CHINA: DEMAND FOR FOREIGN GRAIN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00551R000100060009-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 20, 2016
• Document Release Date: February 26, 2007
• Sequence Number: 9
• Publication Date: January 1, 1979
• Content Type: REPORT

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National
Foreign
Assessment
Center
China: Demand for
Foreign Grain
A Research Paper
Comments and queries on this unclassified report
are welcome and may be directed to:
Director of Public Affairs
Central Intelligence Agency
Washington D.C., 20505
[phone]
For information on obtaining additional copies,
see the inside of front cover.
ER 79-10073
January 1979
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China: Demand for Foreign Grain
The People's Republic of China almost certainly will
continue to import about 10 million metric tons of
grain annually through 1980. The dramatic increase in
grain purchases since the post-Mao changes in leader-
ship has resulted both from the leveling off of grain
production in 1975-77 and from the move to upgrade
living standards.
Several major factors will affect grain imports during
the remaining years of the 10-year plan (1976-85). Of
first importance will be China's progress toward
meeting the highly ambitious plan for producing 400
million tons of grain annually by 1985, which implies
nearly a doubling in the historical (1958-75) rate of
growth of 2.2 percent; continuation of historical
growth would result in production near 350 million
tons in 1985, still a substantial gain over the 295
million tons reported for 1978 (see figure 1). Popula-
tion growth and demand for higher incomes and higher
food rations together will exert continuing pressure on
Beijing (Peking) to buy foreign grain. Grain distribu-
tion will also be a factor-imports will continue to be
needed to feed coastal urban centers, thus reducing the
internal procurement burden.
Collective livestock production is now considered by
the government as the way to provide more meat for
the urban population. Collective livestock raising
requires a substantial input of feedgrains and thus will
compete more strongly for available grain. At present,
livestock in China consume far less than 10 percent of
the grain supply.
Transporting the larger imports of foreign grain to the
northern cities, the main consuming points, presents
few problems. Grain-handling facilities in the northern
ports and the requisite urban transportation systems
are good. Transporting ever higher levels of grain from
rural China to the cities, however, is the problem. The
recent increase in imports of foreign grain helps reduce
the strain on rural transportation.
China's ability to pay for foreign grain at present is not
in question. However, as commitments and negotia-
tions for foreign industrial machinery and technology
accelerate-they now involve a total of more than $40
billion-Beijing will wish to keep expenditures on
grain as low as possible. Thus, over the next several
years the Chinese leaders will be attempting to find a
balance among grain imports, industrial imports, and
mortgages on the future.
China: Grain Production 1949-19851
Million Metric Tons
Expansion of the grain storage system is necessary as
the population grows, and this also adds to total
demand for grain. Grain storage for practical and
strategic reasons is extremely important in China.
Since the nutritional needs of the population are
narrowly met, a vast storage program is essential in
order to prevent malnutrition and starvation during
years of poor harvests.
Low
Estimate
100 rl I I I I I I I
1949 50 55 60 65 70 75 80 85
t The year 1979 is projected to be back on the long term trend Projected
with the return of average weather.
Planned Production i
(High Estimate),-,,......
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China: Demand for Foreign Grain
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We estimate Chinese grain production in 1978 at 295
million metric tons, the first substantial increase since
1975 (see table 1). The leveling off of production in
1975-77 had resulted in stock drawdowns and tight
rations, which the new leadership is trying to rectify
through increased grain purchases in the short run and
through increased agricultural investment in the long
run.
US Secretary of Agriculture Bergland, during his trip
to China in November 1978, was told by Vice Premier
Li Xiannian (Li Hsien-nien) that China would be
importing "something over 10 million tons of foreign
grain per year," and that "5 to 6 million tons would
come from the United States." The number of years
China will be importing at this level was not made
clear, but the time period implied was for the next few
years, presumably while the agricultural sector is
catching up with rising demand.
Two projections of Chinese grain output to 1985 are
shown in table 2. The high estimate reflects China's
goal for the 10-year plan (1976-85) of 400 million tons
by 1985. The 1980 projection of 330 million tons is
consistent with the estimated growth rate for 1978 and
the 1985 target. The low estimates for 1980 and 1985
are extrapolations of the 2.2-percent average annual
growth rate between 1957 and 1975-both years of
average weather. The years 1976 through 1978 (when
the weather was poor) were not used to calculate the
trend, because their inclusion would introduce a
downward bias in the projections for 1980 and 1985.
For the next seven years, 1979-85, the high series
implies an average annual increment of grain produc-
tion of 15 million tons, the low series, 8 million tons.
The Chinese goal of 400 million tons can be achieved
only with an unlikely coincidence of favorable condi-
tions. To reach the goal, the high-priority political and
economic commitment of the regime to the agricul-
tural sector must be maintained; every aspect of the
development program-fertilizer, irrigation, mechani-
zation, and seed research-must proceed on or ahead
of schedule; and good weather will be required. On the
Note: Complete grain production and per capita availability time
series is in table 4.
other hand, China probably will do better than the
historical trend because the massive development
programs, already in train, will begin to pay off.
