MOBILIZATION AND ALLOCATION OF RESOURCES THROUGH THE NATIONAL BUDGET OF COMMUNIST CHINA 1950-55

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01093A001100070001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 68
• Document Creation Date: November 16, 2016
• Document Release Date: October 27, 1999
• Sequence Number: 1
• Publication Date: June 15, 1956
• Content Type: REPORT

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SE
PROVISIONAL INTELLIGENCE REPORT
MOBILIZATION AND ALLOCATION OF RESOURCES
THROUGH THE NATIONAL BUDGET
OF COMMUNIST CHINA
1950 - 55
CIA/RR PR-143
15 June 1956
CENTRAL INTELLIGENCE AGENCY
OFFICE OF RESEARCH AND REPORTS
ENT NO.
` VVF.q: 0 i 937
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This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Sees. 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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MOBILIZATION AND ALLOCATION OF RESOURCES
THROUGH THE NATIONAL BUDGET OF COMMUNIST CHINA
1950-55
cIA/RR PR-14+3
(ORR Project 15.850)
NOTICE
The data and conclusions contained in this report
do not necessarily represent the final position of
ORR and should be regarded as provisional only and
subject to revision. Comments and data which may
be available to the user are solicited.
Office of Research and Reports
S-E-C-R-E-T
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FOREWORD
This report attempts to identify and evaluate the source of the
revenue which is subject to control and allocation through the
national budget of Communist China; to estimate the proportionate
contributions of the various economic sectors to the national budget;
to show the budget allocations for defense, investment, administra-
tion, and consumption as proportions of sector and total national
output; and to appraise the adequacy of budgetary resources for in-
vestment requirements under the First Five Year Plan (1953-57) of
Communist China. For these purposes, the budgets of Communist China
are described as to general features and accounting practices, and
the final national budget for 1954 is analyzed in detail, comparisons
being made with the budgets of previous years and with the planned
budget for 1955. Budgetary trends are reviewed in relation to
economic growth, and the estimated available budgetary resources
are analyzed in relation to the needs for investment funds necessary
to accomplish the Five Year Plan for economic development through
1957?
The information used in this report includes the annual budget
reports of the Ministers of Finance for the years 1950-55, other
commentaries of Chinese Communist officials and government organs
concerning budgetary plans and results, official announcements of
tax and control regulations and of results of production and trading
operations of government and private organizations, a budgetary
accounting handbook used in training students in national budget
accounting, reports of refugees and repatriates from Communist China,
and analyses of the gross national product of Communist China that
have previously been completed in CIA.
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CONTENTS
Summary and Conclusions . . . . . . . . . . . . . . . .
.
1
I. Introduction . . . . . . . . . . . . . . . . . . .
.
2
A. General . . . . . . . . . . . . . . . . . . . .
.
3
B. Budget in Relation to the State Bank Loan
Program . . . . . . . . . . . . . . . . . . .
.
6
C. General Trends in Budgetary Receipts
and Expenditures, 1950-55 . . . . . . . . . .
.
7
D. Size of the National Budget in Relation
to Output . . . . . . . . . . . . . . . . . .
.
12
II. Mobilization of Resources Through the National
Budget . . . . . . . . . . . . . . . . . . . . . .
.
13
A. General . . . . . . . . . . . . . . . . . . . .
.
13
B. Taxes . . . . . . . . . . . . . . . . . . . .
.
14
1. Industrial and Commercial Taxes . . . . . .
.
14
2. Other Taxes . . . . . . . . . . . . . . . .
.
18
3. Budget Burden on the Peasants . . . . . . .
.
18
C. Profits and Depreciation Reserves of State
Enterprises . . . . . . . . . . . . . . . . .
.
19
D. Credit, Loans, and Insurance . . . . . . . . .
.
23
E. Other Revenue . . . . . . . . . . . . . . . . .
.
26
F. Surplus Revenue . . . . . . . . . . . . . . .
..
29
III. Allocation of Resources . . . . . . . . . . . . ... .
30
A. Economic Construction . . . . ... . . . . . . . .
31
B. Defense . . . . . . . . . . . . . . . . . . . . .
34
C. Social, Cultural, and Educational . . . . . . . .
37
D. Administration . . . . . . . . ... . . . . . . .
38
E. Credit, Loans, Insurance, and Other . . . . . . .
41
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Page
IV. Five Year Plan and the Budget . . . . . . . . . . . . 41
A. Effect of Production Un.derfulfillment
on the Budget . . . . . . . . . . . . . . 42
B. Estimated Expenditures in 1957 . . . . . . . . . 44
Appendixes
Appendix A. Classification of the Revenue and Expend-
iture Accounts . . . . . . . . . . . . 47
Appendix B. Methodology . . . . . . . . . . . . . . . . 55
Appendix C. Gaps in Intelligence . . . . . . . . . . . 57
Appendix D. Source References . . . . . . . . . . . . . 59
1. Communist China: Budget Revenue and Expenditures,
1950-55 . . . . . . . . . . . . . . . . . . . . . . 8
2. Communist China: Budget Revenue, by Sector,
1950-55 . . . . . . . . . . . . . . . . . . . . ... 9
3. Communist China: Relationship of the Budget
to Gross National Product, 1950-55 . . . . . . . . . 13
4. Communist China: Relationship of Budget Receipts
to Sector Income, 1954 . . . . . . . . . . . . . . . 15
5. Communist China: Revised Industrial and Commercial
Tax Structure of 1 January 1953 Compared with That
of 1949-50 . . . . . . . . . . . . . . . . . . . . . 17
6. Communist China: Estimated Tax Burden on Peasants,
1954 20
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7.
Communist China: Estimated Breakdown of the Budget
Category Profits and Depreciation Reserves of State
Enterprises, by Sector, 1954 . . . . . . . . . . . .
24
8.
Communist China: Estimated Breakdown of the Budget
Category Credit, Loans, and Insurance Receipts,
1954... ....................
26
9.
Communist China: Estimated Breakdown of the Budget
Category Other, 1954 . . . . . . . . . . . . . . . .
28
10.
Communist China: Disposition of the Reported Surplus
Brought Forward in the Planned Budget of 1955 . . .
30
11.
Communist China: Allocation of Budgeted Economic
Construction Expenditures, by Sector, 1953-55 . . .
33
12.
Communist China: Estimated Breakdown of Economic
Construction Expenditures, by Type of Expenditure,
1954 ........................
35
13.
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Social, Cultural,
and Educational, 1954 . . . . . . . . . . . . . . .
39
14.
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Administration, 1954 . . .
40
15.
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Credit, Loans,
and Insurance and Other, 1954 . . . . . . . . . . .
42
16.
Communist China: Budget Receipts, by Sector of Origin,
1954 ........................
45
17.
Communist China: Estimated Expenditures in the Budget,
1957 ........................
46
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CIA/RR PR-143 S-E-C-R-E-T
(ORR Project 15.850)
MOBILIZATION AND ALLOCATION OF RESOURCES
THROUGH THE NATIONAL BUDGET OF COMMUNIST CHINA*
1950-55
Summary and Conclusions
The rapid growth of the national budget of Communist China re-
flects the drive of the state toward the industrialization and
modernization of the Chinese economy. The planned budget for 1955,
almost 30 billion Yuan ($12.7 billion at the official exchange rate**),
is more than four times greater than the budget for 1950. In re-
lation to the gross national product (GNP), the budget has risen from
about 16 percent in 1950 to 31 percent in 1955. Expenditures and
receipts of the budget will continue to rise in the future but at a
declining rate as the sources of nonrecurring receipts, largely a
product of socialization, are exhausted.
The budget provided over 75 percent of the financing for invest-
ment purposes in 1955. Of the resources allocated in the budget,
about 50 percent went to economic construction, and the defense sec-
tor obtained about 25 percent. Within the category of economic con-
struction, heavy industry and rail transport are the chief recipients
of funds. This pattern of investment reflects the allocation of
economic construction funds under the Five Year Plan of Communist
China. Achievement of the Five Year Plan investment program is largely
dependent upon the ability of the state to obtain adequate funds
through the budget.
Budget revenues are obtained chiefly from taxes and from the
profits of state enterprises. Inasmuch as agricultural taxes, in-
cluding industrial and commercial taxes on goods purchased by
peasants, contribute 28.7 percent of the budget revenues, agricultural
income still remains a major source of tax revenue. A large and
growing share of national income and of budget revenue originates in
those sectors of the economy controlled by budget allocations. The
The estimates and conclusions contained in this report represent
the best judgment of ORR as of 1 March 1956.
** The exchange rate used in this report is 2,367 Yuan to 1 US dollar.
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planned increases in production in all sectors of the economy during
1956-57 will provide the necessary revenue for the investment goals
of the Five Year Plan and other estimated budget expenditures.
The national budget of Communist China is used by the state as
a major instrument in the achievement of the basic goals of the
regime -- industrialization, modernization of defense, and socializa-
tion of the economy. State control over the allocation of resources,
which is essential for the fulfillment of the program, is achieved
by directly allocating resources in the state-owned sectors of the
economy and by anindirect exercise of controls over the remainder
of the economy through the -application of rigid fiscal and monetary
policies.
The national budget of Communist China is a consolidated cash
account which includes the revenue and disbursements of all levels
of government and the profits and investment expenditures of all
state industrial enterprises.* The Minister of Finance gives an
annual report on the budget, consisting of the-final budget of the
previous year and the planned budget of the current fiscal year.
The fiscal year usually is well under way when the budget report is
issued, as in 1-955 when the Minister of Finance, Li Hsien-nien,
reported on the budget in July. The budget reports give totals
for.five general categories of revenue and expenditures, with little
or no descriptive; detail about the accounts from which the larger
categories are constituted. The official budget accounting manual
(which was published in 1952 for the training of Chinese Communist
students), however, contains a description of the items constituting
* The working capital requirements of state enterprise-s are the
dual responsibility of the budget and the state bank. This responsi-
bility has been divided as follows: industrial enterprises get most
of their working capital through the budget, only borrowing from the
state bankfor seasonal or emergency needs, whereas commercial enter-
prises borrow the bulk-of their working capital from the state bank
and receive only minor portions through. the budget. The state bank
loans are not reflected in the budget. I/ (For serially numbered source
references, see Appendix D.)
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the major categories and provides, along with scattered information
from other sources, sufficient basis for analyzing the accounts.
The major revenue categories include taxes (agricultural, indus-
trial, commercial, and other); profits and depreciation reserve
funds of state enterprises; credits, loans, and insurance; the
category other; and surplus carried forward. The major expenditure
categories include economic construction; defense; social, cultural,
and educational; administration; credit, loans, insurance; and the
category other. Another expenditure category entitled capital con-
struction was given for the first time in the 1955 budget report.
The category capital construction covers expenditures for fixed
assets under economic construction; social, cultural, and educa-
tional; and administration.
Certain outstanding characteristics of the Chinese Communist
budget, particularly as to revenue, differentiate it from the
national budgets of private enterprise economies. Chief among
such peculiarities in the revenue accounts is the revenue derived
from profits and depreciation reserve funds of state enterprises,
which constituted as much as 38.7 percent of 1954 budget receipts.
The much smaller receipts of fees and charges of budget-supported
hospitals, schools, and other welfare institutions are another type
of revenue. Another such item, of significance in the past, was
the very considerable revenue derived by the government in 1950
from the liquidation of some of the assets taken over from the
Nationalist (Kuomintang) government. Only those assets in excess
of quotas specified for particular enterprises were liquidated, and
the receipts therefrom were entered in the budget under the category
of other revenue. When the sale or assignment was made to a state
enterprise, the value of the asset appeared as an expenditure.* 3/
Other revenue based on existing capital assets arose in 1951 when
the assets of state enterprises were revalued. The increments in
value were listed both as receipts and as an investment expenditure. 4
To be noted also is the government's revenue from arbitrary tax
penalties, confiscations, and "labor reform" (forced labor) camps --
receipts to be found only in a totalitarian economy. Finally, the
* There is a possibility that certain of these confiscated assets
were not marketable and so have not been a source of receipts. Their
estimated value may be listed as part of the surplus, accounting for
surplus figures exceeding the actual budget results.
