CHINA: FOREIGN TRADE RESURGENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000300060004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 21, 2016
• Document Release Date: February 9, 2009
• Sequence Number: 4
• Publication Date: December 1, 1984
• Content Type: REPORT

Secret
EA 84-10209
December 1984
cony 313
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Directorate of Secret
Intelligence
China: Foreign Trade
Resurgence
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Directorate of
Intelligence
China: Foreign Trade
Resurgence
This paper was prepared by ffice
of East Asian Analysis. Comments and queries are
welcome and may be directed to the Chief, China
Division, OEA,
Secret
EA 84-10209
December 1984
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Secret
Summary
Information available
as of I October 1984
was used in this report.
China: Foreign Trade
ResurgenceF--]
economy
Earlier this year Beijing renewed its commitment to the open-door policy
and economic reform. These decisions will greatly benefit foreign trade, as
well as the domestic economy. Over the past 35 years centralized planning
and an arbitrary pricing system have hampered China's integration into
the world economy. The loosening of central controls and the adoption of
price reforms at the October meeting of the party's 12th Central Commit-
tee will help China realize greater gains from international trade by
providing economically more rational criteria for trade and investment
decisions. Conversely, increased competition through international trade
will give the Chinese a barometer to assess the performance of the domestic
forecasts China's balance of payments in 1984.
This paper briefly describes the economic events that led to Beijing's
decision to reassert an open-trade policy and examines current trends in
China's international economic affairs. It also assesses the impact of the
economic readjustment and reforms on China's international finances and
the International Atomic Energy Agency.
Late last year China began to resume its capital-import program after a
three-year hiatus, and this year foreign purchases have picked up sharply.
Although Beijing all but halted new orders for Western equipment and
technology during its attempt to readjust the domestic economy, it
continued to lay the groundwork for close trading relations with the West.
It enacted legislation on foreign investments and patents, signed bilateral
tax and investment treaties with several countries, and joined the Multi-Fi-
ber Arrangement under the General Agreement on Tariffs and Trade and
funds at home.
Export expansion and import restraint have given the Chinese three
consecutive years of substantial trade and current account surpluses.
China's total international reserve holdings rose to nearly $20 billion by the
end of 1983, the 10th largest in the world. Although this achievement
improved China's already excellent international credit rating, China
would have derived even greater economic benefits from investing these
for foreign sales to and cooperative ventures with China.
investment had severely constrained economic growth, but also for light
industry and agriculture. These investments have boosted the opportunities
In 1983 China began to put its foreign exchange earnings to more
productive use. It allocated funds not only for domestic infrastructural
projects such as energy, transportation, and communications, where lack of
Secret
EA 84-10209
December 1984
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All signs point to a resurgence of trade this year. We expect imports to
grow 25 to 30 percent. The largest gains-at least 50 to 70 percent-will
be in capital goods. Transport equipment purchases in particular have
surged, boding well for the United States in such areas as jet aircraft,
helicopters, and locomotives. Agricultural imports, however, will continue
to decline, reflecting four consecutive years of excellent harvests.
Although exports jumped 22 percent in the first half of 1984 compared
with the first half of 1983, we do not expect this trend to continue. For the
year as a whole, exports probably will rise only 15 to 20 percent. Beijing it-
self is concerned about developments at home and abroad that will affect
long-term prospects for China's exports. Externally, protectionism has
reduced the developed countries' demand for China's exports. Internally,
budget deficits-partly caused by mounting subsidies to foreign trade-
have occupied the attention of Chinese leaders.
To compensate for volume quotas and other quantitative restrictions on
their exports, the Chinese have had to export higher quality goods-
products that compete more directly with items produced in the West.
Beijing also has tried to open up new markets in the Middle East, the Sovi-
et Union, South Korea, and Latin America. These markets have grown
quickly but will not provide a solution for China's vast, long-term foreign
exchange needs.
Over the past two years domestic financial losses from foreign trade have
ballooned. Because domestic prices are not in line with world prices,
Beijing has had to subsidize both exports and imports of some products to
achieve the desired product mix. Furthermore, as the foreign trade system
became more decentralized, China's irrational domestic price structure
tended to distort the desired commodity trade patterns.
In March the Ministry of Foreign Economic Relations and Trade an-
nounced that trade would be recentralized under its aegis, ostensibly to
solve these problems. There are serious disagreements in Beijing over the
needed solutions, however, with many in power favoring price reforms
instead of recentralization. We believe that even if recentralization were
carried out-which now appears unlikely-it would not curtail trade at the
local and provincial level, nor ease the need for subsidies.
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Beijing's slow progress in attracting foreign investment had been caused in
part by disagreements between Chinese leaders on the extent of incentives
that should be offered to foreign companies. This past year, however,
Beijing pushed forward with its open-door policy by opening additional
port cities to foreign investment and giving them greater decisionmaking
authority. Foreign investment in China, which at the end of 1983 totaled
$1.5 billion, including that in offshore oil, probably will climb to over $2.5
billion by the end of this year.
China's change in status from net debtor to creditor stems both from
Beijing's readjustment policy and from stringent foreign exchange control
measures established in early 1981:
? The Chinese have used very little of the $27 billion in commercial and
government-supported credit lines they arranged in 1979.
? Last year China prepaid most of its long-term commercial debt as well as
all of its first credit tranche from the International Monetary Fund.
? Beijing is restructuring the small foreign debt that remains by reducing
interbank borrowings and taking on long-term, low-interest loans from
the World Bank, Japan's Overseas Economic Cooperation Fund, and
other official sources.
Nevertheless, over the longer term, China will need to tap the commercial
markets in a big way if it is to complete its ambitious development plans.
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Contents
Summary
Impact of the Economic Readjustment
Recession and Protectionism
3
Budgetary Problems
4
Balance of Payments: Flush With Reserves
5
The Search for New Export Markets
7
A Resumption of Foreign Purchases
9
Foreign Investment
10
Foreign Debt
12
China's Balance of Payments
15
1. Worldwide Holdings of International Reserves, Yearend 1983
2. China's Top 10 Trade Partners, 1983
3. Direct Foreign Investment in China
4. Paid-in Direct Foreign Investment in Selected East Asian
Countries, Yearend 1983 12
5. China's External Debt by Type of Credit
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Cperpt
China: Fore* n Trade
Resurgence
The three-year hiatus in China's capital-import pro-
gram that began in early 1981 has ended, and China
is again seeking Western equipment and technology.