For two decades the level of per capita grain produc-
tion has not risen significantly above 300 kilograms
(kg) per year. The grain ration has not increased in this
period. We have seen no indication that the Hua
government is considering an increase in the ration. On
the other hand, the government is moving toward
allowing limited free market sales of grain which have
been illegal. Such sales would exert upward pressure
on the demand for foreign grain; less domestic grain
would flow into government channels because less
would be available for above-quota government
purchases.
Year
Grain
Production
Total
Grain Imports
Imports
of US Grain
1965
194
5.9
0
1966
215
5.6
0
1967
225
4.9
0
1968
210
4.4
0
1969
215
3.9
0
1970
243
4.6
0
1971
246
3.1
0
1972
240
4.6
0.9
1973
266
7.6
4.3
1974
275
6.8
2.8
1975
284
3.5
0
1976
285
2.0
0
1977
286
6.9
0
1978
295
9.4
3.3
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China: Projected Grain Output
High estimate output
284
295
330
400
Low estimate output
284
295
317
354
Million Persons
Per capita, high estimate
298
291
314
353
Per capita, low estimate
298
291
301
313
' Midrange estimates as projected by the Bureau of the Census,
Foreign Demographic Analysis Division, in March 1978.
Adult grain rations in China normally average 30 to 40
catties ' per month, depending upon physical need, but
may drop to 25 or below if the local harvest is bad.
Urban dwellers are less subject to wide changes in the
grain ration than are the peasants. Adolescent children
may have larger grain rations than their parents, if, for
example, the parents are not engaged in heavy work
requiring high food rations. A child of 10 might receive
24 catties, and a child of 5 might receive 20 catties or
less.
Vegetable oil is usually rationed at a half catty a
month per person. The sugar ration is often the same as
vegetable oil. In recent years the rationing of pork in
the cities has become more common. A typical pork
ration is 1 catty a month per person.
Table 3 shows the overwhelming importance of grain
to the Chinese diet. The grain ration may be made up
of a combination of several grains or flour. In the south
it is usually rice, and in the north it is mostly wheat and
coarse grain. Sometimes sweet potatoes are part of the
grain ration, at a weight ratio of 5 to 1. Rice, wheat,
'One catty is equal to 0.5 of a kilogram.
China: Nutrient Values of
Per Capita Food Consumption'
Catties
per Month
Calories
per Day
Protein
Grams per Day
Total
1,936
45.1
Sugar
0.3
19
0
Oil
0.5
75
0
Vegetables
7.3
27
3
Fruit
1.0
8
negl
Eggs
0.2
5
0.3
Pork
0.7
37
1
Poultry
0.2
4
0.4
Fish
1.0
10
1.4
Other
30
2
' The data sample, which was obtained from refugee and traveler
reports, represents actual consumption.
coarse grain, or flour contain about 1,750 calories per
catty,' while potatoes contain only 350 calories per
catty. Vegetables play a very important part in the
diet, not only for food value (vitamin content), but also
for variety.
Nutritional requirements of people vary among coun-
tries and depend upon such factors as climate, average
size of the people, and number of hours worked per
day. Estimates of how much nutrient is needed for an
ideal diet also vary. Estimates by the UN Food and
Agricultural Organization (FAO) for Asian centrally
planned nations show a daily per capita consumption
level of 2,170 calories and 60 grams of protein. The
FAO estimates that this amount meets 92 percent of
human food requirements. The International Vegetar-
ian Society claims that a per capita level of about 2,000
calories and 60 grams of protein is more than enough
food, provided the diet includes enough sources of
alkaline elements, such as green leafy vegetables,
which the Chinese diet does furnish. The Society also
claims that there is no need for animal protein.
For most people in China today, the diet is just
adequate to preserve productive efficiency. Due to the
strict rationing system for foods making up over 90
percent of caloric intake, there is only a small variance
in average consumption levels, so that the great bulk of
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the populace is at or near the average. FAO estimates
of human food requirement for an ideal diet have long
been on the high side, and are decreasing over time;
furthermore, FAO data sometimes rests on per capita
"availability" of food in a country-the figures thus
include a considerable element of waste, and losses,
and do not represent actual consumption-whereas the
data for China in table 3 represent what is actually
eaten. Notwithstanding the technical sufficiency of the
average Chinese diet, most people look forward to an
improvement in quality and quantity. Under the
relaxed political climate in Beijing, a demonstration by
peasants "from all over China" was recently held in
demand of democracy and human rights. One of the
main complaints was that "there is not enough food to
eat."
Beijing declared a general wage increase in October
1977, which benefited three-fifths of China's urban
workers, mainly in the lower income brackets, and
which averaged perhaps 10 percent overall. Since then
the reinstitution of bonuses for high productivity has
further raised the average income level.
Although in most cases the wage increase was moder-
ate, the aggregate effect on the demand for food has
been substantial. We have seen a jump in food prices in
China's free markets, which is strongly correlated with
the wage increase. At least part of the government's
decision to increase grain imports appears to be the
result of an increase in demand for food. Urban
Chinese on the average spend just over half of their
income on food.