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handling of loan funds through the budget, although not arising
necessarily from the socialization process in the Chinese Communist
economy, is different from that in Free World countries. For example,
producer and credit cooperatives and other semisocialist groups are
provided some of theirworking capital in the form of loans which
are allocated through the budget and which, when repaid, are listed
as new revenue. This practice tends to inflate the accounts. 5
The accounts are also inflated by the receipts and repay-
ments of government foreign and domestic loans, which are included
in the budget of Communist China. Such borrowing has resulted in
the mobilization. of resources to the extent of at least 2 billion
yuan ($845 million at the official exchange rate*) for the develop-
ment program of Communist China since 1950.
Because the Chinese Communist budgets have been several times
larger than any Nationalist Chinese budget, they have elicited both
amazement and suspicion among Western observers. Even when adjust-
ments were made for the addition of Manchuria as a taxable area, for
the inclusion in the consolidated national budget of all local
receipts from the hsien (county) level up, and for the enlarged
sphere of government activity, there was doubt that the level of
output in Communist China could support such budgets. The numerous
forecasts of financial chaos in Communist China have not been borne
out, however, for budget revenues have continued at a high level,
and the general price level has been relatively stabilized since 1952.
Among the reasons advanced by Western observers for fore-
casting financial collapse has been the amount of nonrecurring
revenue in the Chinese Communist budgets. Each year a new device
has been used to absorb private capital, such as confiscation of
enemy property, socialization of private enterprise, fines from
the "Five Anti" campaign,** "contributions" in support of the Korean
War, and, more recently, economic construction bond drives. The
belief that such exhaustion of private assets is having an impact
on the budget is supported by a new approach that has recently been
taken to maintain financial stability -- the economy drive of 1955.
* Unless otherwise specified, all dollar values in this report
are in terms of US dollars. The exchange rate used in this report
is 2.367 yuan to 1 US dollar.
A campaign of capital levies against alleged tax evaders and
profiteers among private traders and investors.
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Save-food campaigns, elimination of "nonproductive" investment, ad-
ministrative staff cuts, and -- even more significant -- across-
the-board cuts in basic construction expenditures have been insti-
tuted, indicating at least a very tight revenue situation. Additional
evidence that financial stringency may be of increasing urgency is
the deficit on current account and the small revenue increase planned
for 1955? Planned expenditures exceed planned current revenue for
the first time since 1950. The rate of increase in planned receipts
is less than in any previous budget and just matches the planned
rate of increase in gross industrial and agricultural production.
Increased use of money taxes by the Chinese Communists is
another change from the past. As a result of the grain-purchase
program beginning in late 1953, even peasants are now receiving sub-
stantial parts of their incomes in cash, and their market purchases
cause commodity and turnover taxes ostensibly to assume the dominant
rank formerly occupied by the grain tax in the budget tax receipts.
The monetary value of grain taxes, however, is a point of some obscur-
ity insofar as budget figures are concerned, as official statements
have placed grain taxes at varying proportions of the crop. Announce-
ments of the volume of grain taxes, when related to the budget, indi-
cate that the tax grain is carried at a low price which distorts the
monetary value of the taxes.
Another apparent inconsistency of budget reports of Communist
China is the claim of annual balance between receipts and expendi-
tures. When Po I-po was Minister of Finance, until 1954 the previous
year's surplus in each report was included with current receipts,
giving the appearance of annual surpluses from 1950 on. Later,
revised budget reports for previous years show a deficit in 1950
and a surplus from then on. Western analysts have found it difficult
to accept the surplus claimed in 1951, when 1 million Chinese troops
were fighting in Korea. The explanation appears to lie in the
probability that some of the receipts from the 1952 "Five Anti."
campaign were put back into the 1951 budget. This would be contrary
to the Chinese Communists' officially stated accounting practice as
set forth in their budget manual which requires that the budget be
on a cash basis, closing on 31 December of each year. It is apparent,
however, that the whole budgeting process runs behind schedule and
that subordinate units avoid reporting until budget plans are ful-
filled.
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Questions have also been raised. as to the actual level of
defense expenditures, a matter which will be discussed below in
connection with the allocation of resources.
Finally, the Chinese Communists have shown some astuteness
in devising ways of maintaining production and revenue despite the
threat to incentives which is implicit in the heavy tax burden.
The principal device in maintaining revenues at the required level
has been to use standard yield and normal income in computing grain
and income taxes. Thus the government decides what a certain grade
of land should produce or the income that a firm or peddler should
make and assesses; the tax on the postulated rather than on the
actual income.
B. Budget ji Relation to the State Bank* Loan Program.
Of particular interest in connection with budgetary control
and the size of the budget is the loan program of the state bank.
As suggested above, budget policy really shapes the program of the
state bank, the second most important means of resource control.
This is borne out by the fact that budget funds make up 85 percent
of the state bank deposits, part of the balance being in the form
of private savings, which amounted to 1.63 billion yuan in 1954.
Under the present division of responsibility, the state bank uses
80 percent of its funds to provide loans of working capital to
state and cooperative commerce. 6 The bulk of working capital of
state and cooperative industry is provided directly through the
budget. Agricultural loans are a divided responsibility, with t
state bank (the agricultural bank since 1955) playing the major
role. Recent budget speeches have made, clear that use of so-called
surplus funds for other than planned ;purposes or failure to build
up a current budget surplus interferes drastically with the state
bank's loan program.
The annual development plans of state enterprises include
-requirements for credit, and, in accordance with these approved
control plans, bank loans are used to supplement the budgetary
allocations. The state bank, in executing its supervisory re-
sponsibility for enforcement of the budget plan through monetary
and credit controls, requires the various government organs and
enterprises to submit in advance their plans for receipts and ex-
penditures of fiords during ensuing quarterly periods of the entire
fiscal year. Cash receipts must be deposited daily in government
All references to the state bank in this report are to the People's
Bank of China. - 6 -
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banks, and expenditure requirements must be planned and approved in
advance. The bank sees to it that transactions are in accord with
the budget plan, including provision for credit requirements, which
must be planned and approved in advance and can be granted only by
the state banks.
In addition to regulation by the budget and the banking
system, other administrative controls, which cannot be readily
reduced to value terms, are used by the Chinese Communists. Price
controls, forced savings, forced procurement of agricultural goods
at fixed prices, rationing, and other measures are essential parts
of the Chinese Communist programs for industrialization and
socialization.
C. General Trends in Budgetary Receipts and Expenditures,
1950-55.
The Chinese Communist planned budget of 1955 reached new
heights in both revenue and expenditures. Planned current receipts
of 28 billion Yuan were 6.91 percent higher than in 1954 and roughly
31 percent of the Chinese Communist GNP. Inclusion of the surplus
carried over from 195+ raises total revenue to 31.2 billion yuan.
Despite a rise in expenditures of 20.7 percent -- to 29.7
billion yuan -- 1955 was the fifth successive year in which a budg-
et surplus was planned; this, however, was to be achieved by off-
setting a deficit on current account by revenue from the surplus
brought forward. The summarized annual budgets of Communist China,
showing categories of revenue and expenditures by amount, by per-
centage of total, and by sector for 1950-55, are shown in Tables 1
and 2.*
The annual budget reports of Communist China present reve-
nue receipts in two ways, according to form of ownership and type of
revenue. Profits, depreciation reserves, and taxes of state enter-
prises have always been the largest source of receipts by sector
and between 1950 and 1955 have risen from 34+ to 69 percent of
receipts. Among the various types of revenue, total tax payments
take first place. The proportionate share of taxes, however, is**
* Tables 1 and 2 follow on pp. 8 and 9, respectively.
Continued on p. 10.
- 7 -
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declining, and the profits and depreciation reserves of state enter-
prises are arising proportion. As percentages of total revenue,
taxes fell from 75 percent of 1950receipts to 49 percent of planned
1955 receipts, and the profits and depreciation reserves of state
enterprises rose from 13 percent to 40 percent of receipts during
the same period.
Credits, loans, insurance,, and the category other are the
remaining types of revenue. A notable increase in these categories
was explained in the 1955 budget speech as being caused principally
by an increase in Soviet-military credit. The elements comprising
these categories and other types of revenue are analyzed in some
detail below.
Expenditure categories of the Chinese Communist budget are
economic construction; defense; social, cultural, and educational;
administration; and the category other, arranged in order of magni-
tude in the 1954 and 1955 budgets. Capital construction expendi-
tures were also given, and these serve as a good measure of fixed
investment from year to year in Communist China. Most of the capi-
tal construction funds come under the allocation for economic con-
-struction, although some involve the -administration and the social,
-cultural, and educational categories.
A small decline in the proportionate share of economic con-
struction expenditures is planned-for 1955, for which a rise in
defense spending probably is-responsible. These twocategories
appear to be competitive and have more or less exchanged positions
over the years. Defense spending took up 40 percent of the 1950
and 1951 budgets and dropped to its present level of roughly 25
percent in 1952. -The reverse trend occurred in economic con-
s.truction, which rose from 25 percent in 1950 to the present level
of about 50 percent, the rise occurring principally in 1952.
Within the economic construction category, heavy industry
and rail transport have been consistently accorded the greatest
share of expenditures. This emphasis in allocation of resources
was intensified in the 1955 budget, which apportioned over 50 per-
cent of economic construction funds to these two sectors. The
largest producers of national income, agriculture and light indus-
try, receive only a minor share of economic construction funds.
Of the 4.4 percent allocated in 1955 to agriculture, forestry, and
water conservancy, almost all is for flood control.
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The Communists have succeeded in holding down the share of
administrative expenditures, thus freeing a greater portion of
revenue for other more productive uses. Administrative expenditures
have steadily declined proportionately from 19 percent of the 1950
budget to 7.5 percent of the 1955 planned budget.
Although the Chinese Communists devote much propaganda to
the peaceful nature of their budget and to their expenditures for
welfare purposes, as a proportion of,the total budget the annual
allocations for social, cultural, and educational activities have
in fact remained fairly constant at about 13 percent.
Recent budgets have been drawn up to provide a general
reserve fund, 7 which would allow some latitude for shifting
expenditure allocations during the fiscal year and for tiding
over the seasonal periods of low receipts of revenue during the
year. Planned budgets since 1953 have contained appropriations to
such a reserve fund, but no final budget has indicated that such a
reserve fund was in fact achieved.
Finally, as. to trends in budget fulfillment, there has been
a consistent underestimate of revenue and overestimate of expendi-
tures. Profits of state enterprises seem to be the most unpre-
dictable revenue category for the Chinese Communist planners, al-
though an unexpected Soviet loan in 195+ caused the greatest single
case of overfulfillment of planned receipts. On the other hand,
failure to carry out planned investment in capital construction
reflects a serious shortcoming in Chinese Communist planning, in
contrast to which there has been regular overspending on economic
construction. This discrepancy may be partially explained by the
fact that certain economic construction expenditures, such as those
for geological surveys, and assignment of working capital and
operating expenses to socialized enterprises are not dependent on
scarce materials and equipment and so can be more readily carried
out. Expenditure fulfillment by such measures may underlie re-
curring press reports of official criticism of wasteful and non-
productive expenditures.
In summary, as budgetary controls have been extended and as
socialized industry and commerce have expanded, budgetary receipts
and allocations have also expanded, although the problem of achieving
a carryover reserve fund appears to be still unsolved.