Beijing has reordered its priorities and has begun to
erect an institutional framework to attract foreign
investment. It is now intensifying the search for
Table 1
Worldwide Holdings
of International
Reserves, Yearend 1983
foreign partners.
Impact of the Economic Readjustment
Under the economic readjustment program an-
nounced in 1979, the Chinese cut investment in order
to stimulate consumption. At the same time, they
deemphasized heavy industry in favor of light indus-
try. As a result, imports of producer goods and
industrial supplies plummeted. Contrary to specula-
tion in the Western press, the dropoff in purchases did
not reflect foreign exchange difficulties. Chinese ex-
ports were growing rapidly, and Beijing had access to
large sums of credit in the West.
The resulting trade surpluses boosted China's interna-
tional reserves to nearly $20 billion by the end of
1983, the 10th largest total reserves in the world and
the seventh largest in terms of foreign exchange alone
(see table 1). This level of reserves-more than one
year's worth of imports-was much larger than need-
ed to cover any exigencies.
For a capital-poor country the change from capital
importer to capital exporter made little economic
sense. Interest earnings on China's deposits in foreign
banks were far less than the potential return on
capital invested domestically. Foreign exchange de-
posits abroad did nothing to rebuild China's aging
infrastructure nor to upgrade its inefficient industrial
base. Moreover, maintaining a trade surplus created
inflationary pressures at home-state procurement of
goods for export injected more currency into circula-
tion than was absorbed by domestic sales of imports,
that is, more money chased fewer goods. The large
buildup of foreign exchange reserves also raised the
question of whether China deserved access to low-cost
funds from the World Bank and other international
Total Gold b
Reserves
Foreign SDRs c
Exchange
United States
124.9
102.3
6.3
16.3
West Germany
79.7
37.0
37.3
5.4
France
51.6
31.8
18.1
1.7
46.7
32.3
14.4
0
Italy
46.0
25.9
18.5
1.6
USSR
39.3
29.8
9.5
0
34.0
9.4
20.4
4.2
29.2
1.9
17.5
9.8
Netherlands
27.3
17.1
8.7
1.5
China
19.8
4.9
14.3
0.5
United Kingdom
18.2
7.4
8.7
2.1
Belgium
18.0
13.3
3.8
0.9
Spain
13.1
5.7
7.0
0.4
Taiwan
12.8
1.4
11.4
0
Austria
12.7
8.2
3.9
0.6
Venezuela
12.1
4.5
6.3
1.3
Australia
12.0
3.1
8.7
0.2
Singapore
9.2
0
9.1
0.1
India
8.2
3.3
4.3
0.6
Norway
7.1
0.5
5.9
0.7
a In order by relative size of holdings.
b Valued at the yearend market rate.
c For purposes of this table, the column on holdings of SDRs
(Special Drawing Rights) includes the country's reserve position in
the IMF.
In 1983 China began to put its foreign exchange
earnings to more productive use. It invested them not
only in domestic infrastructural projects such as
energy, transportation, and communications, where
lack of investment had severely constrained economic
lending agencies.
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growth, but also in light industry and agriculture. By
the fourth quarter of 1983, China's imports of capital
equipment approached the record level of 1980, yet
one of the biggest categories of capital goods-
payments for industrial know-how, production li-
censes, technical services, and various forms of con-
sultancy-does not show up in the trade returns. We
estimate that payments for such invisibles exceeded
$1 billion last year.
Although imports slumped during 1981-83, Beijing
continued to lay the foundation for even closer trading
relations with the West. It joined both the Multi-
Fiber Arrangement under the auspices of the General
Agreement on Tariffs and Trade (GATT) and the
International Atomic Energy Agency (IAEA). It en-
acted a joint-venture law and completed work on a
patent law to make investing in China more attractive
to foreign entrepreneurs. It also signed bilateral tax
and investment treaties with Japan and other coun-
tries, establishing the rights of foreign investors. And
it established sizable lines-of-credit with Japan, the
World Bank, and Western commercial banks, which
will allow China to proceed rapidly with major infra-
structure projects once technical negotiations are
concluded.
More than any other move, however, Beijing's deci-
sion in April 1984 to open 14 additional port cities
and Hainan Island to foreign investment reflects its
commitment to the open-door policy. As a result of
the decision, local authorities in these areas will be
given greater freedom to accept foreign investments
without Beijing's approval, similar in many respects to
the powers granted the authorities in the Special
Economic Zones. Foreign investors in the new "eco-
nomic development zones" will be given preferential
tax rates, a waiver of import duties on goods that will
be reexported, and greater access to domestic
markets.
This decision is a major departure from the past.
Under Deng Xiaoping, Beijing has now assigned a
leading role to the port cities in China's moderniza-
tion process, contradicting Mao's longstanding policy
of balanced growth between the coast and interior. In
large part we believe the new policy is a pragmatic
attempt to deal with an economic reality-China's
transportation system is so overburdened that in real
terms it often costs more for the port cities to trade
with inland areas than with foreign countries.
The decision, however, also reflects the growing influ-
ence localities have on policies emanating from Beij-
ing. Local and provincial authorities have warmly
embraced their new prerogatives-indeed, many in-
land cities are now claiming to possess the same rights
as those granted to the coastal cities. The ability of
localities to attract foreign funds for their investment
projects gives them an alternative to using central
government funds and a means of circumventing
Beijing's controls. Under the financial "responsibil-
ity" system now being instituted, the ability to find
new sources of funds may be critical to economic
survival.
These actions will begin to bear fruit this year,
significantly boosting the opportunities for foreign
sales to and cooperative ventures with China. All
signs point to a resurgence of trade. China's imports
already have started to take off-they are more than
20 percent higher than at the same time last year.