Rural incomes by and large are determined by the size
of the harvest. Average peasant incomes in the north
are lower than peasant incomes in the south because
per capita production in the north is lower. Peasants in
general have always earned less than city folk. To help
rectify the urban-rural income disparity the govern-
ment has pursued a long-term policy of lowering the
price of farm inputs supplied by industry, lowering
rural taxes as a percent of output, and raising state
procurement prices of farm products.
Since the "Agriculture First" policy was formulated in
1962,2 the government has given special consideration
to the northern peasants by importing grain into the
major northern cities, thereby reducing rural procure-
ment in the area. To further support northern peasants
and reduce the load on the rural transport system,
Chinese officials now appear to have made a medium-
term commitment to maintain a higher level of grain
imports.
An alternative method of supplementing the grain
supplies in northern cities is shipping rice up from the
south. Very little of this is done, however, since
transportation is expensive. Furthermore, the limited
amount of surplus rice may be sold abroad and much
greater quantity of wheat bought in return; wheat
products such as noodles and breads are traditional
northern foods.
Through both necessity and tradition the Chinese have
not been accustomed to a high-meat diet. Neverthe-
less, per capita meat consumption in China is so low at
present, that a marked potential exists for growth in
China's livestock industry. As incomes have risen, the
people have demanded more meat, and the government
has begun to respond to this demand.
In the major suburbs, notably of Beijing, Shanghai,
and Guangzhou (Canton), the government is building
(sometimes with foreign help) modern, mechanized
hog and chicken farms. We do not know the extent of
this development. The Chinese have announced the
recent completion of three modern chicken farms in
the Shanghai area, which have raised a total of
210,000 chickens in eight months, and a foreign-built
pig farm near Beijing that raises 10,000 pigs per year.
Recently, the Chinese also have purchased from
Australia a facility for raising chickens.
z Instead of conducting the agricultural sector as a holding operation,
the government began injecting sizable amounts of resources into
agriculture from industry.
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The trend toward modern feed-lot animal husbandry
breaks with Chinese tradition, and, in the future,
feedgrain could compete seriously with grain for
human consumption. At present, well under 10 percent
of the grain supply is used as animal feed. Most hogs
are raised on private plots, and are fed almost entirely
on poor-quality forage crops such as weeds and tops of
root crops.
The recent developments in livestock raising notwith-
standing, we doubt that China will be importing large
amounts of animal feedgrain before 1985. The 10-year
development program for the whole economy is so
ambitious that it seems unlikely that China would use
much of its scarce foreign exchange to increase the
meat supply.
The preoccupation with obtaining a buffer supply of
food is shown in the often-quoted words of Mao, "Dig
tunnels deep and store grain everywhere." The leveling
off in grain production in 1975-77 resulted in stock
drawdowns that Beijing no doubt viewed as an
impairment in the general Chinese defensive position
and in the ability to meet specific emergencies such as
the Tangshan earthquake of July 1976. Nevertheless,
the primary function of grain storage in China is to
ensure that the minimum grain needs of the population
are met at the lowest cost. To minimize transportation
costs, each production team, production brigade,
commune, county seat, and city has its own storage
facilities. After the grain is harvested, the portion to be
distributed by the production team and brigade is
stored at this primary level in storage facilities
operated by the collectives. Grain acquired by the
government through taxation and procurement is
stored in government facilities at the commune and
county levels or is shipped directly to urban areas.
We have no reliable figures on the level of Chinese
grain stocks; some estimates are as high as 50 million
tons. We do not know what grain stocks are included in
the calculation of national grain stocks. We think it
logical to assume that national stocks are kept in state-
operated facilities and do not include operating stocks.
Year Grain Per Capita Per Capita
Production Grain Grain
(Million Production Availabilities
Metric Tons) (Kilograms) (Kilograms)
1949
111
205
205
1950
130
235
235
1951
141
250
250
1952
161
280
279
1953
164
278
278
1954
166
275
274
1955
180
292
289
1956
188
297
294
1957
191
295
293
1958
206
311
308
1959
171
253
248
1960
156
226
223
1961
168
240
247
1962
180
252
257
1963
190
260
267
1964
194
260
267
1965
194
254
261
1966
215
276
281
1967
225
282
286
1968
210
257
261
1969
215
257
260
1970
243
284
287
1971
246
281
283
1972
240
268
272
1973
266
291
297
1974
275
295
300
1975
284
298
300
1976
285
293
294
1977
286
288
294
1978
295
291
300
China employs two types of storage, granaries and
open-air storage. Granaries are generally located near
cities, county seats, and commune headquarters.
Open-air facilities are used at all levels and are the
main form of storage at the production level. Civil
defense tunnels and caves are also used as granaries.
