LETTER TO WILLIAM PROXMIRE FROM ROBERT M. GATES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B00017R000300870002-5
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: December 8, 2011
• Sequence Number: 2
• Publication Date: September 17, 1987
• Content Type: LETTER

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Cen Anc, 0 E \ V- X l 1
4
17 SEP 1987
The Honorable hilliar Froxnire
Ch airran
Su bcorrr.ittee or. National Security Ecor.orics
Joint Economic Corr:r.ittee
Congress of the United States
hashinGton, D.C. 20510
Enclosed
are
responses to questions submitted by your
Subcommittee
for
the record with your letter of 10 August.
They pertain
to
China's economic development and recent reforms
as discussed
in
a classified briefing on 3 August.
The enclosed material is unclassified.
In a separate channel, the Agency is forwarding a response
to one of the Subcommittee questions which had to be classified
CONFIDENTIAL
I trust that the Agency information will assist the Jo_nt
Economic Comirittee in its review of leading economic issues.
Sincerely,
cbert N.~~tes
Artinc Dire itor of Cep * ~.. Int__ii
STAT
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ZA - J /M V
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SUBJECT: Letter to the Honorable William Proxmire
regarding responses to questions about China
Addressee
ADCI w/o encl.
ER w/encl.
EXDIR w/o encl.
DDI w/o encl.
DDO w/encl.
D/OCA w/o encl.
D/OEA w/o encl.
C/EA w/o encl.
NIO/EA w/o encl.
D/OGI/DI w/o encl.
OCA Chrono
OCA Registry
DCI/OCA,I
w/encl.
w/o encl.
(091487)
STAT
STAT
STAT
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Responses To Questions Regarding Resource Allocation in China
Submitted by Senator William Proxmire, Chairman,
Subcommittee on National Security Economics of the US Congress
The farm sector has been reorganized and much of it turned over to private
control. There has also been some decentralization of industry. How much of the
economic growth in 1986 and 1987 can be ascribed to the private sector? How
much to the reforms in general?
For the past 8 years Beijing has implemented economic reforms that have
decentralized decisionmaking authority and increased the use of material incentives in
the economy. These reforms have caused output in many sectors of China's economy
to increase rapidly.
Reforms in the countryside have been extensive Peasants now lease land for up
to 30 years, make most production decisions on their own. and market all output
remaining after they have fulfilled production contracts with the state. Beijing has
encouraged peasants to diversify agricultural production and also has permitted them to
leave farming and start up rural industries and service trades. However, the government
continues to control the supply of important inputs such as fertilizer and diesel fuel and
to set the price of grains purchased through state contracts.
Reforms in industry have been less extensive. but factory managers now retain a
larger share of revenues and have more flexibility in determining production beyond that
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which must be supplied to meet quotas in the state plan. Although the entrepreneurialr
or private, sector of the urban economy has grown rapidly in the past several years, the
number of self-employed workers in cities still amounts to less than 4 percent of the
urban labor force. Therefore, the urban private sector has not had a large impact on
economic growth in the past two years Much of China's economic growth in the past
two years can be attributed to the overall economic reform program.
You mentioned Beijing's concern over budget deficits. First, how large will
the deficit be in 1987? Second, we never hear about budget deficits as a problem in
other centrally planned economies. Why is it considered a problem for China?
According to Beijing's draft budget for 1987, the government deficit will grow by
about 13 percent this year to 8.02 billion yuan ($2.16 billion). However, Beijing's
accounting format adds 6 billion yuan ($1.6 billion) in domestic government bond sales
and 14 6 billion yuan ($3.9 billion) in anticipated foreign borrowing to the "revenue" side
of the ledger. The projected government deficit would thus be substantially larger if
calculated according to Western accounting methodology.
In the past. China has covered a substantial portion of budget deficits with
overdrafts from its central bank. Beijing is concerned therefore. that deficits will add to
demand pressures and drive up prices on those goods that are produced outside of the
plan
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In general, how reliable and complete are Chinese official economic statistics
compared to those of the Soviet Union?
Chinese data, on the whole are not as statistically reliable as that released by
industrialized and newly industrializing countries China faces many of the same
problems that other countries at its level of economic development face in collecting
accurate data and scientifically estimating economic indicators. Beijing realizes that it is
vitally important to have accurate data when formulating economic policies, particularly
as it increasingly relies on monetary and fiscal policies, in place of administrative
dictates, to maintain economic stability. China, therefore, has stepped up efforts to
improve the accuracy of its economic statistics.
In general, official statistics for the quantity of industrial output of particular
industries in China and the Soviet Union are probably more reliable than statistics for
the total value of production. We do not judge the comparative reliability of overall
economic indi :ators for China and the Soviet Union.