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S -E -C --R-E -T
D. Size of the National-Budget in Relation to Output.
To givesome perspective to budget magnitudes, total receipts
are related to estimated GNP. This procedure is used with important
qualifications. First, the budget and GNP are not comparable. in-
sofar as the budget includes receipts from other than current pro-
duction,-such as the sale of capital assets. In addition, budget
receipts can be changed without any change in the extent of state
control of the economy as would occur if the state enterprises re-
tained their depreciation reserves or portions of profits for en-
terprise investment as in the USSR. Change in the proportion of
output flowing through the budget cannot be equated to burden on
the economy, because the allocation of the receipts is the impor-
tant determinant and the government activities may have increased
output by more: than the increment of budget receipts. A comparison
of the national budget with GNP shows the budget rising from 15
percent of GNP in 1950 to 30 percent in 1954.
A survey of budget operations over the past 5 years shows
that resources mobilized by the government through the budget have
been allocated primarily to defense and investment activities. Of
total expenditures from 1950 to 1954, about 80 percent were devoted
to these and other nonconsumption purposes.*
A comparison of GNP with total budget receipts shows a con-
stant rise inthe proportion of total budget receipts to GNP, as
shown in Table 3.-WE' This proportion probably will not rise so
rapidly in the future, although the effect on budget receipts of
the recent drive for joint state-private enterprise is not yet clear.
If the state's share of profits greatly exceeds the former income
tax on such earnings, there will be a substantial rise in the pro-
portion of budget receipts to GNP.
* Total expenditures were 81.6 billion yuan. Nonconsumption ex-
penditures totaling 68.3 billion yuan were defined as follows:
23.6 billion Yuan for defense; 33.6 billion yuan for economic con-
struction; and one-half the expenditures for administration and
miscellaneous, or 11.1 billion yuan.
** Table 3 follows on p. 13.
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S -E -C -R -E -T
Table 3
Communist China: Relationship of the Budget
to Gross National Product
1950-55 .
1955
1950
1951
1952
1953
1954
Plan
Gross national product a/
(by end use and in bil-
lion current yuan J)
41.7
57.8
68.7
80.1
85.4
90.6
Percentage increase over
preceding year
38.6
18.8
16.6
6.6
6.1
Budget.(current receipts
in billion current yuan)
6.5
12.96
17.56
21.76
26.2
28.05
Percentage increase over
preceding year
99
35.5
24
20.4
7
Budget receipts as a pro-
portion of GNP (percent)
15.5
22.4
25.5
27.2
30.7
31
a.
b. The price index used for conversion to current yuan is as
follows: 1950, 81; 1951, 87; 1952, 100; 1953, 108; 1954, 110;
1955, 110.
II. Mobilization of Resources Through the National Budget.
A. General.
An over-all view of resource mobilization through the budget
can be obtained by relating 1954 budget receipts to the income of
various sectors, as drawn from an analysis of GNP in Communist
China. 10/ For this purpose, the official Chinese breakdown of
revenue by form of ownership (that is, tax and bond purchases of
private enterprise) is used. This breakdown excludes estimated
Soviet loans of 1,215 million yuan. The usual sector-of-origin
distribution of GNP is adapted for comparison to the budget. The
apportionment of income among agriculture, private nonagriculture,
state enterprises, and indirect taxes is discussed in Appendix A.
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On a relative basis, private income is being very heavily
taxed (see Table 4*), with 18 percent of agricultural income and
28 percent of private nonagricultural income collected by the state.
The tax burden is such that private per capita disposable income,
even in the nonagricultural sector, is barely at a subsistence
level. Provision of 1 catty (1.3 pounds) of rice per day would
absorb 65 percent of rural per capita disposable income of 72.5
yuan and about 30 percent of urban income of 159.4 yuan.
The relationship of the budget receipts of Communist China
to sector income in 1954 is shown in Table 4.*
Although taxes remain the chief source of revenue inCom-
munist China, the rapidly rising profits of state enterprises have
reduced the relative proportion of tax revenue from 75 percent of
total budget receipts in 1950 to 50 percent in 1954. At the-same
time, within the tax category there has been a_shif t of even greater
magnitude -- away from reliance on agricultural taxes and in favor
of industrial and commercial taxes. These changes, however, do not
involve -a corresponding shift in the tax burden, as the industrial
and commercial taxes are covered mainly in the prices of consumer
goods. Inasmuch as peasants are the chief consumers in China, agri-
cultural income is still the major source of tax revenue.
1. Industrial and Commerc_i.al Taxes.
The principal types of industrial and commercial taxes
are business turnover, commodity, and income taxes. State enter-
prises are exempt from the income tax because their profits are
remitted to the state. There is no personal income tax on wages
and salaries, although all forms of business income, such as
interest and commissions, are subject to income tax. il/
The determination of coverage and the setting of rates
within the major tax categories have proved very effective means
of drawing resources from certain sectors for use in others. The
rate structures of the revised commodity and business turnover
taxes bear witness to this fact, in'that low rates apply to pro-
ducer goods and essential consumer goods and high rates to luxury
* Table follows on p. 15.
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S -E-C -R-E-T
Table 4
Communist China: Relationship of Budget Receipts to Sector Income
1954
Agriculture, forestry,
and fisheries
Private nonagriculture
State enterprises less
wages e
Indirect taxes
Indirect taxes
Total
Budget Proportion
Income Receipts of Receipts Proportion of
to Income Allocated/
(Billion Yuan) (Percent) Receipts E/
4o.48 7.54 1 18.6 28.2
30.26 8.58 1 28.3 32.1
9.97 9.97 1 100 37.3
0.60 2.4
5.98
86.69 26.69 1
a. See Appendix B for an explanation of income estimate.
b. Estimated'Soviet loans of 1,215 million yuan were not allocated.
c. The value of peasant taxes and bonds is given in the budget as 3,565
million yuan.. The balance of 3,975 million yuan is imputed or shifted from
other sectors.
d. This total is the sum of the following: income taxes, 2,982 million
Yuan; indirect taxes, 4,270 million Yuan; other taxes, 323 million yuan;
bonds, 548.4 million yuan; insurance, 97 million yuan; and other revenue,
356 million yuan.
e. Income of state enterprises is 17 billion yuan. Wages of 7.03 billion
yuan are subtracted from this and included in private nonagriculture
income.
f. Given in 1955 budget as profits and depreciation reserves of state
enterprises.
g. Some of the indirect taxes are on producer goods sold among state
enterprises.
h. The relationship of this total to budget receipts of 26,236 million
yuan is as follows: Soviet loans of 1,215 million yuan are excluded, and
receipts of 1,658 million yuan were imputed (see peasant taxes), giving
surplus receipts of 443 million yuan.
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items. A clear example of allocation of resources by the tax system
was the setting of a 9-percent rate on cloth made from native yarn
and-a 5-percent rate on cloth made from machine-made yarn, the pur-
pose being to foster the modern sector of an industry beset with
shortages of raw materials.
The revision of these taxes (effective 1 January 1953)
effected a regrouping of commodities subject to the old commodity
tax and to the business turnovertax into the following two groups:
one group to be subject to a new commodity circulation tax and
the other group to be subject to a new commodity tax. Table 5*
shows the revised tax schedules for the two groups of commodities.
The rates listed for the revised taxes are given as -a proportion
of the final selling price rather than the actual rate.
Many. of these taxes and rates were in effect before
1949, but the tax burden is believed to be heavier now because of
the improved methods of collection and the stern measures taken
against evasion.
The income tax, which contributes -about 20 percent of
industrial and commercial tax revenues, must be paid by all private
industrial and commercial enterprises, with rates ranging from 5
to 30 percent of net income. The average rate is about 25 percent. 12
Business incomes ; under -300 Yuan are exempt. Incomes-over 10,000
yuan are subject to the maximum rate of 30 percent. Within this
range there are 21 tax classes.
There are a number of ways in which the income tax con-
tributes to the withdrawal of resources from "undesirable" areas
into favored fields. The favored industries, such as steel and
chemicals, may deduct from 30 to 40 percent of net profits for tax
purposes. Further discrimination is possible by the arbitrary use
of estimated rather than actual income for tax purposes and by
demands against some firms for advance payment of taxes. Both of
these devices have been used inequitably to hamper and in some cases
to eliminate private enterprise.
The granting of income ta,x exemption to cooperatives
during the first 3 years of their existence was designed to encourage
the growth of cooperatives. This privilege was suspended in 1953
Table 5 follows on p. 17.
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 Approved For Releas
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at about the same time that price subsidization of cooperatives was
eliminated, indicating that the need for tax revenues superseded
the usefulness of cooperative competition as a means of eliminating
private enterprise. 14/
Income taxes will continue to decline as the private
share of the economy diminishes. The profits of the remaining
private enterprises will be small, as is the bulk of manufacturing
and sales, and will be under state contracts on a commission basis,
which barely covers costs.
2. Other Taxes.
Certain tax receipts are unaccounted for in the most
recent budget speeches. Two possible alternative explanationsof
the residual sum are separate listing of salt taxes or separate
treatment of certain locally retained taxes. The latter interpreta-
tion is considered more likely, as local taxes on real estate, land
deeds, and licenses could appropriately be distinguished from in-
dustrial and commercial taxes.
3. Budget Burden on the Peasants.
In respect to the burden imposed on the peasants by the
Chinese Communist system of resource mobilization, previous analyses
have stressed that the officially reported agricultural taxes are
not a fair measure of the true tax burden on the peasant. Among the
various ways in which receipts are obtained from the peasant over
and above the listed value of grain taxes are those mentioned below.
The value at which agricultural taxes-in-kind are listed
in the budget is 20 percent lower than the price at which the grain
is valued as an expenditure.* / The Ministry of Food distributes
tax grain to other ministries for wage payments, and it probably
lists the added value of the grain as part of its profits. Thus
profits of state enterprises are swelled bypart of peasant tax pay-
ments. In 1954, profits resulting from this paper markup would be
approximately 7 percent of the profits and depreciation reserves of
state enterprises.
* Forty billion catties (1 catty equals 1.3 pounds) of commercial
grain were collected in 1954. Agricultural taxes were given as
3.277 billion yuan, or 0.0819 yuan per catty. Grain is listed at
0.1 yuan per catty.
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The forced sale of grain to the government has also
been suggested as part of the true peasant tax burden. The farm
purchase price is somewhat lower than the resale price, thus
giving the government the benefit of the trade markup. In this
respect it is clearly indicated by available prices that the dif-
ference between farm purchase prices and resale prices to the
peasants is not very great and involves little, if any, monopoly
gain. Although the state monopoly of the purchase and sale of
major agricultural commodities gives to the state revenue that
previously would have been private income, these socialized
profits do not necessarily constitute an additional burden on the
peasants. Only insofar as the grain-sale quota imposed on the
peasant requires the noncustomary repurchase of such grain must
the peasant pay for unwanted trade costs and profits.
Local governments impose their own levies on the peasants
over and above ordinary local taxes listed in the consolidated
budget. Although these local surcharges were supposed to have
been abolished in 1952-53, there are indications that the local
surcharges still remain. These surcharges are estimated to raise
grain taxes as much as 25 percent. In addition, the peasants pay
taxes on other agricultural crops, such as tea, cotton, and
tobacco, and at least 25 percent of the total commodity taxes.
The peasants also contribute revenue to the government
in the form of credit, which in effect is extended through forced
bond purchases and by the forced sale of grain on credit or in
exchange for savings certificates. In summary, it is estimated
that these combined levies raise the tax burden on the peasant by
more than double the amount of the listed grain taxes.
Table 6* shows the tax burden on the peasants as com-
pared with agricultural income in 1954.
C. Profits and Depreciation Reserves of State
Enterprises.
The Chinese Communists are fond of emphasizing the growth
in the budget category profits of state enterprises as proof of the
superior productivity of a socialist economy. They point to the
* Table U follows on p. 20.