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Granaries are warehouse-type buildings in which grain
is stored in either bulk or bagged form. Bulk storage is
used for grain that has a low moisture content or that
will not have to be handled shortly after arrival. Three
methods of bulk storage are used. The first is to simply
store the grain loose in the granary; this method has
the advantage of using the entire capacity of the
granary, but the disadvantage of possible structural
damage to the facility from pressure exerted on the
walls by the grain and of an increase in quality-control
problems. Another method of bulk storage is the use of
round, xuezu bins in the granary constructed of straw
or reeds; these have the disadvantage of significantly
lowering the capacity of the granary. The most
common method of bulk storage in the granary appears
to be the use of bagged grain piled up to form an inner
wall as added protection for the loose grain. This
method increases capacity over bin storage and im-
proves quality control over general bulk storage.
A large quantity of grain is stored in the open. The
methods of storage are similar to those used inside a
granary-stacked bags, bulk inside bag walls, and in
xuezu bins, except in this case the bins are shaped to
facilitate rain runoff and are covered with thatching.
Silo construction has been expanding rapidly since the
introduction of a medium-sized silo during the Cul-
tural Revolution (1966-69). The silos have been
replacing the open-air xuezu bins. These structures
range in capacity from 10 to 250 tons. The major
advantages of these structures are their low construc-
tion costs (construction materials are clay, straw,
bricks, and rocks); their protection against rats, birds,
dampness, fire, and earthquakes; and their ease of
adaptation to mechanized grain handling.
The major differences in Chinese and Western meth-
ods of storage stem from the differences in the
availability of labor and construction materials. Chi-
nese grain storage is very labor intensive. For example,
the Ta-hsing-lou granary near Xi'an (Sian), Shaanxi,
with a capacity of 18,500 tons, employs 127 people-
very high by US standards. The difference in availabil-
ity of labor is the major reason grain is shipped in bags
in China and in bulk in the United States. Present
storage methods seem to meet Chinese needs with
minimum losses. A rapid move toward foreign storage
technology, grain-handling equipment, and grain dry-
ers seems unlikely except at the major ports.
China's plans to increase regional crop specialization
through the development of 12 large "grain bases" and
an unknown number of industrial crop bases will not
substantially alter the current methods of storage. The
major effects will be increased strain on the transporta-
tion system and an increase in grain-storage capacity
in those areas designated as grain bases (see figure 2).
Increased Grain Imports and Internal Transport
If China continues to import grain at current levels
(approximately 10 million tons per year), the urban
transport system can handle the amounts without
undue stress. Because the grain will be unloaded at
port facilities in major cities, transport distances and
scheduling problems will be minimal. Almost all of the
movement will be by rail directly to urban or county
distribution centers, with some participation by trucks.
This pattern was employed as long ago as the 1920s
and 1930s to meet urban demand for food. The
distribution of an additional 10 million tons of
domestically procured grain would pose far greater
problems of transport. In the latter case, native
transport (carts, tractors) would have to move the
grain to local distribution centers from which short-
haul trucks would then convey the grain to railroads or
inland waterway ports for transport to the cities.
We know of no big grain losses since the late 1950s
stemming from inadequate inland transport. Some loss
may be inferred, however, from the ship delays and
port congestion of the early 1970s. Inadequate port
capacity, not inland transport, was the culprit in this
case. But with the additional port capacity derived
from new berths and better equipment in recent years
(more is continually being added), unloading has been
speeded and ship delays shortened.
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People's Republic of China: Major Transportation Routes and Grain Bases
1. Central and eastern Heilongjiang
7.
2. Central Jilin
8.
3. Huang He River, western corridor
9.
in Kansu
10.
4. Huang He River. in Nei Monggol
11
and Ningxia
5. Huai River, in northern Jiangsu
.
6. Huai River, in northern Anhui
- Road
Mongolia
Chang Jiang River Delta
Dongting Lake area of Hunan
Poyang Lake area of Jiangxi
Pearl River Delta in Guangdong
Chang Jiang and Han River area
in Hubei
inhua dao (Ch'in-huk
Luda (Dairen)
Yantai (Chefoo)
Qingdao (Tsingtao)
ndong 'Huangdao (Huang-too)
j ,Lianyungang
iJ / (Lien-yun-kang)
i Vtangsu
"Shanghai
hanghai
iang'-
Jiangxi ,l
F jia
ngdong
trangzhou (Canton)
f?J Hong Kong
Macao (U.K.)
(Port.)
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Ports
Ten major ports are involved in the grain trade, with an
estimated annual capacity to unload 17 million tons of
grain. Only two of the ports, Shanghai and
Guangzhou, are equipped with modern facilities to
unload grain. The other ports use a combination of
mobile pneumatic unloaders, grab-type portal cranes,
or shipboard cranes.
Unloading facilities with a capacity of about 5 million
tons have been completed during 1976-78. The modern
handling facilities at Shanghai account for almost 3
million tons, the special grain berth open in 1978 at
Guangzhou adds another 1.5 million tons, and the
remainder is the result of new general cargo berths and
cranes added at other ports.