Imports of capital goods and industrial supplies-
particularly steel, nonferrous metals, lumber, and
plastics-lead the list; imports of agricultural com-
modities have dropped following three consecutive
years of excellent harvests. For the year as a whole we
expect imports will climb 25 to 30 percent to $23-24
billion.
Exports have jumped even more-22 percent in the
first half of 1984-to produce the highest first-half
trade surplus ever, but we do not expect this trend to
continue. The Foreign Trade Ministry's announce-
ment in mid-March that trade would be recentralized
may have caused a temporary surge that could lead to
a subsequent slowdown. We believe export growth for
the year will be limited to about 15 to 20 percent,
reducing the trade surplus to $3-5 billion. Most of this
surplus will have occurred in the first half. In the
second half, China's trade balance will decline consid-
erably (see figure 1).
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Figure 1
China's Trade and Net Foreign
Assets, 1979-84
- Exports
- Imports
0 1979 80 81 82 83 84-
- Trade balance
- Change in liquid assets
-4 1979 80 81 82 83 84a
Whether China's reserves will continue to grow will
depend in part on complex equity and debt consider-
ations. Based on past patterns, we would expect
reserves to follow the trend of the trade balance.
Although Beijing wants to reduce the level of its
reserves, much of the capital equipment China will
get will be through direct foreign investment or on
buyer's credits. Therefore, reserves might not decline
and could even increase. We project that by yearend
reserves will be $2-4 billion higher than at the end of
1983.
The Uncertainties Ahead
This past May, in his report to the National People's
Congress on the 1984 economic plan, Song Ping,
Minister in Charge of the State Planning Commis-
sion, announced that China's total trade volume in
1984 would decline 5 percent from the 1983 level.
Wang Weicai, director of the State General Adminis-
tration of Foreign Exchange Control, has stated that
China will run a merchandise trade deficit for the
year. We believe the Chinese projections seriously
underestimate trade growth in 1984, particularly for
exports. In the last three years Chinese officials have
consistently made inaccurate predictions of China's
foreign trade prospects. Lack of up-to-date trade data
and the volatility of the international economy are
largely to blame. Growing uncertainty over the pros-
pects for exports, caused by both external and internal
developments, has added to Beijing's cautiousness this
year.
Recession and Protectionism. Externally, recession
and protectionism have reduced developed-country
demand for China's exports. Over the past two years
lower world market commodity prices have hurt
China's agricultural, mineral, and crude oil exports.
At the same time, Chinese attempts to gain greater
access to the US and EC textile markets have been
rebuffed.
In response China has attempted to boost sales to the
Soviet Union, the Middle East, South Korea, and
other untapped markets. Arms sales to the Middle
East, for example, shot up from almost nothing in
1980 to an estimated $1.5 billion last year-6 percent
of total exports. In an attempt to earn foreign ex-
change, China has even offered to store nuclear waste
materials for several West European nations. Beijing
hopes that increased trade with the Soviets may also
help reduce Sino-Soviet tensions and that increased
trade with the less developed countries will increase
China's visibility, foster better political relations, and
diminish Soviet influence. All of these markets, how-
ever, involve some long-term political risks and will
provide only a short-term boost to China's hard
currency earnings.
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Budgetary Problems. Internally, budgetary problems
continue to occupy the attention of Chinese leaders.
The central budget remained in deficit in 1983,
particularly because subsidies to agriculture and for-
eign trade took an unanticipated jump.
subsidies could restrict the growth of both exports and
imports this year
The trade subsidies are a result of China's irrational
price structure-domestic prices are fixed arbitrarily
and are not in line with world market prices. At the
"internal settlement rate" of 2.8 yuan per dollar-the
exchange rate at which Chinese entities are permitted
to convert foreign exchange into yuan at the Bank of
China-the domestic prices of primary products gen-
erally appear to be lower than world prices and those
of manufactures appear to be higher.' Hence, it is
generally profitable for Chinese traders to export
primary products and to import manufactures. The
reverse-exporting manufactures and importing pri-
mary products-tends to produce losses.
At the official exchange rate in use prior to 1981,
exports produced losses, on balance, while imports
produced profits, a sure sign of the overvaluation of a
currency.' Because foreign trade corporations (FTCs)
under the Ministry of Foreign Trade handled all
trade, the FTCs could offset the losses on trade in one
commodity with the gains made on another, and such
losses or gains did not affect the decision to trade. P
As China's foreign trade system became more decen-
tralized, however, the domestic price structure led to a
trade pattern that was contrary to China's compara-
tive advantage. The price system encouraged exports
of capital- and land-intensive commodities that were
in short supply (for example, oil, steel, and tobacco)
and encouraged imports of labor-intensive manufac-
tures that could have been produced for a lower real
cost at home (for example, cameras, televisions, radi-
os, and wristwatches)
' It is difficult to generalize about Chinese prices. The generaliza-
tion above applies only to major commodities at the wholesale level
that would enter into world trade; it does not apply to retail prices.
' During most of the 1970s, the official exchange rate, as published
by the Bank of China, floated between 1.5 and 2.0 yuan per dollar.
Since early 1981 Beijing has taken several steps to
counteract these distortions. First, Beijing-in ef-
fect-devalued the yuan by introducing the internal
settlement rate. Although this step reduced the level
of subsidies for exports, it increased subsidies for
many imports. Moreover, with a decline in some
highly profitable imports that resulted from the read-
justment of the economy and with a decline in world
prices for many of China's exports, net financial losses
from trade increased sharply, resulting in record
government subsidies last year.
In 1982 Beijing introduced a trade licensing system
and revised its tariff system to prevent local enter-
prises from exporting goods in short supply or from
importing goods that competed with domestic prod-
ucts. The licensing system gave the Ministry of
Foreign Economic Relations and Trade (MFERT)
new regulatory and oversight capabilities, while the
new tariffs-on exports as well as imports-helped to
shield the domestic price structure from the effects of
international trade.'
Finally, in March of this year MFERT announced
that trade would be recentralized under its aegis.
Pricing and supply problems created by the decentral-
ization were offered as reasons for reasserting
MFERT control. While these problems are no doubt
real, we believe the recentralization announcement
also was part of an attempt by Chen Muhua and
others in MFERT to boost their positions within
China's economic bureaucracy.