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S-E-C-R-E-T
Table 6
Communist China: Estimated Tax Burden on Peasants
19.4
Item
Million Yuan
Million Yuan
Percent
Grain taxes
4,116.55
Bond purchases:
287.6 b
Insurance and other
553 c/
Commodity taxes
1,762.0 -
Local surcharges
819 J
Total tax
7,538.15
Farm income
40,480.0
Proportion of agricultural taxes
to income
18.6
Proportion of agricultural taxes
to budget revenue
28.7
a. This figure reflects an adjustment of announced grain taxes
based on 1952 farm income and taxes. The statement of the value of
farm income in the Five Year Plan was related to an announcement
that food crop taxes were 7 percent of farm income. 16 As food
crops represent only 77 percent of major crops subject to grain
tax, the tax on commercial crops was added on the assumption that
taxes are in proportion to production. The resulting value of
agricultural taxes was 57 percent higher than the budget figure.
Only 80 percent of the adjusted gratin tax was listed, as farm in-
come figures have beer adjusted to eliminate the overstatement,
arising from the valuing of all farm output at prices above farm
procurement prices.
b. Given in the 1954 budget.
c. The peasants are estimated to pay two-thirds of insurance pre-
miums, or 197 million yuan, 17 and half of other receipts, or 356
million yuan.
d. Cash purchases by the farmer are estimated to be 14 billion yuan
and the average commodity tax rate on rural purchases to be 8 per-
cent. The tax: rate is derived from a weighting of commodity tax
rates to an estimated rural pattern of expenditures. Other taxes
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S -E -C -R -E -T
Table 6
Communist China: Estimated Tax Burden on Peasants
1954
(Continued)
on property raise this total by 646 million yuan.
e. Twenty-five percent of announced grain taxes.
f. This percentage would be 27 percent if imputed taxes were added
to reported budget revenue.
large increase in such revenue -- from 869 million yuan in 1950 to
3 billion yuan in 1951 and yearly increases of approximately 2 bil-
lion yuan thereafter -- as support for their theme. The official
statements often give credit to socialist industry for these in-
creases, leaving open the question of whether the increases result
more from the nationalization of the private sector and more inten-
sified utilization of existing capacity than from increased produc-
tion of expanded or newly constructed state enterprises.
An analysis of the factors underlying the growth of the
category profits of state enterprises is important not only because
it relates directly to the achieved rate of growth of the state
sectors of industry and trade but also because it provides a basis
for judgment of the extent to which the Chinese Communists can de-
pend on increases of revenue of the same magnitude in the future.
In order to measure the extent to which the rise has been
due to enlarging the base by the confiscation of private production,
several assumptions were made. It was assumed that former private
enterprises are contributing the same proportion of output which
they contributed as private enterprises. This implies no change in
relative productivity or profit margins. Profits on that propor-
tion of output by which private industry and trade have declined
since 1949 were considered the fruits of socialization. This ap-
proach supported the conclusion that the combined socialization of
trade and industry is the basis of 43 percent of profits and de-
preciation reserves in the 1954 budget.
The calculations underlying this conclusion were as follows.
Private industry (including all cooperative and half of joint
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state-private enterprises) declined from 65 percent of industrial
output (excludingindividual handicrafts) in 1949 18 to 30 percent
of output in 1954; 19 Profits on the 35 percent of output from
the socialized sector constituted 23 percent of profits and de-
preciation reserves in 1954.*
Private trade declined from roughly 81 percent of trade
in 1950 21 to 50percent in 1954. L2/ Profits on the nationalized
proportion in 1954 were equal to 20 percent of profits and deprecia-
tion reserves.
The goalsfor further socialization in the Five Year Plan
will affect, for the most part, industrial profits, as private com-
merce will not betaken over directly by the state. Private in-
dustrial output, including one-half of joint state-private produc-
tion, is to decline to 28 percent of the total by 1957, according
to the Five Year Plan, so that the profits and depreciation reserves
category of the budget will continue to be bolstered by socialization
gains. It is obvious, however, that this method of securing revenue
has certain absolute limits, which are,, in fact, already reflected
in the declining rate of increase of profit revenue in the 1955 planned
budget. The 1955planned increase of only 1 billion yuan in profits
receipts (compared with the earlier annual increase of 2 billion
yuan) is believed-to be symptomatic of the declining rate of increase
in this category through the remaining years of the Five Year Plan,
although this decline may be delayed until 1956 because of the un-
expected great expansion in the number of joint state-private enter-
prises in late 1955. The profits derived from the state's share of
the enforced joint operation probably will more than compensate for
the loss of income from tax receipts.
There has been considerable speculation as to the portion
of state profits which arises from state trade in grain and in
generalfrom its monopoly over the sale of major agricultural com-
modities (as distinct from its revenue from agricultural taxes-in-
kind and indirect taxes). The best information available pertains
to pricing and volume of -state grain trade. This information indi-
cates that roughly 15 percent of state enterprise profits arise in
grain trade. State sales of grain in 1954 totaled about 44.6 million
Profits are taken as 65 percent of value added by industry and
60_percent of value added by trade, excluding indirect taxes as
found in the analysis of the Chinese Communist GNP. LO/
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metric tons. 23 Average profit per ton is estimated to be 30 yuan,
yielding state grain profits of 1.4 billion Yuan.
It is estimated that trade in other agricultural commodi-
ties raises the proportion of state enterprise profits directly
dependent on agricultural commodities to a total of roughly 25
percent.* With a decline in state grain sales planned by 1957
and the major gains already wrested from monopoly sales of agri-
cultural commodities, the conclusion that yearly increases in
profits revenue will level off after 1955 or 1956 at 1 billion
yuan is substantiated.
By relating the profits of state enterprises as shown in
the 1954 budget to the profits' share of value added in production
and services, it is possible to derive an estimated breakdown of
the budget revenue category profits and depreciation reserves of
state enterprises. This comparison indicates that the state ob-
tains the largest proportion of its profits from industrial enter-
prises. Within the industrial sector, heavy and light industry
contribute about an equal amount of profits revenue, despite the
very much smaller share of light industry in investment allocations.
Table 7** shows the estimated distribution of the category profits
and depreciation reserves of state enterprises, by sector.
D. Credit, Loans, and Insurance.
Soviet credit and national bond campaigns are the major
items in this category. That portion of the category ascribable
to Soviet credit became of great importance in 1954 when unantici-
pated Soviet loans were indicated as a partial explanation for a
91-percent overfulfillment of planned receipts. When subtractions
are made for all other items in the category, an unplanned loan of
from 945 million yuan to 1,183 million yuan is indicated. No men-
tion of a loan of this magnitude appeared in the press, and it has
been interpreted as covering secret military deliveries by the
USSR during 1954. Credit of the same magnitude for further military
supplies, including those turned over at Port Arthur, is shown in
the planned budget for 1955.
* The more general subject of the agricultural versus nonagricultural
origin of budget revenue is discussed in greater detail in IV, A, be-
low, where a breakdown of all budget receipts is made as an aid to
weighing the impact on the budget of possible failure to meet certain
production targets of the Five Year Plan.
Table 7 follows on p. 24.
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O r d
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S -E -C -R -E-T
There was a considerable amount of revenue unaccounted for
in the 1951 and 1953 budgets which also may have reflected secret
military deliveries or short-term credits on foreign trade accounts.
There was no significant amount of revenue unaccounted for in the
1952 budget, which may be explained by the fact that foreign ex-
change assets seized in the "Five Anti" campaign were sufficient
to meet the normal import surplus from the Soviet Bloc.
The inclusion of bond receipts as ordinary revenue is a
feature of Chinese Communist budgets. There have been 3 nation-
wide bond campaigns up to the present time, with sales ranging
from 286 million yuan in 1950 to over 900 million yuan in 1954.
The 1955 subscription campaign, the announced goal of which was
600 million yuan, probably will be oversubscribed also, follow-
ing the pattern set in 1954. Whereas regional quotas were used
in 1950, the 1954 and 1955 drives assigned quotas to specific
sectors. The workers' quota was raised to 25 percent in 1955, but
private enterprise still has the major assignment of 50 percent.
Peasants have been the most reluctant purchasers, but the enlarged
forced grain sales program gives the state greater control over
their income.
The bond-redemption schedule has been extended steadily
from 5 years for the 1950 bonds to 10 years for the 1955 bonds.
Each year a certain percentage of each bond issue is retired by
lot. Interest rates on the bonds have dropped from 5 percent in
previous years to 4 percent in the 1954 and 1955 issues.
The nature of the insurance receipts is not clear, as the
profits of the compulsory insurance system established in 1951 are
included in the category of profits of state enterprises. It is
believed that these receipts may be the reserves of the insurance
company which the state assigns as working capital to other enter-
prises. This is borne out by a press comment on the insurance plan
which indicated that China could benefit by the Soviet experience
with this very fertile source of working capital. 24/
An estimated breakdown of 1954 receipts under this category
is given in Table 8.*
* Table 5 follows on p. 26.
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Table 8
Communist:China: Estimated Breakdown of the Budget Category
Credit, Loans, and Insurance Receipts
1954
Item
Bond sales 836 a/
/
Soviet loans 1,215 J
Insurance(residual) 294
Total 2,345
a. 2
b. Based: on 142 million yuan under the 1950 loan agreement
and 1,073. million yuan in estimated 1954 loans.
E. Other Revenue.
The intermittent character of most of the receipts under the
category other'is reflected in sharp changes in absolute collections.
It is the one category in which revenue has not increased-steadily.
The types of receipts included in this catch-all category
are donations,! confiscated assets, currency issue, revenue from
forced labor camps, and operating revenue of budget-financedenter-
_prises. Early budget reports given by Finance Minister Po I-po
included the surplus carried over from previous years in this cate-
gory. This practice was discontinued in the 1955 budget report,
which lists as revenue only that portion of the surplus that is
specifically appropriated and clearly distinguishes this portion
from current receipts. The reasons for the separation and dis-
position of the accumulated surplus are discussed below.
Two items of other revenue -- donations and confiscated
assets -- appear to substitute for bond drives when ordinary revenue
sources are exhausted. Donations in support of the Korean War of
approximately' 500 million yuan played an important role in balancing
the 1951 budget. Extraction of this sum required rather stringent
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measures not usually associated with the concept of donations.
The following year, extraordinary receipts were secured under
the guise of the "Five Anti" campaign against tax evasion, excess
profits, and other crimes. Penalties resulted in the turnover of
all or part of the assets of a majority of private firms. The
revenue.from this virtual capital levy has been estimated to be
as high as 10 billion yuan, but this appears excessive even if
some of the confiscation is reflected elsewhere than in the cate-
gory other. A more realistic estimate would be about 4.3 billion
yuan, a figure reached by taking the unaccounted-for revenue in
the category other-for 1952 and 1951 (the "Five Anti" campaign was
initiated in the Northeast region in 1951) and adding to it that
portion of the surplus in excess of the 1950-53 budget balances.
Another possibility is that some of the revenue from the "Five
Anti" campaign did not come in until 1953. Revenue in the cate-
gory other for 1953 is almost as much as in 1952 and is approxi-
mately l 'billion yuan higher than in 1954. There is no apparent
explanation for the 1953 receipts{and, judging by the 1954 receipts,
which are described as "devoid of certain special and temporary
receipts," it is probable that 1 billion yuan of the 1953 revenue
resulted from the "Five Anti" campaign.
Currency issue, admittedly, was used extensively in 1949
and 1950 because the state bank had insufficient reserves to
support its loans to the government. 26 Currency issue to meet
expenditures in those years totaled at least 2.1 billion yuan, as
provision is made in the 1955 budget to repay this much of the
government's 19+9-50 overdraft on the state bank. Currency issue
apparently is no longer relied upon as a source of budget revenue,
an achievement of great importance in maintaining price stability
in Communist China.