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What are your estimates for inflation and unemployment for 1987 and how
does this compare with the recent past?
We do not publish a price index for China nor do we estimate China s
Many foreign observers believe that the actual rate of inflation is higher than
Chinese official statistics indicate. Year-to-year changes in the officially calculated
inflation rate, however, may provide an accurate qualitative indicator of inflation trends.
Listed below are inflation rates for the past several years that are calculated on the
basis of China's official retail price index.
1979
2.0%
1980
6.0%
1981
2.4%
1982
1.9%
1983
1.5%
1984
2.8%
1985
8.8%
1986
6.0%
Rapid. reform-driven economic growth and policies allowing workers to open
their own transport and service-oriented businesses have caused China's unemployment
rate to fall since the late 1970s. However, Chinese officials admit that in many state
enterprises more than one-fifth of the factory work force is surplus. China's rural sector
also suffers from extensive underemployment of labor. Therefore, China's official
unemployment statistics probably do not accurately depict the economy's ability to
create productive employment opportunities for Chinese workers.
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You discuss efforts to improve productivity, but no figures are cited. What
are the figures for labor and capital productivity for each of the past 10 years?
Official Chinese statistics indicate that labor productivity in state-owned industrial
enterprises grew at the following rates from 1979 to 1986.
1979
6%
1980
2%
1981
-2%
1982
2%
1983
8?0
1984
8?%%
1985
8%
1986
4%
China publishes a time series that shows the gross output value of state-owned
industrial enterprises per 100 yuan of fixed assets. The capital productivity numbers are
seriously biased, however, because the fixed assets are valued according to their
original purchase price.
The July 27, 1987, issue of Beijing Review contains a midyear report on the
economy by the State Statistical Bureau. It shows 10 percent growth in GNP for the
first half and a 15 percent rise in total industrial value. How reliable is this report
and do you agree with it?
China has been publishing GNP estimates for only 2 years, and we have not yet
made a judgment on the accuracy of these estimates. China measures the industrial
output of large state-owned enterprises in constant prices, but it may not adequately
adjust for inflation in measuring the output of small-scale rural enterprises--thereby
biasing the industrial output estimate upward somewhat. Nevertheless, it is apparent
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that overall economic growth, and industrial output in particular, picked up in the first
According to the Beijing Review midyear report, management reforms had
been carried out in 37.8 percent of small, state-owned industrial enterprises by
June 1987, as against 8 percent by year-end. Do you agree with this figure, and
what does it say about the reforms?
We cannot independently confirm the estimates for the number of small,
state-owned industrial enterprises that have carried out management reforms. In the
past few years, Beijing has gradually extended the scope of management reforms.
Chinese leaders have stated that industrial reforms will be carried out over a long period
of time.
Explain the methodology for estimating China's GNP and the reasons for
revising it downward since 1986. Nongovernment groups, such as the World Bank
and Wharton Econometric Forecasting Associates, use a different approach for
estimating the size of China's economy and come up with much larger estimates.
Explain the differences between the CIA's and these other methodologies. Is the
CIA considering whether to modify its methodology along the lines of the World
Bank's?
Our estimate of $343 billion for 1985 Chinese GNP was based on a time series
that uses a 1983 exchange rate to convert Chinese currency values to US dollars.
Beijing has devalued its currency significantly since 1983. The estimate for 1986
Chinese GNP that we gave during the hearing was based on the current exchange rate,
and therefore does not represent a decrease in Chinese GNP.
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There probably are several valid alternative approaches to calculating China's GNP
from its officially released statistics.
What has constrained Chinese oil exports and what is the status of on-shore
and off-shore exploration?
China reduced the volume of its oil exports by about 5 percent last year in
response to lower world oil prices (oil export earnings fell by almost 50 percent), and
Beijing publicly supports OPEC efforts to stabilize oil markets and prices. Over the next
few years, growing domestic demand probably will restrain Chinese oil exports to near
their recent levels.
Some foreign oil firms are continuing to explore for offshore oil, but the results
to date probably have been disappointing for both Beijing and the foreign firms. China
is continuing to exploit existing onshore fields and is stepping up efforts to explore for
oii in the northwest region of China.
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You say in your prepared statement that defense spending grew by 5 percent
in 1986 but will grow by only 1.3 percent in 1987. Are those real or nominal growth
rates, and, if the latter, what are the real rates and what have they been for the past
five years?
Chinese budget statistics indicate that defense spending increased by 5 percent
in nominal terms in 1986 and is budgeted to increase by 1.3 percent in nominal terms in
1987. The following lists the nominal growth rates for announced Chinese defense
spending during the past few years.