Even if the recentralization order were carried out, we
doubt that it would have significant consequences for
the trade of local and provincial enterprises. Its
primary effect would be to shuffle lines of responsibil-
ity for trade within the central government itself. Last
year the FTCs under MFERT reportedly were direct-
ly responsible for about 40 percent of China's foreign
trade, other ministries of the central government
conducted about 20 percent, and local and provincial
' Export tariffs prevented Chinese traders from price cutting and
thereby passing windfall profits on to foreign buyers, and import
tariffs raised the domestic prices of foreign goods to protect local
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Secret
enterprises were responsible for the rest. Under the
recentralization order, MFERT was slated to recoup
most of the trade conducted previously by other
ministries.4 The lengthy treatment given in the Chi-
nese press to the recentralization announcement sug-
gests that Beijing merely intended to make the opera-
tions of MFERT an example of how administration
and economic management can be separated. Thus,
many of the local producers, end users, and trading
firms would continue to make economic decisions,
while MFERT would administer the plan, regulating
provincial trade through the use of licenses, tariffs,
and other indirect controls. Although MFERT would
exercise greater oversight, it would not supplant pro-
vincial corporations.
In anticipation of the recentralization announcement,
many trade organizations in China may have rushed
to fill standing export contracts in advance-one
possible explanation for the strong upturn in exports
in the first quarter. According to business reports on
the spring Canton trade fair, prices were up 10 to 15
percent, perhaps an indication of MFERT's new
effectiveness in coordinating foreign trade negotia-
tions. Whatever the reasons for the recent surge in
Chinese exports, if Beijing maintains a disproportion-
ate incentive to export and continues tight controls on
imports, China's current account surpluses are unlike-
ly to evaporate.
Balance of Payments: Flush With Reserves
China's central planners have attempted to prevent
domestic economic pressures from causing excess
demand for foreign goods. Nevertheless, domestic
economic developments are transmitted, at least par-
tially, to the foreign sector after some lag. Hence,
China's balance of payments has reflected Beijing's
shifting national economic policies. Current account
surpluses during 1976-78 gave way to deficits in 1979
and 1980, as deliveries began on the $10 billion worth
of complete plants and equipment China had ordered
in 1978. Readjustment policies favoring light industry
and agriculture-announced in early 1979-did not
affect China's current account until 1981, when deliv-
eries of capital equipment and industrial supplies
began to subside. Although the domestic economic
recovery has been under way since 1982, imports
began to pick up only in late 1983. Continuing export
expansion and restraints on imports have given the
Chinese three consecutive years of substantial trade
and current account surpluses (see figure 2).
Although the growth rate of trade in services has
outpaced that in merchandise, service expenditures
have generally exceeded earnings. Last year payments
for industrial know-how, production licenses, techni-
cal services, and various forms of consultancy in-
creased dramatically-we estimate that payments for
such invisibles totaled about $1.2 billion. The Chinese
are making a major effort to turn the deficit in
services into a surplus by expanding their internation-
al merchant fleet, improving tourist facilities, and
boosting foreign sales of construction labor services.
China now has 29,000 workers abroad, double the
number in 1980, and plans to have 100,000 workers in
LDCs by 1990. In addition, interest earnings on
China's foreign exchange holdings have climbed
sharply (see appendix).
In recent years China's net receipts from unrequited
transfers have declined, primarily as a result of a
slowdown in remittances from overseas Chinese. A
decline in monetary remittances from Hong Kong
probably reflects the opening up of the Crown Colo-
ny's border with China-relatives now bring gifts
instead of sending money-and the declining value of
the Hong Kong dollar. Between 1980 and 1983 China
received $71 million in funds from the UN, including
$23 million from the UN Development Program, $8
million from the Fund for Population Activities, $25
million from the World Food Program, $5 million
from the High Commissioner for Refugees, and $8
million from UNICEF (the UN Children's Fund).
Since 1977 China has substantially cut back its aid to
the Third World to conserve resources for its own
economic development. Nevertheless, its aid abroad
still exceeds the amount it gets from international
organizations.
' The Ministries of Coal and Machine Building, the Chinese State
Shipbuilding Corporation, and the China National Automotive
Corporation are the only organizations known to have received a
waiver to continue trading.
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Figure 2
China's International Finances,
1978-83
Balance-of-Payments
Flows (During Year)
International Financial
Stocks (End of Year)
1978 .79 80 81 82 83 1978 79 80 81 82 83
Excludes gold holdings, b Excludes international gold
payments agreements assets, transactions.
and "soft" loan assets.
Proceeds from the current account surpluses have
been used to lift foreign exchange reserves to record
levels, to reduce foreign commercial debt, and to
increase investments abroad. China's international
reserves, excluding gold,' totaled $14.9 billion at the
end of 1983 and in mid-1984 amounted to more than
$16.8 billion, while China's total foreign debt stood at
only $5.7 billion. For the past three years Beijing has
restructured its foreign debt by reducing interbank
borrowings and taking on long-term low-interest loans
from the World Bank, Japan's Overseas Economic
Cooperation Fund (OECF), and other official sources.
Last year China prepaid its first credit tranche by
drawing from the International Monetary Fund
(IMF) one year ahead of schedule; it also paid off
almost $1 billion in commercial debt. In 1984, debt
servicing probably will amount to less than 5 percent
of China's export earnings. Last year foreign invest-
ment in China almost quadrupled the level of 1980,
the first year any significant amount came in. This
increase was not enough, however, to offset the heavy
outflow of Chinese investment funds, particularly to
Hong Kong and the United States.
China's change in status from net debtor to creditor
stems both from its readjustment policy and from
stringent foreign exchange control measures estab-
lished in early 1981. The decline in imports of capital
goods mainly reflects reductions in investment in
heavy industry. State budget deficits have reinforced
the cutbacks in capital imports: in some cases domes-
tic funds have not been sufficient to pay for the local
costs of imported plants.