Another item shedding light on the Chinese Communist policies
is revenue from labor camps, which is listed on a gross basis. It
is estimated that in 195+ gross receipts from income of these labor
camps amounted to 150 million yuan. This figure is based on two
other estimates -- one on the gross value of production per prisoner
and the other on the number of persons in labor camps. In arriving
at the estimate of gross revenue from prison labor, the value of
output per capita was assumed to be one-half the per capita gross
agricultural production, as statements by former prisoners indicate
that labor productivity is relatively low in prisons. 27 The num-
ber of persons in forced labor camps in Communist China has been
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variously estimated, with some estimates as high as 10 million
persons. A figure of 2.8 million is used in this estimate be-
cause it approximates the total derived from camp studies.
The most sizable continuing type of receipts in the cate-
gory other is the operating income of budget-financed enterprises.
These receipts include tuition fees and movie-ticket sales.
There are two items under the category other which seem
to be counterbalancing figures that cancel out in the consolidated
national budget. Subsidies from higher levels of government to
lower levels and transfers from lower levels to higher levels ap-
pear in subordinate level budgets as a receipt and again as an
expenditure under the category other. The breakdown of the 1954
budget given in this report assumes that these are bookkeeping
items and that they cancel out in the consolidated national budget.
The estimated breakdown of the budget category other for 1954 is
shown in Table; 9.
Communist China: Estimated Breakdown of the Budget Category Other
19,54
Item Amount
Administrative revenue 392 a
Public property revenue (residual) 100
Armed forces- production 70 b
Labor camp revenue 150 c
Total 712
a. Composed of 152 million yuan for theater tickets -7 0 million
at 0.2 yuan); 50 million yuan for clinic and miscellaneous fees;
and 190 million Yuan for tuition fees (average tuition fee of 6
yuan paid by approximately 30 million students).
b. 28/
c. Estimate.
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F. Surplus Revenue.
The 1955 budget report of Communist China stated that the
surplus was 6,113 million yuan at the end of 1954. It is not clear
how this surplus was accumulated, for the unexpended balance from
previous years' budgets totals only 3,427 million yuan. A possible
explanation for the difference is that some of the assets confis-
cated during the "Five Anti" campaign were included in the 1954
total announced surplus but were not listed as current receipts
under the category other. Such a division of the "Five Anti" cam-
paign receipts is supported by the Budget Accounting Manual, which
lists fines for tax violations and various specified offenses as
an item in the revenue of the category other, but makes no pro-
vision for confiscation of excess profits or profits arising from
poor-quality goods.
Certain statements in the 1955 budget report clarify the
nature of the surplus category and indicate that it is for the most
part fictitious. Its fictitiousness arises from the fact that
all but 3,142 million yuan of the surplus was already obligated by
the end of 1954. The available surplus is even lower if a 1955
appropriation of 1,687 million yuan to state enterprises for re-
payment of overdue loans from the state bank is considered as an
existing obligation. Among the obligations met out of the accumu-
lated surplus at the end of 1954 were retirement of part of a 1949-
50 central government overdraft on the state bank; replenishment
of local budget revolving funds; and exclusion from the surplus of
certain special accounts in the state bank, the latter probably in-
volving funds over which the government acts as trustee.
A clarification of the relationship of the state bank loan
program to government surplus accounts was made necessary because
of overlapping plans for use of the same funds. In both the 1953
and 1954 budget years, budget officials apparently drew on the sur-
plus funds as planned, without due consideration of the gtate
bank's deposits and reserves position, thus forcing the state bank
to contract its loans of working capital to state enterprises and
cooperatives. The state bank now has use of the funds repaid to it
for loan purposes under the 1955 planned budget.
Table 10* shows the claimed surplus of the budget (6,113.4
million yuan). It is interesting to note that the deficit on current
* Table 10 follows on p. 30.
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account in the planned 1955 budget is equal to the allocation from
surplus funds of'1,686.9 million yuan to state enterprises for re-
payment of overdue state bank loans.
Communist China: Disposition of the Reported Surplus
Brought Forward in the Planned Budget of 1955
Repayment of 19+9-50 government overdrafts
on state bank
Transfer to special accounts in state bank
Replenishment of local governments' revolving
funds
Allocated for 1955 planned budget expenditures:
Repayment of state enterprises' loans
from state bank 1,686.9
Increase of local governments'-revolving
funds 85.1
2,158.8
504.)+
307.4
1,772.0
1,370.8
61131+
III. Allocation of Resources.
Modernization of the defense establishment, industrialization,
and socialization stand out as the dominant objectives of the
Peiping regime in the particular pattern of resource allocation
that is evident in Chinese Communist 'budgets. The timetable fixed
for the achievement of these objectives has clearly given priority
to the defense program, although since 1950, industrialization has
received an increasing proportion of total budget allocations.
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The share of the allocation going to economic construction
(industrialization) would be even greater if the allocation for
social, cultural, and educational programs were grouped with it --
a grouping which appears legitimate because of the indoctrinational,
state-oriented character of the so-called welfare programs. The
allocation of resources through the budget is discussed in the fol-
lowing sections in terms of the five major categories of expendi-
ture: economic construction; defense; social, cultural and educa-
tional; administration; credit, loans, and insurance and other.
The categories are taken up according to their relative order of
magnitude in the 1954 budget, and under each class a description
is presented of the principal subcategories of expenditure falling
thereunder with an estimate of these items based on 1954 budget
data.
A. Economic Construction.
Expenditures for economic construction have continually
favored heavy industry, a trend that is even more evident in the
1955 planned budget, which allocates roughly 6 billion Yuan to
heavy industry from economic construction funds of 14.2 billion
yuan and a total budget of 29.7 billion yuan.
Information on the sector allocation of economic construc-
tion expenditures was first given in detail in the 1953 budget re-
port, in which such expenditures were divided into the following
five subclasses: industry; agriculture, forestry, and water con-
servancy; commerce, food, and foreign trade; transport and com-
munications; and stockpiling, municipal construction, and invest-
ment in joint enterprises. In 1953, half of the economic construc-
tion funds were allocated to industry, which has received approxi-
mately that proportion ever since. In 1954, additional information
was given to the effect that the industrial category was divided
into 2 subclasses, with heavy industry receiving 78 percent of in-
dustrial funds and light industry the remainder. In 1955, this
division was even more favorable to heavy industry, with the planned
assignment to it of 89 percent of such funds.
Although the official budget reports have indicated sub-
stantial investment in railroads since 1950, no absolute figures
were given until the 1955 planned budget. This shows railroad
expenditures as two-thirds of all investment in transport and com-
munications for the 1955 fiscal year, or 10 percent of total economic
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construction expenditures. The relative importance of railroad in-
vestment is made clear by the Five Year Plan, which calls for 5.67
billion Yuan in railroad investment, a figure only 1 billion yuan
lower than planned capital construction in the machine industries
or in heavy industry.
In view:of the predominantly agricultural nature of the
Chinese economy;, perhaps the most surprising aspect of the sector
allocations is the small share for agriculture. Agriculture,
forestry, and water conservancy received only 11 percent of 1954
economic construction expenditures, although this sector con-
tributed the greatest proportion of national income. Furthermore,
the Five Year Plan calls for agricultural production to increase
at a yearly rate of over 3.5 per-cent, with no increase -in state
investment funds. Official discussions of the level of agricultural
investment stress the importance of private investment in this sec-
tor. In fact the Five Year Plan estimate of private expenditure is
about 2 billion yuan per year or 500 million yuan greater than state
investment.
A significant shift in the proportionate allocation of
economic construction fundsis planned-for 1955, when the require-
ments of the grain purchase and storage program raise the economic
construction expenditures on commerce to 20 percent of the total,
as compared with 14 percent in 1954. Expenditures on commerce,
food, and foreign trade reflect the government's monopolization of
trade in major agricultural commodities. Appropriations of this
type have risen from roughly 1 billion yuan in 1953 to 2.8 billion
yuan in 1955. The working capital requirements for execution of
the agricultural. procurement (forced-sales)program and, in general,
for the socialization of trade are only partially represented by
these appropriations, for the Chinese Communists have ruled that
state and cooperative commercial enterprises must obtain most of
their working capital from the state bank in the form of loans.
With reference to the allocations for "stockpiling, municipal
construction and joint state-private enterprises," it is notable
that this class of expenditures was not specified until the 1954 final
budget report, although an unaccounted-for residual in the final
budget of 1953 was assumed to represent this class. There is no
information on: the breakdown within the class, but the production
level supports the conclusion that stockpiling has not been very
important thus far. In respect to the subcategory of municipal
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construction, there is a possibility that this allocation may in-
clude primary and secondary schools, for the Budget Accounting
Manual makes no other provision for such expenditures under the
social, cultural, and educational category. On the other hand,
there is a possibility that much of the required lower school con-
struction may be financed by local extrabudgetary receipts, that
is, outside the consolidated national budget.
As for the subcategory of joint enterprises, the regime's
determined pressure toward socialization of industry and trade
and the relevant investment requirements probably are the prin-
cipal reasons for this subclass increasing from 800 million Yuan
in 1953 to the 1955 level of .1.5 billion yuan as the number of
joint enterprises has risen rapidly during that period.
The allocation of expenditures for the category economic
construction is presented in Table 11.
Communist China: Allocation of Budgeted Economic Construction
Expenditures, by Sector
1953-55
1955
Sector
1953
1954
Plan
Industry
49.8
46.4
45
Heavy
39
36.2
40
Light
10.8
10.2
5
Transport and communications
14.4
14.2
15.1
Agriculture, forestry, and water conservancy
13.2
11.1
9.3
Commerce, food, and foreign trade
11.6
14.3
20
Stockpiling, municipal construction,
and joint enterprises
11
14
10.6
Economic construction expenditures as a pro-
portion of total expenditures
40.2
50.2
47.7
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On a functional basis, basic or capital construction ex-
penditures* constitute the bulk of the economic construction
category. The expenditure for fixed assets absorbed 63.5 percent
of economic construction funds in 1954.
Working capital increments of state enterprises and co-
operatives are the second largest subcategory under the c-ategory
economic construction. Industrial enterprises are the principal
recipients, receiving roughly 93 percent of the working capital
appropriated through the budget.
Expenditures on repairs, operating expenses of budget-sup-
ported enterprises, and other items make up the balance of eco-
nomic construction expenditures. The estimated breakdown of
economic construction expenditures in 1954is shown in Table 12.E
B. Defense.
Except for total expenditures, very little is known about
defense spending, as this section of the budget is drawn up
separately by the defense department, which has its own financial
administration, independent of the Ministry of Finance. Only rough
estimates of the general categories of expenditures can be made.
Estimated wage payments and food and maintenance expenses of the
2.5 million troops constituted 15 percent of 1954 defense funds.*
The balance of 4.9 billion yuan covers weapons, supplies, and
equipment (including imports), transport, training, and miscel-
laneous expenses.
* The basic construction-figure given in budget reports cuts
across the budget categories of economic construction; social,
cultural, and educational programs; and administration. The
breakdown of the 1954 figure was given by the State Statistical
Bureau. It encompasses expenditures which increase fixed assets
in any of these fields.
Table 12 follows on p. 35.
Total wage payments per year equal 842 million yuan. 29
Army cash wages 'are estimated at 150 yuan per year, plus main-
tenance expenses; of 150 yuan per year per man. 30 Navy and air
personnel are estimated to get cash wages of 270 yuan per year per man
and maintenance expenses of 190 yuan per year per man.