The grain port at Shanghai, which can handle about
8 million tons annually, comprises four berths, six
pneumatic loaders, a conveyor system, 18 silos, and at
least 10 warehouses. Guangzhou has at least one grain
berth, two pneumatic unloaders, a conveyor system,
and 21 silos, and can unload about 1.5 million tons
annually. The grain berth at Luda (Dairen) is served
by a battery of 16 silos, but unloading is done by
portal cranes or shipboard cranes. Using this and other
berths, Luda can unload 2.5 million tons of grain
annually. Most of the imported grain goes through
Shanghai and Luda. Berths devoted almost exclusively
to the grain trade are also located at Qiingdao
(Tsingtao), Lianyungang, (Lien-yun-kang), Yantai
(Chefoo), and Zhanjiang (Chan-chiang) (see figure
2).
Although grain is unloaded more efficiently at spe-
cially equipped grain berths, it can be unloaded at
almost any berth at any port. In fact, large quantities
of grain are unloaded at general cargo berths at
Xingang (Hsin-kang) and Tanggu (T'ang-ku), as well
as at general cargo berths at Shanghai, Luda, and
Chingdao. Using shipboard or dockside cranes, grain
can be unloaded directly into trucks or rail cars and
moved immediately out of the port area. The grain can
also be bagged at the dockside and either shipped out
or stored.
Storage
Capacity of grain-storage facilities, both silos and
warehouses, at Chinese ports exceeds 500,000 tons.
Assuming that grain will be stored an average of seven
days at the ports, existing storage capacity could
accommodate 26 million tons of grain imports annu-
ally if the grain flowed in steadily. This is in excess of
unloading capacity but does provide a cushion as grain
imports are not evenly spaced throughout the year.
From Port to Consumer
Grain makes up about 10 percent of the total tonnage
moved in the modern transport sector. Of the total
tonnage of grain loaded onto the various modes of
transport, trucks carry 38 percent and railroads and
waterways, 31 percent each. Grain represents about
5 percent of the total rail freight both in absolute
tonnage and ton-kilometer terms. With the growth of
motor transport, an expanded road network, and
centralized state grain procurement, many feeder
roads now join scattered communes to the rail and
water networks. Some 15 percent of total truck traffic
is given over to grain. Grain makes up 30 percent of
total inland waterway freight. Although all inland
waterways are important in the transportation of food,
most of the flow occurs along the Yangtze River, which
passes through the major rice areas in Sichuan
(Szechwan) Province and the so-called rice bowls of
the middle and lower Yangtze Valley. Finally, 10
percent of the total cargoes shipped along the coast
consist of grain.
Rail freight volume of all types doubled in the period
1970-77 and is scheduled to double again in 1978-85.
The unused capacity on existing railroads combined
with additional capacity resulting from new and
double-track construction and other improvements will
permit increased traffic without squeezing operations.
Moreover, the unused capacity at rolling stock plants
probably will suffice to accommodate increased de-
mand for hoppers and boxcars for grain transport.
Production of such rolling stock increased 75 percent
between 1970 and 1977 and can be increased further to
meet expanded grain requirements. Motor transport
and inland waterways have even more unused capac-
ity, hence potential, than railroads do. Overall then,
transport can cope with foreseeable grain imports
without substantial detriment to normal traffic.
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Since the first major grain imports took place in 1961,
China has used short-term credits to smooth out
payments for grain purchases. Imports from Canada
and Australia have routinely been financed on 12- to
18-month terms, probably at commercial rates. Some
of the US grain purchased in 1973 and 1974 through
third-country firms was also under short-term credits.
Present US grain purchase terms are all cash. In 1978
the US Congress authorized credits of the Commodity
Credit Corporation (CCC) for Chinese grain pur-
chases, but China has not shown interest in using them.
China: Imports of Grain, by Source
Million Tons
6.8
0
CCC lending rates are currently 10.5 to 11.5 percent
per annum for three-year credits.
Variations in China's grain imports have reflected not
only crop fluctuations, but also changes in the balance-
of-payments position. China severely reduced grain
imports during 1975-76 as the foreign exchange
situation became unusually tight (see figure 3). The
People's Republic of China also drew down stocks and
reduced local food rations. As the balance of payments
improved in 1977-78, imports of grain rose. Beijing's
newfound willingness to incur substantial foreign debt
will facilitate maintenance of a more stable level of
grain imports in the future.
T"fi2
1.4
3.3
o8 i
o Other
Argentina
1966-70 71 72 73 74
Annual
Average
0 7 0.1 2 3.5
-,aO:I'It
0.8
 Approved. For-Release 2007/02/28 :.,CIA-RDP83BQ0551 R0001 00060009-4
CHINK: THE ECONOMIC OUT~O0K
Executive Sur^ary
This year, and in 1980-81 as well, China's post-Mao
leadership will be concerned primarily with realigning its
long-term program for economic modernization. The leader-
ship's reassessment of pace and priorities was summed up
by Premier and Party Chairman Hua Guofeng at the National
People's Congress (NPC) in late June:
The work of recovery and development in
the previous two years (1977-78) has yielded
results far in excess of our expectations.