Central regulations controlling foreign exchange have
added to the growing reserves. Beginning in March
1981 Beijing required all domestic enterprises to
deposit their foreign earnings with the Bank of China
rather than in foreign banks. It further required
enterprises to repay hard currency loans in hard
currency. Imports by Chinese firms are thus limited
largely by the value of their own exports; surplus
foreign exchange can be sold to other enterprises, but
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have far to go.
in the absence of developed capital or foreign ex-
change markets the regulations help assure a trade
surplus. Although the Chinese began to relax their
capital controls in 1983, particularly on the remit-
tances of foreign partners in joint ventures, they still
ed bringing them down to a level commensurate with
China is managing its foreign exchange reserves
better than it did just a few years ago, keeping most in
the form of interest-bearing short-term time deposits
at banks in New York, Tokyo, Hong Kong, London,
Paris, and Bern. For the past year the Chinese have
not taken a strong position in the gold market,
preferring instead to engage primarily in gold arbi-
trage. They have, however, purchased some silver on
the international market for sales in China, apparent-
ly to soak up excess domestic currency. Chinese
economists are aware of the irrationality of holding
such a large amount of reserves and have recommend-
achieved from 1978 to 1981 ~
The Search for New Export Markets
In 1983, for the second consecutive year, recession
and protectionism in the developed West slowed the
growth of China's exports. Exports totaled $24 billion,
up only 2 percent from the year before. This is far
below the 25- to 30-percent annual growth rates
als wherever possible (see figure 3).
We estimate that in 1984 China's exports will grow at
a rate of 15 to 20 percent as recovery in the industrial-
ized countries gathers momentum. Agricultural ex-
ports will be mixed, caught between higher world
prices and increased domestic demand. Although the
long-term outlook for exports from the extractive
sector-including minerals, ores, coal, and oil-
appears promising, the near-term prospects are for
slow growth. Exports of manufactures will make the
largest gains this year, as the Chinese continue to
substitute exports of processed goods for raw materi-
Over the past two years domestic supply shortages
and weak foreign demand have hampered Chinese
exports to the developed countries. Exports of agricul-
tural commodities, petroleum, and other raw materi-
als have stagnated or declined because of increasing
demands in China and decreasing prices abroad.
Petroleum exports dropped to $4.2 billion in 1983,
reflecting price cuts of almost 15 percent. The volume
of crude oil exports, however, increased almost 2
percent to 300,000 barrels per day (14.8 million tons),
an indication that Beijing continues to give high
priority to exports despite increased shortages at
home.
Inadequate rail and port capacity continues to con-
strain coal exports. Nevertheless, this year the volume
of exports should increase to nearly 7 million metric
tons-1 percent of total output. Japanese, European,
and US firms are actively negotiating joint develop-
ment projects with the Chinese. A major agreement
was signed earlier this year with a US firm concern-
ing the development of China's potentially largest
open pit mine-the Pingshuo Mine in Shanxi.
Exports from the Chinese mines,
years.
The Chinese have attempted to increase export earn-
ings from their manufactures by moving into higher-
value-added lines. Part of the reason for this strategy
has been the increase in volume quotas and other
quantitative restrictions on imports from China in the
West, which force the Chinese to export better quali-
ty, higher priced goods than they otherwise would.
But the Chinese are also trying to increase their gains
from trade by moving into exports that reflect their
comparative advantage in labor-intensive products.
By branching out into industries that require large
inputs of manual labor, they hope to absorb some of
the large number of unemployed into the work force.
Unemployment among the urban labor force of 114
million probably is much larger than the official
unemployment figure of 2.6 percent reported at the
end of June 1983.
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Figure 3
China's Commodity Composition of Trade,
1983
Agriculture (24)
Extractive (I5)
Capital goods (28)
Foodstuffs (13)
Consumer durables (3)
Crude minerals & metals (2)
Crude oil (11)
Other (7)
Oil seeds (1)
Grain (2)
Crude animal materials (2)
Textile fibers (3)
Fruits & vegetables (4)
Animals, meats & fish (5)
Consumer durables (3)
Other (2)
Sugar (2)
Grain (9)
Other (4)
Electric machinery (6)
Transport equipment (8)
Nonelectric machinery (10)
To compensate for declining exports to the developed
West, Beijing has tried to open up new markets in the
Middle East, the Soviet Union, South Korea, and
Latin America. In the Middle East, in each of the last
two years, China has delivered over $1 billion in arms
to Iraq
have found trade partners eager for cheap textiles and
consumer goods that have been restricted in the West.
Textile yarn & fabric (14)
Clothing & footwear (12)
Petroleum products (7)
Military arms &
ammunition (6)
Chemicals (5)
Metals & metal products (4)
Machinery & equipment (4)
Other (9)
Iron & steel (17)
Chemicals (12)
Textile fibers (6)
Textile fabrics (5)
Nonferrous metals (4)
Rubber (1)
Other (11)
Trade with the USSR increased 110 percent in 1983
and is scheduled to double again this year. This trade
is only one-seventh as large as Sino-US trade and,
over the long term, its growth will depend on contin-
ued improvements in political relations.
Since 1980 the Chinese have sharply expanded con-
tacts with South Korean businessmen. While Beijing
is sensitive to P'yongyang's concerns over improve-
ments in Sino-South Korean relations, the Chinese
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Table 2
China's Top 10 Trade Partners,
1983
Hong Kong
8,341
United States
4,425
West Germany
1,743
Jordan
1,527
Canada
1,389
Singapore
1,001
Brazil
856
view South Korea as a large potential market for its
coal. Two-way trade totaled more than $400 million
last year. The recent cooling of relations over the
release of six Chinese hijackers, however, could re-
duce trade.
Brazil catapulted into the ranks of China's top 10
trading partners last year as Chinese exports-
primarily crude oil-soared to nearly $600 million
(see table 2). Trade missions have exchanged several
visits in the last few months, and trade this year
A Resumption of Foreign Purchases
Last year imports rose 10 percent to $18.4 billion,
after bottoming out in 1982. In contrast to 1982,
when foodstuffs-chiefly grain and sugar-were the
only major category of imports that increased, last
year China sharply stepped up imports of industrial
supplies and capital goods. We expect imports to grow
this year on the order of 25 to 30 percent. Capital
goods will show the largest gains, and industrial
supplies will show growth in selected areas, but
agricultUral itports. will continue-to decline.
area sown to food grains in order to increase the
output of commercial crops such as cotton and oil
seeds. These adjustments are having a major impact
on China's agricultural trade. Last year, for example,
China cut back substantially on cotton imports and
began exporting for the first time. Within the next
few years China probably will emerge as an important
cotton exporter. This development could significantly
hurt US exports, especially to major Far Eastern
markets.
