to export $1.5 billion worth of
carpets in the next five years and established the China Carpet Import and Export
' This assumes that oil prices will average $18 per barrel in 1986 and that petroleum
products--nearly 20 percent of China's oil-related export volume--will earn
approximately 25 percent more per barrel than crude.
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Implications for the United States
China has little chance of turning to alternative commodities to compensate for
the expected drop in oil export revenues--attempts over the past several years to
diversify exports have met with limited success. Hence, Beijing will probably focus on
slowing runaway imports. We believe much of the slowdown in import growth will be
effected through stricter foreign exchange controls, including an additional curtailment
of the purchase authority previously granted to local traders under decentralization.
Beijing will also continue other restrictive measures such as import licensing and
selective tariff increases. According to Hong Kong press reports, Beijing's attempts to
conserve foreign exchange are driving some small, marginal Chinese import-export
companies out of business. These same sources caution that, because of foreign
exchange shortages, China may also renege on negotiated contracts--similiar to the
cancellations of grain and synthetic fiber contracts that occurred in 1983.
We believe that tightening import restraints will change the composition of
China's purchases over the next year. Restrictions are already in place on commodities
that China can produce domestically, including such consumer durables as color
televisions, refrigerators, radios, and motor vehicles. But Beijing will also need to cut
deeper into its import shopping list. We believe these cuts will begin with capital
equipment purchases for postponed or cancelled government projects.
We believe, however, Beijing will continue to encounter problems slowing
economic growth and therefore will achieve only moderate success in reducing
industrial and capital equipment purchases. Consequently, the effect on US exports to
China, more than one-third of which are machinery and transport equipment, will be
marginal. Moreover, demand for raw materials and chemicals--which represent an
additional 25 percent of US exports to China--probably will also be sustained.
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CHINA: EXPORTS, F.O.B., BY AREA
8 -----------------------------------------------------------------------------------------------------------
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0
_J 4
E
II III IV
1984
III IV I II III IV 1 II III IV
1981 1982 1983
II III
1985
Legend
DEVELOPED COUNTRIES
LESS DEVELOPED
COUNTRIES
COMMUNIST COUNTRIES
TOTAL
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 1
Z
0
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CHINA: IMPORTS, F.O.B., BY AREA
II III IV
1981
I! III Iv I II III Iv 1 II 111 Iv I II III
1982 1983 1984 1985
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Legend
DEVELOPED COUNTRIES
LESS DEVELOPED
COUNTRIES
COMMUNIST COUNTP
TOTAL
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UNITED STATES-CHINA TRADE
3 -------------------------------------------------------------------
1979 1980 1981 1982 1983 1984 1985
BILLION US $
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China's Foreign Trade in 1985 and Prospects for 1986
1 - Mary Yee, Office of East-West Economic Policy, Room 4450, Department of the
Treasury
1 - Joan Plaisted, Office of Chinese Affairs, Room 4318, Department of State
1 - William B. Abnett, Director of China Affairs, USTR, Room 316, 600 17th St., NW,
Washington, DC
1 - Myna Stoltz, Office of East Asia and the Pacific, Room 3820, Department of
Commerce
Central Intelligence Agency
2 - C/OEA/CH
1 - C/OEA/CH/FOR
1 - C/OEA/CH/DEF
1 - C/OEA/CH/DOM
1 - C/OEA/CH/DEV
1 - OEA/Production Officer, 4G-48
1 - D/OEA, 4F-18
1 - DDI, 7E-44
1 - Senior Review Panel, 5G-00
1 - PDB Staff, 7F-30
1 - NIO/EA, 7E-62
1 - C/PES, 7F-24
1 - FBIS/NEAAD/China Branch, 306 Key
1 - C/EA
1 - CPAS/ILS, 7G-50
5 - CPAS/IMC/CB, 7G-07
1 - Author
1 - Chrono
1-
OEA/CH/DEV 27Mar86
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