1982 5%
1983 4%
1984 2%
1985 6%
We do not calculate a price deflator for Chinese defense expenditures, but it is highly
likely that because of inflation in the past several years, announced defense
expenditures fell in real terms.
I thought they were trying to hold down their defense spending. Why did it
The 5-percent increase was slightly more than planned. That growth rate for
defense spending was consistent with rates since 1982, which ranged from 2 percent to
6 percent
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What is the Chinese defense burden in terms of the share of GNP spent for
defense, and to what extent does their relatively modest burden account for their
good economic performance in recent years?
We estimate that China spends approximately 5 percent of its GNP on defense
By apparently restraining the growth of defense expenditures, Beijing probably has
somewhat facilitated reform-driven economic growth.
We have numerous exceptions for China in COCOM. Does this suggest that
we want China to buy U.S. weapons and military technology?
This question concerning US policy should be addressed to the Department of
State and other US Government agencies. As for China's policy, Beijing is interested in
acquiring selected Western military technology, including US technology that the United
States exports to many countries. China probably is reluctant to become too dependent
on any one source, however, and thus seeks to diversify suppliers, and where possible,
to acquire manufacturing capability as well.
The Soviets are reportedly directly involved in several dozen industrial
projects in China. Can you summarize the projects and their significance and
provide for the record a detailed explanation of each?
In the two years since Chinese and Soviet officials signed a broad five-year
agreement on technical cooperation, they have agreed that the Soviets will provide
equipment and technical advice for the renovation of 1' Chinese factories and for the
construction of seven new facilities. Neither side has published a list of the projects,
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and we believe they may not yet have reached agreement on all of them. Bilateral
discussions have focused on metallurgy, power generation and transmission, coal.
machinery, railways, textiles, light industry. and chemical processing Projects that have
been mentioned in the Soviet or Chinese press as candidates for cooperation include
Project
Anshan Iron and Steel Corporation
Wuhan Iron and Steel Plant
Baotou Iron and Steel Plant
Fushun Aluminum Plant
Matou Ore-Dressing and Coal Mining Plant
Yiminhe Open-Pit Coal Mine and Coal-
Concentrating Mill
Xingangtai Coal Mine
Qixing Coal-Dressing Factory
Luoyang Copper Processing Plant
Luoyang No. 1 Tractor Factory
Xian Electrical Manufacturing Corporation
Xian Insulation Plant
Xian High-Voltage Circuit Breaker Plant
Xian High-Voltage Insulator Plant
Taiyuan Chemical Fertilizer Plant
Lanzhou Chemical Industry Corporation
Nancha Timber Hydrolysis Plant
Jiamusi Paper Mill
Harbin Flax Mill
Liaoning
Hubei
Inner Mongolia
Inner Mongolia
Hebei
Inner Mongolia
Heilongjiang
Heilongjiang
Henan
Henan
Shaanxi
Shaanxi
Shaanxi
Shaanxi
Shanxi
Gansu
Heilongjiang
Heilongjiang
Heilongjiang
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Shanghai, Shanxi,
Shandong,
Heilong-jiang.
and Others
Shanxi-Hubei and
Jilin-Heilongjiang
Unknown
China's ability to pay for Soviet technical assistance through barter trade, rather
than hard currency, is one of the factors encouraging the development of technical
cooperation with the Soviets. Beijing is seeking Soviet technology in areas--such as
thermal power, open pit mining, hydroelectric generation, and long-distance electric
transmission--where it is on a par with that available from the West Beijing is also
interested in Soviet assistance in modernizing Soviet-designed heavy industry facilities,
where it has had difficulty attracting Western investment.
In contrast to the situation in the 1950s, when the Soviet Bloc was China's
primary source of technical assistance and equipment, the number of Sino-Soviet
technical cooperation projects planned for the 1986-90 period are dwarfed by the
thousands of contracts for Western assistance that will be signed during the same
timeframe. Sino-Soviet technical cooperation also will involve a comparatively small
number of technical personnel; several hundred Soviet. technicians will work on the
Chinese projects between 1986 and 1990, compared to the tens of thousands of Western
technicians that have worked with the Chinese over the past eight years
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What is the status and significance of the Soviet-Chinese Amur River project?
Soviet General Secretary Gorbachev called for the joint development of boundary
river resources in his speech in Vladivostok in July 1986, and in October 1986 the Soviet
and Chinese governments agreed to establish a committee to plan for joint development
of the water resources of the Argun and Amur Rivers. Since then, the two sides have
concluded a joint survey of the Amur River and signed a protocol stipulating that each
side by 15 September 1987 should draw up a detailed report on constructing first-phase
projects. These reports will provide the basis for a joint report to be written when
Soviet experts visit China this October. Beijing and Moscow reportedly intend to work
together in building a multipurpose dam and large hydropower stations to (1) prevent
floods by regulating water levels of the two rivers, (2) reduce energy shortages in
adjoining areas, and (3) harness water resources for agricultural purposes.