But the grave effects of the sabotage by Lin
Biao anti the Gang of Four cannot be eliminated
in a short period. We did not take this into
full account and some of the measures we adopted
were not sufficiently prudent. [As a result, it
is] absolutely necessary that we concentrate our
efforts within these three years [1979-81] on
readjusting, restructurin , consolidating, and
improving our economy. [Emphasis added]
Aside from the forthright discussion of current dif-
ficulties, Hua and other officials gave out an unprece-
dented number of economic statistics that generally
confirm their appraisal of economic recovery in 1977-
78. On the other hand, the new policies are forcing
a slowdown this year in the rate of growth of industrial
production and a sharp reduction in budgetary appropria-
tions for capital investment projects. For the first
time in many years, China's managers have been directed
to emphasize quality, product mix, and cost effective-
ness rather than sheer output.
unciassified memorandum was prepared by the'China Division of
Gfice of Economic Research, National Foreign Assessment Center,
.:: response to a request from the Nati v Counc 1. Ques
r:s a:"" cc::~::ents may be addressed to
STAT
 Approved For Release 2007/02/28: CIA-RDP83BOO551 R0001 00060009-4
The five major objectives under the slogan of
readjustment center around:
-- Praising growth rates for foodgrains and
other farm products in relation to population
and industry.
-- Increasing the growth rate of consumer goods
production, both for domestic consumption and
to expand exports.
-- Assigning higher priority to energy, trans-
portation, and communications.
-- Cutting back an "gverextended" investment
program so as to concentrate resources on
completing vital projects.
-- Raising the incomes of rural and urban workers.
The new policies of restructuring and consolidating
require an "overall reform of t e structure o economic
management." While efforts in this regard are still
experimental, they apparently are expected to evolve into
some uniquely Chinese model of market socialism in which
local authorities are given greater powers over planning,
investment, finance, material supply, and foreign trade.
Policies in the improvement category are aimed at raising
labor productivity and capital efficiency.
Despite the revamping of economic strategy, China's
leaders insist that their need for foreign equipment,
technology, and capital remains large. What is new is
that their shopping list now is more practically focused,
reflecting a better appreciation of the high costs of
acquisition and the difficulties in absorbing foreign
technology.
The comprehensive character of all that Beijing is
attempting to accomplish in 1979-81 has inevitably up-
set the targets and timetable of the 10-year plan for
1976-85 announced early last year by Chairman Hua. That
:"'-:i--or "draft outline" as Hua now calls it--has been de-
ci,.red overly ambitious and hastily conceived; neither it
its first phase, the Fifth Five-Year Plan (1976-80),
1.' gi':en much mention at present. The State Planning
1sson, having revised the original version of the
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 Approved. For Release 2007/02/28: CIA-RDP83B005.51 R0001 00060009-4
annual plan for 1979, is currently reworking earlier plans
for 1980 and 1981. A draft of the Sixth Five-Year Plan
(1981-85) will not be presented to the NPC until sometime
in 1981.
Finally, we believe that the policies of realignment
and retrenchment may be in place longer than the three
years now envisaged:
-- Institutional changes proposed under the
new policies seem too far reaching to be
completed so quickly.
-- Leadtimes required for bringing new invest-
ment projects into production in bottleneck
sectors are such as to make it unlikely that
these constraints will be lifted by 1981.
-- In a country as poor and populous as China,
the problem of matching supplies to consumer
demand will necessarily be around for a long
time to come.
Nevertheless, there are grounds for optimism. In con-
trast to the Maoist era, the present leadership seems
pragmatic and relatively unconstrained by orthodox
ideology-in its policy choices. And, perhaps most
important of all, it has already demonstrated this yea'
an ability to react quickly to adverse consequences of
these policy choices.
Economic Performance in 1976-79
One of the milestones distinguishing the recent Na-
tional. People's Congress from all others since the late
1950s is the public disclosure of major speeches and a
large body of economic and social statistics. Although
most of the data cover only the years 1977 and 1978,
enough information was provided to show the performance
of key economic sectors in 1976 as well.' Some data also
were released on planned targets for 1979.
A comparison of the new figures with CIA estimates
S`:U,:s that our appraisal of recent economic trends in
'??:,:.a has been close to the mark. This is not surprising
,.uch as our estimates have been attempts .to reconstruct
01_?cial data from piecemeal claims of percentage increases
 Approved For Release 2007/02/28 : CIA-RDP83B00551R000100060009-4
and other fragmentary disclosures. The new official data
__.aryear internally consistent, and we expect to adopt
nearly all of the figures as the best available.
In interpreting the tabulation of selected official
data presented here (see table), a word of caution is in
order. The use by Hua and others of 1976 as the base
year for much of the data is logical because it marks
the point where the present leadership came into power.
It was a poor year economically, however, and thus con-
stitutes a low base. Moreover, much of the output in
major basic industries is admittedly of poor quality;
for example, nearly half of the 618 million tons of coal
produced in 1978 probably came from small-scale mines
whose output is of variable and generally low quality.