Grain imports dropped from 15.4 million tons in 1982
to 13.5 million last year, in part because of increasing
supplies at home." US sales fell from 8.5 million tons
to 3.8 million last year-a loss of more than $700
million-as China shifted purchases to Argentina and
Canada during the dispute over US restrictions on
textile imports from China. Shipments fell 2.2 million
tons short of the 6-million-ton minimum required
under the US-China long-term grain agreement.F_
We believe three factors explain the fall in US 25X1
shipments: lower import demand, the textile dispute,
and the efforts of France and Argentina to move their
large stocks of wheat by price cutting. Lower import
demand would have cut US exports by about 1 million
tons, or $150 million, since this factor presumably
would not have affected the US market share. But the
US share of China's grain imports fell from 55
percent in 1982 to only 28 percent in 1983 as a result
of the combined effects of price cutting and the textile
dispute. This lower share represented a loss of about
$550 million, or 4.7 million tons. And the largest part
of this $550 million drop-roughly $300-400 mil-
lion-is the result of the textile dispute, without which
China probably would have bought at least the
6-million-ton minimum.
We project that total grain imports will decline to
12-13 million tons in 1984. For the first half of the
year, imports from the United States totaled 2.5
million tons. The Chinese would have to make sizable
purchases immediately in order to reach the minimum
Favorable weather has led to four consecutive years of
bumper harvests, reducing the need for agricultural
imports. Furthermore, the Chinese are reducing the
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required under the agreement. We think it is increas-
ingly likely that China will use the recent change in
US rules for determining the country of origin for
textile imports,' when and if it is implemented, as a
reason for retaliating with another grain embargo.
Under these circumstances, we believe the Chinese
will let the long-term grain agreement expire when it
comes up for renewal at the end of this year.
Imports of most industrial supplies picked up substan-
tially in 1983, reflecting increases in domestic eco-
nomic activity and growing domestic shortages. Steel
imports nearly doubled to 9.9 million metric tons as
China surpassed the United States as Japan's num-
ber-one customer. Imports of copper, aluminum, nick-
el, and zinc also made impressive gains. Record
imports of logs and plywood, two-thirds of which
came from the United States, reflected the speedup in
Chinese construction activities. Aside from its lumber
sales, however, the United States was one of the few
countries that did not benefit from China's increased
purchases of industrial supplies, perhaps because of an
exceptionally strong US dollar.
We expect that imports of industrial materials this
year will remain at about last year's level, with some
exceptions. Lumber, plastics, and fertilizer are grow-
ing strongly. Rubber imports are down, however, and
cotton and synthetic textile fiber imports will continue
to slump. Imports of US lumber may be vulnerable if
there is another imbroglio over textiles. China proba-
bly could turn to the Soviets and Canadians to fill its
needs.
Recovery of investment in China has resulted in a
resurgence of capital equipment imports, which in-
creased to $5.2 billion last year, up 36 percent over
1982. Transportation equipment especially had a ban-
ner year, and as a result US sales of aircraft and
trucks increased. US exports of computers, telecom-
munications equipment, machine tools, medical elec-
tronic apparatus, and heavy construction equipment
' According to the new rules, textile products that are shipped
among several countries during manufacture would be charged
proportionately to the quotas of the country where the processing is
done. Past rules charged products to the quota of the country that
processed them last. The new system has caused great concern
among textile exporting countries because it is expected to stifle
legitimate trade mechanisms. China expects to lose 50,000 to
100,000 jobs and more than $300 million in revenues from the
also grew. Associated with the jump in capital equip-
ment purchases has been a Chinese push to obtain
pure technology. In the past year the Chinese have
purchased know-how in such diverse areas as tree
cultivation, insecticide chemistry, water control, food
preservation, coal excavating and gasification, build-
ing materials research, iron ore dressing, large-scale
integrated circuits, cargo handling, birth control, dis-
ease treatment, environmental protection, and energy
conservation.
We expect China's capital equipment imports to
climb 50 to 70 percent this year. Transport equipment
purchases in particular have surged, boding well for
the United States in such areas as jet aircraft,
helicopters, locomotives, marine radar, and support
vessels. Imports of mining and construction equip-
ment, fueled by the offshore drilling activity, have
also risen sharply. Imports of oil industry equipment,
such as production platforms for the Bohai Bay and
South China Sea, are increasingly being paid for by
foreign joint-venture firms and thus do not represent a
major drain on China's foreign exchange reserves.
Similarly, imports of military equipment and weapons
may increase, depending in large part on the willing-
ness of the United States and other Western countries
to sell. Although China's long-term commitment to
military self-sufficiency remains firm, in the short run
the Chinese are willing to buy some weapons systems
outright and are negotiating such deals with both
European and US companies.
Foreign Investment
Until last year Beijing's progress in attracting foreign
investment had been slow, in part because of the
uncertainty of Chinese leaders and planners as to the
extent of the incentives that should be offered to
foreign companies. Other obstacles have been China's
inexperience, lack of credibility with foreign business-
men, inadequate infrastructure, problems.with labor
productivity and wages, and the lack of detailed
regulations on taxes and remittances of profits.
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Last year, however, Beijing made a range of conces-
sions to gain more foreign participation in moderniz-
ing the economy. Scores of new laws have been
released to attract or protect the foreign investor. In
September, China issued regulations to clarify its
1979 Joint-Venture Law. The rules offered longer tax
holidays, increased opportunities to sell the output of
joint ventures in the domestic Chinese market, and
provided more decisionmaking autonomy for ventures.