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Table 12
Communist China: Estimated Breakdown of Economic Construction
Expenditures, by Type of Expenditure
1954
Type of Expenditure
Proportion
(Percent)
Amount
(Million Yuan)
,Basic construction
62.8
7,331.0 J
Working capital
16.6
/
2,051.4 J
Large-scale repair expenses
5.8
716.8
Prospecting, equipment stockpiling, cash
reserves, military land reclamation
8.5
1,050.4 J
Residual
Operating expenses, enterprise schools,
experimental manufacture, cadre train-
ing, and other residual expenditures
6.3
1,208.6
Total
100.0
12,358.2
a. Given in official breakdown of capital construction expenditures
with an adjustment to include half of the I,nallogated funds. 31
b. This represents a 50-percent increase. in the Five Year Plan pro-
portion of 11.1 percent for working capital. The upward adjustment
is made on the assumption that the state made extra appropriations of
working capital to correct the shortage which occurred in 1953-
c. Analogy to Five Year Plan.
Alternative views concerning the Chinese Communist alloca-
tion of resources to defense are either that they are understated
by inclusion of defense spending in other budget categories or
that the whole budget is understated to hide from the public the
true level of defense spending.
The most important area of hidden defense spending is
alleged to be in the category economic construction. There is
believed to be some validity in the argument because military
requirements to some extent influence the size of planned investment
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in heavy industry, and the capital construction and working capital
requirements of the machine, aviation, shipbuilding, and communica-
tions equipment industries certainly provide in part for defense
items. This argument is weakened, however, when any expenditure
is called military which increases defense potential, such as heavy
industry investment, for the budgets of other countries do not
categorize such investment as part of defense spending.
As the total planned budget expenditures under the category
economic construction for the six :Listed headings did not add up
to the announced total allocation for the category economic con-
struction in previous years, it has been assumed that the un-
specified allocations were for secret military projects under the
Second Ministry of the Machine Industry. The Budget Accounting
Manual, however, specifically states that national defense con-
struction is under the defense budget, and in China the munitions
industry traditionally has been under the defense category. Fur-
thermore, no mention is made of weapons and armaments industries
being among those receiving economic construction funds. Thus it
would appear that they are in fact included under the defense cate-
gory.
There are items in all the other categories-of the budget
which arerelated to defense and might be labeled as hidden de-
fense spending. These include pensions, disability aid, burial
expenses, medical costs, and other compensation to soldiers and
their families under the social, cultural, and educational cate-
gory. Certain transport expenses of troops, at least during the
Korean War, were listed under the category other. Wages, food,
.and maintenance for public security troops and expenses for the
construction of border and coastal defenses cover a type of mili-
tary activity ; which _is listed under the administrative category.
A final element in the possible understatement of defense
spending is for items that are financed outside the budget.
Examples of this are the instances in which army units grow their
own food crops and troops in transit are supplied locally with
food, housing;, and transport.
The second conclusion as to concealed defense spending
was generated by announcements that a budget surplus was achieved
in 1951. Theability of the Chinese Communist economy to support
the war effort in Korea and still show a budget surplus was
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questioned. One surmise that was offered to explain such a surplus
was that currency issue was used to cover some defense spending with-
out recording either the receipts or the expenditures through the
budget. A.review of cumulative budget and price information suggests,
as a more likely explanation, that secret Soviet military aid has
been more extensive than was then believed likely.
The level of defense spending, even in the absence of any
understatement, represents an imposing drain on Communist China's
resources, amounting in 1954 to 24 percent of the total budget
and 7 percent of GNP. Defense spending absorbed as much as 40
percent of budget funds in 1950 and 1951 and in 1955 was to re-
ceive 24 percent. Even at this lower share, defense spending is
still the chief competitor of economic construction for available
resources. The proportional shares of the two categories have
moved almost exactly in reverse correlation, economic construc-
tion expenditures moving from 25 percent of the total in 1950 to
48 percent in the planned 1955 budget. The competitive relation-
ship of these two categories is of special significance in
analyzing the availability of funds for the Five Year Plan. For
example, of the total increase in expenditures of 5 billion yuan
planned in 1955 over 1954, economic construction received 1.9
billion, and defense received 1.4 billion yuan. It would appear
that any substantial increase in defense spending over the 1955
level would be at the expense of the industrialization program.
C. Social, Cultural, and Educational.
Although compared with previous programs in these fields,
the Chinese Communists have made great strides in building the
physical facilities for schools, hospitals, and other welfare in-
stitutions, the social, cultural, and educational expenditures have
never exceeded 16 percent of the budget, and the benefits to the
individual have accrued as byproducts of a program geared pri-
marily to meet the state's interest. The suballocations under the
budget appropriation for social, cultural, and educational ex-'
penditures demonstrate that educational policy is geared solely
to improving the quality of the labor force. The much vaunted
relief funds are primarily loans to maintain agricultural produc-
tion and to promote cooperativization. The principal cultural
expenditures -- on press and broadcasting -- serve only to pro-
mote general acceptance of the Communist Party line. Educational
expenditures are made in those areas vital to the national
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construction program or to meet political objectives such as
propaganda to overseas Chinese. Relief and loan funds are avail-
able to those willing to join cooperatives or to other Party
faithfuls rather than on the basis of need.
Certain items included in the-social, cultural, and
educational category pad the level of welfare expenditures when
comparison is made to budgets of private enterprise economies.
Investment in drug production, movies, publications, news
agencies, and broadcasting are listed. under this category as
well as school and hospital construction. Subsidies to provide
education for family members of Party cadres and to so-called
people's organizations to provide popular support for the regime's
programs are also considered social and educational expenses.
Certain aspects of large-scale migration expenses, which are
classed as social, might also be considered unique in that they
cover expenses involved in forcing urban residents to move to
rural areas.
Other expenditures under this general category are teachers'
salaries; veterans' rehabilitation; anti-epidemic and antinarcotic
campaigns; drama, art, andcultural activities; unemployment assist-
ance; and rural ;relief.
The estimated disposition of funds under the category social,
cultural, and educational in 195+ is shown in Table 13.*
D. Administration.
The expenditures under the category administration encompass
both the normal: political, judicial, and foreign relations expenses
and the nontypical administrative expenditures on the vast labor re-
form (forced labor) program of Communist China and on the para-
military public security forces.
The Chinese Communist vigorous attempts to keep scarce re-
sources from being used for "nonproductive" administrative expend-
itures have met: with some success. The absolute amount of ad-
ministrative expenditures has increased by less than any other
category of the budget, the relative share declining from 19 per-
cent in 1950 to 7.5 percent in 1955. Some of the economy has been
Table 13 follows on p. 39.
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Table 13
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Social, Cultural, and Educational
1954
Type Amount
Personnel
Basic construction
Relief
Student allowances
Veterans' pensions
Residual
Office expenses; travel; school, medical,
and scientific equipment; library books,
public security troops' clothing, sub-
sidies, and other residual expenditures
1,100 aJ
895
419.58 C/
154 1
198.02 e/
694 . of
Total 3,460.61
a Estimate based on 2.5 million workers at an average
annual wage of 400 yuan plus 10 percent for fringe benefits.
b. Given in official breakdown of 1954 basic construction
expenditures. 32
c. 33
d. Estimate based on average monthly allowance of 10 yuan
for living expenses plus 3 yuan for books, with approximately
1.1 million students receiving living expenses and 2.3 mil-
lion receiving book allowances for 9 months of the year.
e. 34
rather artificial, with civil servants taking enforced wage cuts or
losing such fringe benefits as free housing and medical care.
Despite the holding down of administrative expenditures,
the Chinese Communists are using a relatively greater proportion
of revenue for this type of activity than they consider desirable.
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Administrative expenditures are the only category of expenditure in
which the Chinese Communists spend at a level proportionately close
to that of the US.
The estimated breakdown of expenditures under the category
administration for 1954 is presented in Table 14.
Table 14
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Administration
1954
Administrative, political, and legal units
Personnel
630 a
Other (residual)
602.07
Public security forces
390 b
Basic construction
460
Labor reform 80
:Total 2,162.07
a. Estimated 1. million employees excluding labor
reform guards and public security troops) at an average
wage of 450 yuan per year.
b. Estimated 1.5 million troops at an average wage of
150 yuan and average expenses and equipment of 150 yuan
each.
c. The breakdown of basic construction funds leaves
10.5 percent unallocated. Half of this portion is
assumed to be for basic construction under the adminis-
trative category. 35
d. Estimated 200,000 guards at an average wage of 300
yuan per year plus miscellaneous expenses. Other labor
reform expenditures are included under basic construction
and the residual components of this category. The food
grown and used by labor camps is not recorded in the budget.
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E. Credit, Loans, Insurance, and Other.
The category credit, loans, insurance, and other includes repay-
ment of principal and interest on foreign and domestic loans and exten-
sion of loans to other countries. These items are estimated to be about
516 million yuan of the 1954 expenditures of 838 million yuan, including
about 296 million yuan in aid to North Korea and possibly 70 million
yuan to North Vietnam. The insurance part of this account may be to
provide for payment of unfunded insurance claims on the state insurance
companies and possibly for allocations of statutory reserves for future
indemnities. The remaining portion of this category includes certain
tax collection expenses (including storage) and possibly some subsidies
to political organizations, although the Budget Accounting Manual (see
Appendix A) lists these under the social, cultural, and educational
category.
These expenditures have never required a very large portion
of the budget, a high of 7.8 percent being reached in 1953 and the
average for the 5 years being about 5 percent. Payments into the
general reserve fund were separated from these expenditures for the
first time in 1955. Failure to meet reserve plans was probably the
reason for the sharp drop in this type of spending in 1954 as com-
pared with 1953. Overfulfillment of economic construction and defense
spending in 1954 appears to have prevented a buildup of reserves.
The estimated breakdown of expenditures under the category
credit, loans, insurance, and other in 1954 is shown in Table 15.*
IV. Five Year Plan and the Budget.
The problem of the adequacy of budgetary resources for investment
requirements under the Five Year Plan lends itself to analysis by two
different approaches. The first has to do with agriculture as the
principal originating source of budgetary revenues, particularly with
the possible effect on the budget of food-crop production falling
short of the planned increase of 17.5 percent. The other approach
relates to the estimated required 1957 budget expenditures as a
proportion of the projected GNP. Both analyses tend to the conclusion
that financing will not pose insurmountable difficulties in the
accomplishment of the remaining portion of the Five Year Plan.
* Table 15 follows on p. 42.
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Table 15
Communist China: Estimated Breakdown of Expenditures
under the Budget Category Credit, Loans, and Insurance and Other
954
Item Amount
Repayment pf principal and interest on 1950 Soviet loan 78 a
Aid to North Korea 296 1
Aid to North Vietnam 70
Repayment of principal and interest on domestic bonds 72
Short-term credit on international accounts, items
in transit, insurance indemnities, and so on 322
838
a. Payment of first installment on loan of US $300 million plus
1 percent interest on balance.
b- 36
c. Estimated from articles delivered.
d. 37
A. Effect of Production Underfulfillment on the Budget.
The past and projected relationship of the budgetary system
to economic development in Communist China points to the maintenance
and increase of the level of budgetaryreceipts as one of the key
factors in achieving the investment goals of the Five Year Plan.
For the realization of the required level of income, Communist China
must rely principally on profitsand taxes from current production
to support its planned investment program, for other sources -of
revenue have, from 1950 to 1955, diminished in relative proportions,
and the principal alternative sources of revenue, internal capital
levies and foreign loans, have never provided more than 11 percent
of current receipts -- in fact, less than 10 percent in 1954.
It is apparent then that failure to meet production goals
could cause underfulfillment of budget receipt plans and hence inter-
fere with investment goals.
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Analysis of Communist China's present and planned production
has led to the conclusion that agricultural production is the only
area of probable production underfulfillment. Within agriculture
the probable shortfall is confined to food crops because the rela-
tively small amount of acreage devoted to commercial crops could be
increased according to plan without undue strain on scarce resources.