Nevertheless, a number of economic trends stand out at
once:
-- Industrial output began a rapid recovery
in 1977, whereas agricultural production
continued to stagnate; in 1978, both had
remarkably good years.
-- Budget revenues and expenditures, which
normally change at about the same rates
as industrial production, rose much
faster in 1978 than did industry.
-- With the notable exception of domestic
and foreign trade, plans for 1979 reflect
a marked slowdown in rates of expansion.
Reasons for the slowdown in 1979 are not hard to find.
Last year was an especially good one for grain produc-
tion--one that is unlikely to be repeated this year. In
industry, most of the capacity that stood idle in earlier
years has been brought back into operation, so that
double-digit growth in 1979 seems infeasible. In addi-
tion, many industries--most notably the iron and steel
industry--have been ordered to concentrate on improving
product quality and product mix rather than increasing
c;:tput. As for the budget, expenditures and revenues in
are to level off, reflecting what China's Finance
:lister has described as an extremely tight budget.
will be cut into by a number of new incentive
ies of:ecting tax flows, and expenditures are to be
a as part of a wide-ranging scaleback in
projects.
 Approved For Release 2007/02/28: CIA-RDP83B00551 R000100060009-4
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 Approved. For Release 2007/02/28: CIA-RDP83B00551 R0001 00060009-4
After the flood of statistics released for 1977-78,
China's reporting on economic performance in the first
half of 1979 looks curiously thin, apparently because
prospects are mixed. The country reportedly had a good
winter wheat harvest, but it is too soon to gauge agri-
cultural performance for the entire year. Industrial
production rose by only 4.1 percent as compared with the
first half of 1978, meaning that second-half performance
must be well above the 8 percent planned for-1979 as a
whole.
Current Problems and Policies
The proceedings of the National People's Congress
formalized policies of economic realignment and retrench-
ment that have gradually come into force since the third
plenum of the Chinese Communist Party in December 1978.
The Chinese leadership now is clearly much more concerned
with short-term economic problems than with ambitious
long-term economic goals such as those embodied in the
"draft outline" of the 10-year plan unveiled in March
1978. Thus, while Chairman Hua recently spoke of a
three-year period of readjustment (1979-81), only the
annual economic plan and planned budget for 1979 were
presented for discussion at the NPC.
Domestic economic policies are aimed at rectifying
a number of longstanding problems that remain major ol;-
stacles to eventual Chinese modernization. These in-
clude:
-- The need for improved consumer welfare both
to stimulate labor productivity and to en-
sure that poor living conditions do not
contribute to political instability.
-- Amelioration of the currently high level
of urban unemployment, particularly among
youths who cannot now be absorbed in the
schools and universities.
-- Raising the low level of productivity of
labor and capital that has prevailed for
the past decade.
-- Alleviation of the chronic shortages of
raw materials, electric power, and trans-
4
portaticn ca,acty that constrain indus-
trial performance.
 Approved For Release 2007/02/28 :. CIA-RDP83B00551 R000100060009-4
-- Elimination of the waste of resources
engendered by ill-conceived investment
programs.
Solutions to these problems are still evolving,
mainly because of the present leadership's desire'to test
new policies on a trial basis. Nevertheless, these
problems are being tackled by (a) introducing new incen-
tive and institutional systems and (b) changing the pat-
tern of resource allocation. Under the former, agricul-
tural procurement prices have been raised and the prices
paid by peasants for industrial goods have been lowered.
In addition, rural production teams have been given
greater latitude to decide what crops will be grown and
how much will be planted. Similarly, new systems of
improved worker and management incentives are being
installed in industry, transportation, and other services.
The systems have not been in effect long enough to judge
their impact on production.
The government is well aware of the impact these
policies have on incomes and the demand for consumer
goods. Thus, it is attempting to ensure--through new
investment and increased allocation of energy and raw
and finished materials--that the supply of such goods
from agriculture and light industry will more adequately
meet the-new demand. In addition, Beijing is experiment-
ing with numerous new systems of industrial organization
and management--for example, a contract system (to govern
how and when goods are to be produced and delivered among
supplying, producing, and marketing units) and the crea-
tion of so-called "specialized corporations"--all of which
are designed to increase efficiency and productivity.
Progress in this area will remain slow because party, gov-
ernment, and enterprise bureaucracies are resisting changes
and individual cadres remain unsure of the permanence of
the new policies. Indeed, one of Beijing's major chal-
lenges is that of motivating middle-level managers to
act decisive.
As for resource allocation, cutbacks have already
Ien ordered in those parts of the construction program
thit have been poorly designed or that will pay off only
c.er the very long term. Since December 1978 priority
investment has been given to agriculture, light in-
and textiles because of their importance to con-
%"elfare and to the expansion of Chinese exports.
r__::=ortation, and the building materials in-
-ion _ _..;r to be ne::t in line in resource alloca
 Approved For Release 2007/02/28.:. CIA-RDP83B00551 R0001 00060009-4
decisions because these sectors constrain the operations
---of industry in general and because they support the
scaled back, but still sizable, construction program-now
under wav.