Early this year China introduced new tax rules that
exempt joint ventures from import duties and abolish
certain industrial taxes on ventures that import ad-
vanced machinery and technology. Last April the
opening of 14 additional port cities and Hainan Island
to foreign investment gave entrepreneurs many of the
advantages of the Special Economic Zones. In addi-
tion to ratifying this decision, the National People's
Congress endorsed laws clarifying the status of totally
foreign-owned companies in China.
At the end of 1983 there were 188 "equity" and 1,047
"contractual" joint ventures in China.' In addition
there were 18 cooperative projects for offshore oil
prospecting and exploitation. At the end of 1983 total
paid-in foreign investment on these three forms of
direct investment amounted to approximately $1.5
billion. Of that total about $380 million is in the four
Special Economic Zones, with the bulk in Shenzhen,
on the Hong Kong border. If licensing agreements,
processing and compensation trade, and wholly owned
foreign subsidiaries are included in the totals, in
' From a Western viewpoint, both forms of joint ventures, as well as
joint oil exploration agreements and wholly owned foreign subsid-
iaries, are considered direct foreign investment. In our balance-of-
payments estimates, other forms of business arrangements, such as
licensing, processing, and compensation trade agreements, are not
treated as foreign investment since no foreign claims on real assets
located in China exist. The Chinese, however, use the term "foreign
investment" loosely to refer to all forms of foreign participation,
even loans to Chinese enterprises. The Chinese appear to use the
term "cooperative production agreement" synonymously with "con-
tractual joint venture." From a Chinese legal viewpoint, there are
three chief distinctions between contractual and equity joint
ventures:
(a) Equity joint ventures fall under the joint-venture tax law (a
flat 33-percent tax), whereas contractual ventures are taxed on a
graduated basis under the foreign enterprise income tax.
(b) Equity joint ventures share profits in proportion to equity
participation, whereas contractual joint ventures share profits
according to a ratio agreed to in the contract.
(c) Equity joint ventures form new legal entities with their own
boards of directors, whereas contractual joint ventures are managed
Table 3
Direct Foreign Investment in China a
Equity joint
ventures
88
141
340
103
166
Contractual
joint ventures
1,800
2,726
2,900
530
730
Joint oil
exploration
498
999
2,000
486
651
Compensation
trade
460
725
930
413
542
Other
businesses b
367
420
237
254
e Chinese data, which include licensing, processing, and compensa-
tion agreements that would not necessarily be used in Western
definitions of foreign investment.
b Including wholly owned foreign enterprises and licensing
agreements.
accord with Chinese practice, total paid-in foreign
investment amounted to $2.3 billion through the end
of December 1983 (see table 3).
As of November 1983, American investors had spent
$406 million on 23 joint projects in China. There were
16 equity joint ventures involving $91 million, one $10
million cooperative management project, and eight
agreements for joint exploitation of offshore oil worth
$305 million. The three largest nonoil Sino-US joint
ventures are the Great Wall Hotel with US participa-
tion of $35 million, the Jianguo Hotel with US assets
of $11 million, and American Motors Beijing Jeep
Corporation with $16 million in US assets.
China's competitive offshore leasing program got
under way last year and now boasts 23 exploration
and development contracts with 31 foreign oil compa-
nies, including 12 US firms. Drilling will begin this
year on most of the blocks, which are located in the
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Exploration continued last year in offshore areas
previously leased to Japanese, French, and US firms.
The Japanese have had success exploring in the Bohai
and will soon begin developing at least one field.
Atlantic Richfield found a commercially viable natu-
ral gas field in its concession south of Hainan, but the
discovery was marred by the loss of the drill ship and
its 80-member American-Chinese crew in an October
typhoon. The Chinese have asked Atlantic Richfield
to lead a multibillion-dollar joint venture to use the
gas from this field to produce fertilizer on Hainan
Island.'
The Chinese have also signed preliminary agreements
with foreign investors for the Guangdong nuclear
power plant and for development of the Pingshuo and
Jungar open pit coal mines. They are currently ar-
ranging financing for these projects and work could
begin by early next year.
Despite the obstacles to foreign investment posed by
differences in economic environments and investment
philosophies between China and the West, China's
efforts to attract foreign investment have been rela-
tively successful. Foreign investment in China at the
end of 1983 was on a par with that in South Korea,
just slightly below that of Taiwan, and about one-
quarter the level of the other Asian NICs (newly
industrialized countries)-Hong Kong and Singa-
pore-and Indonesia (see table 4). By midyear 1984,
however, foreign investment in China-led by explo-
ration for offshore oil-probably surpassed that in
South Korea or Taiwan.
Foreign Debt
The Chinese have used very little of the $27 billion in
commercial and government-supported credit lines
they arranged in 1979 (see table 5). Fiscal conserva-
tism and cutbacks in capital expenditures, rather than
the previous ideological aversion to foreign debt, have
left little need for these loans
' If approved, the fertilizer plant would be the largest in the world.
Atlantic Richfield is attempting to enlist other Western firms to
Table 4
Paid-in Direct Foreign Investment in
Selected East Asian Countries,
Yearend 1983
Hong Kong c 6.0-8.0
SingaporeC 5.0-7.0
a Estimated from data on commitments.
b Excluding offshore oil.
c Estimated from official data on investment in the manufacturing
sector and from other indicators.
China's current outstanding debt of $5.7 billion is a
mixture of commercial and official loans with a wide
range of maturities. For the past three years commer-
cial borrowing has been cut back sharply, and it now
accounts for less than one-quarter of the total debt.
China is seeking only concessionary loans and will
avoid incurring commercial debt for all but short-
term trade financing
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Table 5
China's External Debt by Type of Credit
Buyer credits (guaranteed by foreign governments)
0
36
142
340
638
1,200
Supplier credits (long term only)
1,736
1,723
1,582
1,138
1,504
NA
Borrowings from commercial banks
752
3,316
3,805
2,440
1,376
828
Trust fund
0
0
0
360
341
32
Total debt servicing (during year) a
620
859
1,493
2,415
2,388
NA
Principal
405
509
881
1,594 b
1,747 b
NA
215
350
612
821
641
NA
a Includes interest charges but excludes principal on short-term
bank borrowing.
b During 1981 and 1982 China prepaid $800 million and $1,100
million in loans, respectively, which accounts for the abnormally
large increase in debt servicing. Excluding these prepayments,
China's ratio of debt service to exports in these years amounted to
8.6 and 5.5 percent, respectively.
c Data include exports, total earnings, and total credits.