China and the Soviet Union originally considered jointly developing their
boundary river resources during the 1950s, but the plan fell victim to the Sino-Soviet
split. The present Soviet-Chinese Amur River project, taken together with heightened
prospects for an eventual border agreement, signals willingness by both countries to
defuse the once-contentious border dispute. The Chinese, however, still insist that
political normalization is possible only if Moscow makes concessions on the "three
obstacles' of Soviet support for Vietnam's occupation of Cambodia, the Soviet invasion
of Afghanistan, and the Soviet military build-up along China's northern border.
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What significance do you place on the revival of Chinese-Soviet trade and
During the 1950s, Sino-Soviet trade equaled about $1.2 billion annually, and
accounted on average for almost 45 percent of China s total trade in any given year.
Because of frictions between Beijing and Moscow that surfaced in the 1960s, the total
value of Sino-Soviet trade in that decade was less than one-half what it was in the
1950s. In the 1970s, Sino-Soviet trade equaled about $300 million per year. accounting
on average for 2.5 percent of China's total trade.
The increase in political, economic, and scientific contacts between Beijing and
Moscow in the past two years has been accompanied by an increase in Sino-Soviet
trade. In 1985, bilateral trade increased by 45 percent to reach $1.9 billion. Sino-Soviet
trade grew by an additional one-third last year to $2.6 billion. However, trade with the
Soviet Union accounted for less than 4 percent of China's total trade in 1986, and
probably will average about $3 billion annually until 1990 under the terms of the current
Sino-Soviet trade accord.
Is our military sales policy to China in conflict with our interests in Taiwan?
This question regarding US policy should be addressed to the Department of
State and the Department of Defense.
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What is the future of U.S. grain sales to China, and of U.S.-China trade in
general?
In the early 1980s, sales of grain to China accounted for 30 to 40 percent of total
US exports to China. Because of the success of economic reforms in the countryside,
China's demand for grain imports has decreased considerably. and US grain sales to
China were equivalent to less than 1 percent of total US exports to China in 1986
Although China has stepped up purchases of US grain in the first half of 1987, grain
sales probably will continue to be a relatively small portion of total US exports to China.
Trade between China and the United States has grown at an average annual rate
of almost 9 percent since 1980. If Beijing continues to implement market-oriented
economic reforms, China's economy probably will continue to expand rapidly--as will its
demand for capital equipment and industrial inputs. Because of the technological
sophistication and high quality of US equipment, the United States will likely be able to
expar i its exports of those products to China. Growth of Chinese imports will partly
depend on Beijing's ability to earn foreign exchange through exports, and Beijing
probably will push hard for increased sales of handicrafts. textiles, and light industriai
goods of low to moderate technological sophistication.
To what extent do Chinese textile exports, directly or through Hong Kong.
Tables A and B indicate that in 1986 China was the fourth largest exporter of
clothing to the United States and the second largest exporter of textile fabrics and
yarns. Table C shows that the share of US imports of clothing accounted for by China
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has increased from 4 percent in 1980 to about 10 percent in 1986. Many categories of
Chinese clothing and textile exports to the United States are controlled by quotas
The Department of Commerce and other US Government agencies can address
the impact of these Chinese exports on the US textile industry.
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Table A. US Imports of Clothing in 1986
Country of Origin
Million US Dollars
Percent of Total
Hong Kong
3,390
19%
Taiwan
2,633
15%
South Korea
2,573
15%-
China
1,710
10%
Italy
850
5%
Philippines
474
F
3'
Japan
465
3F
Singapore
384
2%
India
345
2%
Mexico
321
2%
Table B. US Imports of Textile Fabrics and Yarns in 1986
Country of Origin
Million US Dollars
Percent of Total
Japan
856
16%
China
475
9%
Taiwan
445
8%
Italy
441
8%
South Korea
379
7%
West Germany
259
5%
Canada
241
4%
India
225
4%
United Kingdom
216
4%
Hong Kong
181
3%
Source: US Department of Commerce (imports valued F.A.S.).
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Table C. US Imports of Clothing From China, 1980-86
Year Million US Dollars Share of US Clothing Imports
1980
250
4%
1981
422
5%
1982
635
8%
1983
773
8%
1984
863
7%
1985
967
6%
1986
1,710
10%
Source: US Department of Commerce (imports valued F.A.S.).
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