Food-crop production on the other hand constitutes the largest source
of income in Communist China, and its maintenance requires the
largest allocations of labor, land, and capital of any type of
economic activity in the country. Without entering into an exten-
sive analysis of the subject, reports of competent agricultural
specialists are cited, which indicate that in order to achieve
the very substantial increase of 17.5 percent predicated in the
Five Year Plan, much more investment than is planned would be re-
quired. 38 It is estimated that food-crop production will increase
actually at about half the planned rate, or 9 percent over 1952.
The effect on budgetary receipts of this estimated short-
fall of 50 percent may be gauged by determining what portions of
present budget receipts are dependent on food-crop production.
Dependence on food crops is defined to include such things as in-
direct taxes, profits on grain trade, food processing, and wine
production. A breakdown of 1954 budget receipts indicates that
25 percent of receipts are dependent on supplies of food crops.
If the Chinese Communists are planning on increased receipts on a
scale proportionate to planned production increases, the planned
receipts from food crops in 1957 would be 17.5 percent higher than
in 1954. If the actual receipts; however, are only 9 percent
higher, then the difference between planned and actual receipts
from food-crop production would be roughly 600 million yuan.
This sum represents about 1.7 percent of estimated 1957 expendi-
tures and equals the excess of the estimated available receipts
over the estimated expenditures in that year. It may be concluded,
therefore, that underfulfillment of food-crop goals by the amount
estimated does not represent a barrier to financing the Five Year
Plan investment program.
The relationship of the various sources of revenue to total
budget requirements is illustrated by the breakdown of 1954 receipts
into the following three principal components: receipts dependent
on food crops, receipts dependent on industrial crops, and receipts
dependent on nonagricultural industrial production. Examples of
the latter two classifications are profits and taxes on textile
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production, which are listed as industrial crop receipts, and
profits and taxes on electric power, which arise in a nonagri-
cultural industry.
The allocated receipts constitute 79 percent of current
receipts in 1954. The unallocated receipts were roughly half in
the form of credit, loans, insurance, and other, and half in the
form of fees and taxes on-services-and property. The breakdown
of budget receipts by sector of origin is shown in Table 16.*
As budget revenues from nonagricultural industry, revenues
from the category other, and fees and taxes of -services and property
are dependent upon agricultural production only to the extent that
economic activity in general requires the support of the agri-
cultural sector, it is apparent that the increase of budget reve-
nues in the nonagricultural sectors could not be hampered by any
shortfall in achievement of agricultural goals other than a severe
crop disaster for 2 or more years in succession. With a minimum
increase in food crops of 9 percentover 1952 and with substantial
achievement of the industrial crop goals the prospects for ful-
fillment of budgetary requirements to support the investment pro-
gram under the Five Year Plan appear to be feasible.
B. Estimated Expenditures in 1957.
Government expenditure on goods, services, and investment
in the last year of the Five Year Plan has been-estimated at 34.3
billion yuan. The assumptions underlying the projection of both
the total and of each category of expenditure yield expenditure
figures consistent with the Chinese Communist plan to make 48 per-
cent of capital investment in the last 2 years of the plan. These
assumptions are given in the footnotes to Table l7,** which shows
the estimated expenditures in the budget of 1957.
When the estimated expenditures are compared with estimated
GNP by end use in 1957, they appear feasible. Output of investment
goods based on physical production indexes plus government services
will have a value of 35.1 billion yuan in 1957. In addition, as a
portion of GNP, the estimated expenditures are only a slightly
higher proportion of GNP than in 1954. This rise from 31 percent
to 33 percent of GNP is certainly to be expected in view of increased
socialization.
K Table 16 follows on p. 45.
Table 17 follows on p. 46.
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The conclusion that the estimated expenditures are feasible
depends on defense spending remaining at about the 1955 level of
7 billion Yuan. It is believed that defense spending at a rate
much in excess of this figure, at least within the Five Year Plan
period, would interfere with economic construction goals.
Communist China: Budget Receipts, by Sector of Origin
1954
Amount
(Million Yuan)
o
o
tio
P
Profits of
Agri-
p
r
r
n
of Current
State Enter-
Inco;ne~
Indirec
culture],
Receipts
Sector
prises t
Tax J
Taxes
Taxes zf
Total
Percent
Food crops
2,048
720
1,361
2,458
6,587
25
Industrial crops
2,040
447.5
2,703
819
6,009.5
23
Nonagricultural
industry
5,873
471
1,875
o
8,219
31
Unallocated re-
ceipts
5,420.5 J
21
Total
9,961
1,639
5,939
3,277
26,236
100
a. Profits were estimated from value-added indexes used on p sical production
(1952 = 100), adjusted for an 8-percent price rise in 1954 over 1952. The state's
share (includes one-half of joint enterprises) of industry (65 percent) and trade
(50 percent) was taken from official announcements. The state shares of construc-
tion and of transport and telecommunications were estimated at 90 percent and
80 percent, respectively.
b. Income taxes were estimated by taking 20 percent of private income from in-
dustry, trade, transport, and construction and roughly 12 percent of private in-
come from individual handicrafts and native transport. All figures are adjusted
for an 8-percent rise.
c. Indirect taxes were estimated by applying official tax rates against gross
value of production at producer prices. The totals were adjusted for an 8-percent
price rise.
d. The total value of agricultural taxes given in the budget was allocated in
accordance with the proportion of gross value of industrial and food crops.
e. This is made up of the following budget data: credit, loans, and insurance,
2,345 million yuan; other receipts, 712 million yuan; miscellaneous taxes and
fees, 969 million yuan; and taxes and fees on services, 1,394.5 million yuan.
The latter figure is a residual.
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Table 17
Communist China: Estimated Expenditures in the Budget
1957
Expenditure
Category Million Yuan Percent of Total
Economic construction 19,770 a/ 57.6
Social, cultural, and educational 2,550 J 7.4
Defense 7,200 J 21.0
Administration 2,400 J 7.0
Other 2,400 / 7.0
Total 34,320 100.0
13,333 / 38.9
a. The expenditures for 1953 through 1955 assuming the latter were
100 percent fulfilled) were subtracted from the Five Year Plan goal
of 62.4-billion-yuan expenditure on economic construction. The balance
was adjusted for an estimated 25-percent rise in investment prices by
-the end of 1954. Prices are assumed to remain constant after 1954. Half
the balance is assumed to be spent in 1957.
b. The 1953 through 1955 expenditures (assuming the latter were 95 per-
cent fulfilled) were subtracted from the Five Year Plan goal of 14.27-
billion-yuan expenditure on social, cultural,-and educational departments.
The balance was adjusted-for an estimated 10-percent-rise-in prices by
the end of 1954.
c. Defense spending is assumed to level- off at the 1955 level. Expend-
itures for nonrecurring transfer of Soviet assets, such as those at
Port Arthur in 1955, are assumed to be replaced in 1957 by.increases
in other areas of defense spending.
d. Assumes a 150-million-yuan rise over 1955 to cover increased control
apparatus of the government.
e. Assumes continuation of 1955 allocations to reserves and other pur-
poses, with a slight increase to cover repayment of Soviet loans and
the 1954 and 1955 domestic bonds.
f. Half of the remaining basic construction expenditures are adjusted
for 25-percent price rise by the end of 1954, assuming 1955 planned
expenditure was 100 percent fulfilled.
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APPENDIX A
CLASSIFICATION OF THE REVENUE AND EXPENDITURE ACCOUNTS
The titles of the major and component revenue and expenditure
accounts listed in this glossary are extracted from the Chinese
Communist official Budget Accounting Manual. The manual is help-
ful in analyzing the accounts, although in some instances it is
not clear to which major account a subcategory belongs. For
example, category S -- business revenues of government -- could
either be under profits of state enterprises or under the category
other receipts. The latter interpretation is used in this report,
although the manual does not state the actual practice.
A.
Agricultural Taxes.
1.
2.
Summer levy: grain, commercial crops, commutation
to cash
Autumn levy: grain, commercial crops, commutation
to cash
3.
Payment in arrears of previous years: grain, com-
mercial crops, commutation to cash
4.
Pastoral taxes
B.
Commodity Tax Revenues.
1.
Tobacco and spirits taxes
2.
Firecrackers and religious articles
3.
Cosmetics
4.
Taxes
on food and beverage
5.
Taxes
on fiber, skin,and leather
6.
Taxes
on sundry goods
7.
Taxes
on manufactured goods
8.
Taxes
on mineral and wood products
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C. Industrial and Commercial Tax Revenues.
1. Taxes on state-operated enterprises
2. Taxes on subordinate government enterprises
3. Taxes on cooperative enterprises
4. Taxes on joint public-private enterprises
5. Taxes on private industrial and commercial enterprises
6. Special assessment on business
7. Temporary commercial business taxes
8. -Taxes on peddlers
Industrial and Commercial Income Tax Revenues.
2.
Income
taxes
on cooperative enterprises
3.
Income
taxes
on public-private enterprises
4.
Income
taxes
on private enterprises
5.
Other
income taxes
Income taxes-on government enterprises
(other than national)
E. Stamp Tax Revenues.
F. Revenues from Taxes on Income from Interest.
G. Customs Revenues.
1. Import duties
2. Export duties
3. Tonnage dues
H. Salt Tax Revenues.
1. Taxes on table salt
2. Salt export tax
3. Tax on fish salt
4.' Tax on industrial salt
5. Tax on agricultural salt
6. Tax on salt byproducts
I. Consolidated Sales Tax.
1. Taxes on cloth and thread
2. Other consolidated sales taxes
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1.
Slaughtering
2.
Transactions
taxes
3.
Deeds
4.
Real estate
(buildings and land)
5.
Special consumption taxes (luxury banquet)
6.
License taxes (vehicles)
7.
Special production taxes (applicable only to Manchuria)
8.
Local surtaxes (must be approved by next higher level
government and must not be increased greatly)
a. Agricultural surtaxes
b. Industrial and commercial surtaxes
c. Real estate surtaxes
d. Surtaxes on public utilities
e. Other surtaxes
K. Income from Land Deeds (issued after land reform).
L. Income from Monopolies (shared by central and local
governments).
1. Tobacco monopoly
2. Spirits monopoly
3. Other monopolies
M. Revenues from Profits of Government Enterprises.
1. Profits of heavy industry
2. Profits of fuel industries
3. Profits of textile mills
4. Profits of light industry
5. Profits of railroads
6. Profits of posts and telegraphs
7. Profits of communications
8. Profits of agriculture (including pastoral enterprises
and fishing)
9. Profits of forestry
10. Profits of water conservancy
11. Profits of banking
12. Profits of trading
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13. Profits of insurance
14. Profits of salt production
15. Profits of monopoly-construction enterprise
16. Profits of drugs manufacturing
17. Profits of cultural institutions (including firms
for manufacturing scientific instruments)
18. Profits of public utilities
a. Water companies
b. Urban communication companies
c. Gas and electric companies
d.' Public construction companies
e.' Other companies
19. Profits of joint-public-private enterprises
20. Profits of other enterprises
N. Revenue from Payments by Government Enterprises
into the General Depreciation Fund.
1.
Heavy industry
2.
Fuel industries
3.
Textile mills
4.
Light industry
5.
Railroads
6.
Posts and telegraphs
7.
Communications
enterprises
8.
Agriculture
9.
Forestry
10.
Water conservancy
11.
Banking
12.
Trading
13.
Insurance
14.
Salt production
15.
Monopoly enterprises
16.
Pharmacological enterprises
17.
Cultural enterprise-s
18.
Public utilities
a.
b.
c.
d.
e.
Water companies
Urban communication companies
Gas and electric companies
Public construction companies
Other companies
19.
Other enterprises
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0. Revenue from Business Operations and.Rental Receipts
of Government Enterprises.
1. Business operations
2. Rental operations
P. Revenue from the Sale of Fixed Assets of Government
Enterprises.
Q. Revenue from Reimbursements made by Government Enterprises
from Their Working Capital (includes repayments from work-
ing capital of cooperatives).