Despite the revamping of economic strategy over the
past several months, Chinese interest in foreign equip-
ment, technology, and capital remains strong. However, it
is now more practically framed, reflecting the leadership's
understanding that both the costs of acquisition and dif-
ficulties in absorbing foreign technology are much greater
than previously anticipated.
Short-Term Prospects
The policies developed at the third plenum in Decem-
ber 1978 and now formally ratified by the NPC have been
described by the Chinese as "preparing the ground" for
eventual modernization. They appear to be well designed,
practical measures that probably will mitigate some of
the problems noted above.
Perhaps the most difficult problem for the govern-
ment over the next three years will be that of handling
rising consumer expectations. Notwithstanding repeated
insistence that consumer welfare can be improved only
gradually and should be preceded by increased produc-
tivity, the new policies are stimulating long-suppressed
popular demand for more and better quality food, clothing,
housing, and consumer durables.
One indication of the strength of this demand is
that, despite low interest rates over the past two dec-
ades, urban and rural bank savings have steadily risen.
The size of these deposits is unknown but they clearly
are large enough to have become a serious concern for
the government. In March the government abandoned the
old system of paying.a uniform annual interest rate for
fixed deposits regardless of term and installed a system
of six-month, and one-, three-, and five-year time
deposits. In addition to inhibiting the withdrawal of
funds from these accounts, the new higher interest rates
are also intended to attract more of the increased money
income that is beginning to be received by the population.
Vl'e suspect that the government will find this problem of
it.chi:g supplies to consumer demand a continual one for
the foreseeable future.
 Approved For Release 2007/02/28: CIA-RDP83B00551 R0001 00060009-4
0
Providing employment for youths of high school and
college age who cannot be absorbed by the educational
system is also likely to remain a difficult problem.'
Although expansion of educational facilities has not
been slighted under the new policies, resources are
simply inadequate to provide space for several million
junior and senior middle school graduates. The current
attempt to create new jobs in the services sector seems
unlikely to satisfy the ambitions of this group. We
suspect that they will continue to be a problem for
Beijing's leaders, primarily because they are a potential
source of political dissent.
Finally, the policies of realignment and retrench-
ment may well extend beyond the three-year period now
envisaged. The number and scope of changes proposed under
the new policies seem too great to be rapidly accomplished.
The leadtimes required for adding new capacity in the
energy and transportation sectors also make it unlikely
that present bottlenecks will be removed by 1981. Never-
theless, we believe the odds favor the general success of
new policies because they embody an unprecedently rational
approach to China's economic problems. As compared with
that of the Maoist era, the present leadership appears to
be much less bound by ideological constraints in its policy
choices and more thorough in its consideration of new
policies, and to have demonstrated its ability to react
quickly to new problems created by the policies.
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 Approved For Release 2007/02/28: CIA-RDP83BOO551 R0001 00060009-4
China Sees Economic Problems Despite Plan Fulfillment
China. while announcing that major 19.79 plans were fulfilled, has not concealed
its concern over the serious problems that continue to hamper the economic
readjustment scheduled for the period 1979-S1.F~
China's Xinhua news agency last week reported that industrial output grew "over
8 percent" in 1979, with heavy industry up 7.4 percent and light industry up 9
percent. In keeping with readjustment policies, the plan had called for 8 percent in
industry as a whole, down from the 13.5 percent achieved in 1978. Heavy industry
was to rise by 7.6 percent and light industry by 8.3 percent, a marked change from
longstanding patterns of the past. Through June, industrial growth was only 4.1
percent and Beijing was exhorting producers-especially in the faltering light industry
sector-to bear down. Subsequently, greater shares of industrial raw materials and
energy were channeled to light industry; and military factories used excess capacity to
turn atut consumer goods.
Agricultural output responded positively to good weather and a series of policy
changes, including substantially higher purchase prices. Beijing claims grain produc-
tion reached 315 million tons, exceeding the 1979 target by 2.5 million tons and
surpassing 1978 production by 10 million tons. Cotton production grew only slightly
from the 1978 level of 2.2 million tons, falling short of the 2.4 million ton target. The
goal of 4-percent growth in gross value of agricultural output may have been met,
although no claim was made. F-1
The sober tenor of the Xinhua release indicates that the leadership is not
completely satisfied with economic performance in 1979. Profits remitted to the state
probably did not reach planned levels, most likely resulting in a deficit in what was
already a tight budget. Early in the year, Beijing realized that the correction of
sectoral imbalances was proceeding more slowly than planned. Overextension of
capital construction (which has been under attack since the beginning of 1979)
persists, and light industry continues to suffer from inadequate supplies of raw
materials and energy. At the same time, increases in urban wages and peasant
incomes-while not dramatic-have raised expectations and have added to the
demand for consumer goods. Given the difficulties in reshaping economic strategy, the
leadership has indicated it may stretch out the readjustment period at least one year,
through 1982.
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