Earlier this year Tokyo also agreed to extend another
$2.6 billion in Japan Export-Import Bank resource
development loans to cover oil and coal development
projects. The new loans will carry interest rates of 7.1
to 7.3 percent. This compares with the 6.25-percent
rate on the $2 billion line-of-credit that the Export-
Import Bank provided in 1979.
The Chinese have also obtained commitments for over
$1.9 billion from the World Bank. The loans will
cover 18 projects, including four for energy, two for
communications development, four for agriculture,
and the rest for education and medicine. Loans for
energy account for 27 percent of the total; those for
communications, 18 percent; and those for education-
al projects, 22 percent. Of the total, the International
Bank for Reconstruction and Development has con-
tributed about $1.2 billion and the IDA (the Interna-
tional Development Association) has contributed $734
million. Only a small fraction of the loans have been
drawn. While at first glance these loans might appear
to crowd out commercial lending, this probably is not
the case, since most of them are for infrastructural
projects that do not provide high or immediate returns
and thus would not attract commercial lenders.
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Appendix
China's Balance of Payments a
Exports, f.o.b.
10,170
13,458
18,875
21,496
23,459
24,019
Imports, f.o.b.
-10,331
-14,364
-19,180
-17,949
-16,660
-18,354
Services, net
-343
-833
-1,264
-862
405
-700
Total earnings
1,028
1,736
2,472
3,205
3,618
3,900
Freight and insurance d
245
416
680
1,103
986
1,000
Passenger services
13
33
106
113
140
161
Port dues, ship chandlering
180
316
385
422
389
NA
Travel receipts
241
413
511
672
703
780
Reinvested earnings from direct investment
abroad
32
43
63
75
105
NA
Total expenditures
-1,371
-2,569
-3,736
-4,067
-3,213
-4,600
Freight and insurance d
-623
-938
-1,253
-1,357
-1,100
-1,430
Passenger services and travel abroad r
-6
-12
-35
-69
-66
NA
Port dues, ship chandlering
-227
-376
-566
-710
-612
NA
Reinvested earnings from direct investment
in China g
0
0
-9
-28
-38
Bank interest and charges
-215
-350
-612
-821
-641
-500
Labor expenses, other services, and
transfers
-96
-316
-272
-376
-544
Technology payments n
-204
-577
-989
-706
-212
-1,200
Unrequited transfers, net
528
626
570
572
471
389
Total credits
597
656
689
640
659
589
Total debits
-69
-30
-119
-68
-188
-200
Remittances of foreigners, plant
cancellation fees
0
0
-28
-20
-14
NA
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China's Balance of Payments a (continued)
Capital account, excluding reserves
-1,027
2,265
1,841
-876
-364
-1,000
Long-term capital, net i
-786
711
1,765
83
-322
-966
Direct investment abroad
-57
-68
-98
-93
-430
-750
Equity capital
-25
-25
-35
-18
-325
NA
Reinvestment of earnings abroad
-32
-43
-63
-75
-105
NA
Direct investment in China
0
0
101
321
460
384
Equity capital
0
0
92
283
384
280
Reinvestment of earnings in China
0
0
9
38
76
104
Portfolio investment in public-sector bondsi
0
0
0
-9
20
-300
Foreign bond purchasesi
0
0
0
-9
-20
-300
Chinese bond flotations
0
0
0
0
40
NA
Drawings on loans received
506
1,862
2,928
1,784
1,894
1,500
Government-to-government loans k
0
0
11
19
333
NA
Energy loans from Japan Ex-Im Bank
0
0
435
460
225
200
Buyer credits 1
0
36
106
207
335
NA
Supplier credits I m
506
496
539
177
886
NA
Processing and compensation
arrangements n
0
0
294
85
106
NA
BOC borrowings from foreign banks
NA ?
1,330
349
44
0
0
Non-BOC borrowings from foreign banks P
0
0
195
125
55
NA
Nonresident deposits with BOC, net q
0
0
999
288
-46
NA
IMF Trust Fund loan
0
0
0
379
0
0
Repayment of loans received
-405
-539
-948
-1,670
-1,871
-1,800
Buyer credits
0
0
0
-9
-42
NA
Supplier credits
-405
-509
-680
-621
-519
NA
Processing and compensation arrangements
0
0
-57
-66
-59
NA
BOC borrowings from foreign banks
NA ?
NA ?
-201
-844
-1,089
NA
Non-BOC borrowings from foreign banks
0
0
0
-120
-97
NA
Settlement of blocked US assets, other
transfers
0
-30
-10
-10
-65
NA
Drawings on loans extended r
-900
-613
-253
-284
-413
NA
Repayment of loans extended '
70
69
35
42
18
NA
Short-term capital, net 1
-241
1,554
76
-959
-42
NA
Supplier credits received (drawings net of
repayments)
-35
447
174
121
177
NA
Supplier credits extended (drawings net of
repayments)
NA?
NA?
-156
-662
-318
NA
Bilateral payment agreements assets
(net change)
-379
-127
-80
110
56
-87
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China's Balance of Payments a (continued)
Special drawing rights
0
0
54
-41
61
-121
Total change in holdings
0
0
-92
-183
61
-121
Counterpart to allocation of SDRs
0
0
146
142
0
0
Reserve position in IMF
0
0
-191
191
0
-176
Use of IMF credit
0
0
0
524
-28
-496
Total
0
0
0
524
0
-485
Approved For Release 2009/02/09: CIA-RDP85T0031OR000300060004-4
 Approved For Release 2009/02/09: CIA-RDP85T0031OR000300060004-4
Approved For Release 2009/02/09: CIA-RDP85T0031OR000300060004-4
 Secret
Secret
Approved For Release 2009/02/09: CIA-RDP85T0031OR000300060004-4
Approved For Release 2009/02/09: CIA-RDP85T0031OR000300060004-4