R. Revenue from Increase in Appraised Value of Goods.
1. Heavy industry
2. Fuel industries
3. Textile mills
11.. Light industry
5. Railroads
6. Posts and telegraphs
7. Communications enterprises
8. Agriculture
9. Forestry
10. Water conservancy
11. Banking
12. Trading
13. Insurance
14. Salt production
15. Monopoly enterprises
16. Pharmacological enterprises
17. Cultural enterprises
18. Public utilities
a. Water companies
b. Urban communication companies
c. Gas and electric companies
d. Public construction companies
e. Other companies
19. Other enterprises
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S. Business Revenues of Government.
1. Economic construction (agriculture, water conservancy,
and other revenues from economic constructi-on)
2. Educational
3. Cultural
4. Social
5. Medical
6. Public utilities
7. Assessment on land and property
8. Other business revenues
T. -Administrative Revenues.
1. Fines (administrative, court, police, taxation fines,
salt tax fines to central government, other to
province and municipality, other fines)
2. Fees (administrative, court, police, medical -- in-
cluding slaughtering and inspection)
U. Revenues fromPublic Property.
1. Income from rental
2. Income from increase in value of public property
3. Income from interest on public funds
4. Income from warehouse clearance (cash from sale
and increase in value, probably Chinese Nationalist
government property)
5. Income from disposal of enemy property
V. Revenue from Public Loans.
1. Domestic
2. Foreign
3. Income from repayment of funds loaned abroad
W. Other Revenues.
1. Revenue from production by military units
2. Revenue from contributions
3. Revenue from production by labor reform
4. ;Miscellaneous
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X. Revenue Forwarded by Lower Level to Higher Level
Governments.
Y. Revenue from Subsidies by Higher Level to Lower
Level Governments.
Z. Revenue from Previous Year's Surplus.
AA. Revenue from Currency Issue (applies to central government
only).
II. Expenditures.
A. Defense.
1. National defense expenditures (National Revolutionary
Military Committee and defense construction)
2. Military affairs expenditures (mobilization of local
military forces)
3. Heavy industry
4. Fuel industries
5. Textile industries
6. Light industry
7. Railroads
8. Posts and telegraphs
9. Communications and transport
10. Agriculture and conservancy
11. Forestry
12. Water conservancy (large-scale irrigation, flood control,
hydroelectricity)
13. Banking expenditures (costs of operations)
14. Insurance expenditures
15. Trade and commerce (domestic and foreign)
16. Salt production
17. Monopolies (tobacco and spirits)
18. Investment in joint public-private industries (shares)
19. Costs of other investment in corporation, including
grain processing
20. Municipal construction (housing and public utilities)
21. Surveying of natural resources
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22. Construction of storage facilities
23. Cooperatives
C. Social and Cultural Expenditures.
24. Cultural (film., drama, music, fine arts)
25. Educational (adult training, normal schools,
and universities)
26. Training of cadres
27. Scientific (research, experimentation)
28. News (newspapers, photography, broadcasting)
29. Publishing (copyright, translation, printing,
publications)
30. Public health
31. Social (support for disabled workers, relief
to families of soldiers)
D. Subsidies to Political Parties and Mass Organizations.
32. Subsidies to political parties and mass organizations
E. Administrative.
33. Administrative organization control expenditures
(central, regional, provincial, municipal, hsien)
34. Political affairs (popular assemblies, nationalities
affairs, overseas affairs, land reform, political
propaganda, celebration of national holidays)
35. Foreign relations
36. Public security and judicial expenditures
F. Fiscal (cost of collections of taxes).
37. Fiscal expenditures -- customs, salt, general
G. Other Expenditures.
38. Expenditures on public loans both foreign-and domestic,
payment of interest and principal
39. Subsidies to local governments
40. Funds remitted to higher level governments by lower
level governments
41. Expenditures on storage of valuables
42. Other
43. General reserves
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APPENDIX B
METHODOLOGY
I. Reclassification of Gross National Product.
The :GNP sector-of-origin accounts for 195+ have been regrouped
into four accounts in Table 4*: these are agriculture, forestry,
and fishing; private nonagriculture; state enterprises; and in-
direct taxes. The purpose of the regrouping is to show the re-
lationship of a particular sector's actual and imputed income to
budget receipts drawn from that sector.
The components of the income from agriculture, forestry, and
fishing are first the value of such production (including home
industry but net of production expenses) based on a physical
production index (1952 = 100) adjusted for an 8-percent rise in
grain prices in 195+ over 1952. 39 Some of the wage payments
by state enterprises go to peasants and are not reflected in the
valuation of home industry. The income based on production in-
dexes does not include rent, and so rent has been imputed at the
rate of 5.2 percent of net farm income.
Wage payments to government employees have been divided be-
tween the private agriculture and nonagricultural sectors. This
division, on the basis of which group uses the services rendered
is an alternative to listing these wage payments separately with
their tax payments. The former method is used on the grounds
that the government services augment peasant income and should be
taken into consideration in relating tax collections to sector
income.
Private nonagricultural income was taken from indexes of
physical production valued at factory prices. For certain sec-
tors it was possible to use official announcements of the pro-
portion of output contributed by private enterprise. The an-
nounced private ownership in 195+ was 35 percent of modern indus-
try and 50 percent of trade. All of individual handicraft and
native transport was treated as private value added. The private
* P. 15, above.
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ownership of the remaining two sectors was estimated to be 20 per-
cent of modern transport and communications and 10 percent of
construction.; This gave a total value added in private industry
and trade of 16.26 billion yuan: modern industry, 3.81 billion
yuan; trade, 4.48 billion yuan;modern transport and communica-
tions, 0.43 billion yuan;,constructicn, 0.35 billion yuan;
native transport, 3.91 billion Yuan; and individual handicraft,
3.28 billion yuan.
The value of consumer services, which was based on the labor
force, was added to this sector. One-third of the value of
government services, that is, the wage payments to government
employees, was added to this sector. In the division of the
value of these services between agriculture and nonagriculture,
double the proportion to total population was attributed to
the noriagriculture sector. Wage payments totaled 4,816 million
yuan, with the following breakdown: troop wages, 872 million
yuan; supporting defense personnel, 872 million yuan; health,
education, and welfare wages, 1,100 million Yuan; transfer pay-
ments, 872 million yuan; -administrative wages, 630 million yuan;
public security troops, 390 million yuan; and labor reform wages,
80 million yuan.
Wage payments by state enterprises were the final addition to
the income of, this sector. These wage payments include bonuses
and welfare expenditures from that portion of profits retainable
for the purpose (that is, 5 percent of planned and 20 percent of
exces-s profits -- a maximum of 15 percent of the wage bill). 40/
Basic wages for the estimated 6.4 :million full-time state enter-
prise employees total 4.83 billion yuan. Fringe benefits,
bonuses, and payments to casual labor raise the wage payments
to about 6.6 billion Yuan.
The value added by state enterprises is derived in the same
way as private income from trade and industry. Wage paymentsto
peasant and nonagricultural laboraccounted for somewhat less than
half, and the: balance equaled the profits and depreciation re-
serves which are remitted in total to the national treasury.
Indirect taxes were listed separately because the prices at
which the output of the other sectors was valued excluded such
taxes.
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APPENDIX C
GAPS IN INTELLIGENCE
There are gaps in intelligence throughout the budget of Communist
China. The budget reports give no details on the accounts making
up the major categories, and scattered information from other sources
is inadequate for almost all categories.
On an over-all basis, it is not clear whether there is fi
nancing outside the consolidated national budget and, if so, the
extent of it. The particular areas in which extrabudgetary
financing may be important are primary and secondary education
and hsiang (town) level administrative expenses.
The amount and category listing of subsidies to political par-
ties is another area of uncertainty on the expenditure side.
There are several types of receipts, the magnitude and manner
of listing of which require more intelligence. The amount and
character of Soviet loans is one type requiring clarification.
Along the same line, the amount, if any, of credit by the European
Satellites is unknown. Within the same major category of credit,
loans, and insurance, it would be helpful to know the distinction
between the insurance receipts and those listed under profits of
state enterprises.
Two budgetary items which may be related are surplus funds and
receipts from the "Five Anti" campaign. The source of the surplus
cannot be determined from present budget reports. The "Five Anti"
receipts are a puzzle as to amount and manner of listing.
Other revenue items about which additional information is re-
quired are the value at which agricultural taxes are listed, the
amount of profits made on state grain trade, the sources of re-
ceipts of budget-supported enterprises, and the composition of
miscellaneous taxes.
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APPENDIX D
SOURCE REFERENCES
Evaluations, following the classification entry and designated
"Eval.," have the following significance:
Doc. - Documentary
A - Completely reliable
B - Usually reliable
C - Fairly reliable
D - Not usually reliable
E - Not reliable
F - Cannot be judged
1 - Confirmed by other sources
2 - Probably true
3 - Possibly true
4 - Doubtful
5 - Probably false
6 - Cannot be judged
"Documentary" refers to original documents of foreign govern-
ments and organizations; copies or translations of such documents
by a staff officer; or information extracted from such documents
by a staff officer, all of which may carry the field evaluation
"Documentary."
. Evaluations not otherwise designated are those appearing on the
cited document; those designated "RR" are by the author of this
report. No "RR" evaluation is given when the author agrees with the
evaluation on the cited document.
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4.
5.
6.
7.
8.
9.
11.
FOIAb3b1 12.
13.
25X1A
14.
FOIAb3b1 15.
FOIAb3b1 16.
25X1A 17.
FOIAb3b1 18.
CIA.: FDD Summary no 550, Selected Articles from Chinese
Communist Periodicals (2), 20 Jun 55. C.
CIA. FDD Translation no 345, Government Budget Accounting
in the Peo le's Republic of China, 31 Jan 55. C.
CIA.! FDD Summary no 69, Materials on the Economic
Organization of China, 1949-1 52, 2 Sep-52. S.
Ibid.:, p. 74. S.
Ibid.:, p.30. S.
CIA. FDD Translation no 345 (2, above).
Ibid.;, p. 12, 20-21. C.
CIA. ORR Project 15.849, Economic Planning and Develop-
ment in Communist China, 1952-1960 (to be published). S.
CIA.. FDD Translation no 521, Statistical Data on Economic,
Cultural and Educational. Development in China, 19 9-5 ,
29 Feb 56. C.
CIA. ORR Project 15.446, Gross National Product of Com-
munist China, 1952, unpublished. S.
CIA. FDD Translation no 345 (2, above), p. 25-27. C.
CIA. FDD Translation no 338, People's Practical Economic
Dictionary: Public Finance of China, 15 Dec 54, p. 46.
19. Ibid.:, 11 Jul 55. OFF USE.
20. Ibid..
21. CIA. FDD Summary no 351, WeeklyInformationon Communist
FOIAb3b1 22.
23. Ibid.!, 22 Jul 55, P. AAA 25. OFF USE.
24. "Discussion of the 1953State Budget," Ching-chi Tao-pao,
10 Mar 53. OFF USE.
FOIAb3b1 25.
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26. CIA. FDD Translation no 340, People's Practical Economic
25X1A Dictionary: Banking, Currency and Credit in China,
17 Dec 54,'P- 3. OFF USE.
Ibid., 13-15 Nov 54, p. 31. U.
25X1A2g 28.
29.
25X1 X7 30
31. CIA. FDD Summary no 754, Weekly Information Report
on Communist China (77), 1 Dec 55, p. 6. C.
32. Ibid.
FOIAb3b1 33.
34. Ibid.
35 ? Ibid.
36. People's China, no 24, 1954. U.
37. CIA. FDD Summary no 338, Weekly Information Report
on Communist China, 15 Dec 54. C.
38. CIA. ORR Project 15.849, op. cit. (8, above).
FOIAb3b1 39?
40. CIA. FDD Translation no U-6652, Finances of the People's
Republic of China, 19 Oct 54. C.
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