NIE 13-5-67 - ECONOMIC OUTLOOK FOR COMMUNIST CHINA

Created: 6/29/1967

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national intelligence estimate

Economic Outlook for Communist China

7*

Th* rcflowmg ititrtvtnn vgonaohotu porliopaktd in th, ihH

Th* Canfrol Iwrolinarit* Aaanc*'O*pori-rn.ro. olnd Dihw, ondMSA.

Concurringi

IV.Vvirrtfolh* Dwaclor olnd ftaMarth. Mparlraont of Stat*

It. Oea.irector. Dafaru* Inallaariia Afl*acy U..racter, ttoiionolT

* AuOort jWdI Monocur.Fn**Oy

AWoining:

Mi. WiKon O.a>AruriaM Dtraeor. FaaVral kr*au al HvwilootOn. th* lubjitl being evliide ol hi* jaradlcnan.

i

CONTENTS

CONCLUSIONS

DISCUSSION

L THE POLITICAL SETTINC

IL PERFORMANCE

C TtiMpartatta

ilitary Production

E- Foreign TrmJo

F. Support lo NonJi

Ill, PROBLEMS AND PROSPECTS

A The Shot Tkt. Outlook

B. Economic CooBtWationi for the Longer Term

ECONOMIC OUTLOOK FOR COMMUNIST CHINA

conclusions

activity in China, especially in tha industrialbeing slowed by the Cultural Revolution Nevertheless,and development continue toigh priority,been considerably aided by imports from ihe Free World.

trade has grown, and the non-Communist worldfor three-fourths of China's trade. China's balance ofposition has Improved over tbe past two years. SupportVietnam haa been substantially Increased during the pastimpose* no undne strain on the Chinese economy.

C The economic outlook depends heavily upon tbe development of the political situation. During the next year or two,ontinuation of the present level oi political turmoil, the economy seems likely to deteriorate somewhat, though probably not to the point ofharp decline in industrial production, widespread unemployment, or acute food shortages. The weapons programs could be continued, though some stretch out in particular Items might be necessary.

D We think it unlikely tbat Mao will achieve surncient pohOcal success in tbe Cultural fusvolutJoa to permit Kim to embarkew economic Initiative similar to the Leap Forward. When Mao dtsapfi-an from tbe scene, there will probablyeriod of confused contesting for power during which economic recovery will be neither rapkl nor sure.

E. The unfavorable feed-population ratio, the economic costs and imbalances inherent In the military program, and the shortcomings

of the educational system are problems likely to persist for atragmatic regime could probably surmount them, but any successor to the present regime will also Inherit some at thepolitical goals of its predecessor. These will strongly afiect the allocation of resources, probably at the expense of laying founda-ttons for self-sustaining economic growth.

2

DISCUSSION

I. THE POtlTtCAl SETTING

1 The political upheaval Id China hu complicated tbe analyti- of ChUiaj economic pstennance, pofcto, ind gosh. The Third Fl re-Year Plan wu to Into begunornpfthwwho pkn has not yet hrrn oBeklty an-ooonccd. and during the couw of the Cultural Revolution httk haa hren Mid concerning fcooomic performance. Instead, attention haa been focused on tha political and social relation. The leadenhip hat been riven,ew genera-tkn li begmntng lo assert Itirlf. Cleavages are appearing between the young and tha old, the stadents and Iho workers, the urban and the ruralnd tho regiom and the center.ew order and cooieiuut nro eiiubliihcd,la likely to be ol secondary concern.

1 This ittuauoo reflects Uao'i dectrmae of social development Mao fears tha buraaucnt and the tec hn id an who, by their tasks and framing, piece aon stability aad fad rnasoca to halt nvohjtdeaatry change. The curt of the amateur, teribodkd hi "Mao'slace* more faith In arousing the talents and Initiative of theman than la following tba advice of the highly trained speeiabt. It follows thai Man dJrdnins material incentive* for the moreephemeral -force of idnolngiwl uimnli. and Imfcns on the primacy of political enthusiasm over technical ipcdilirsrtkro Prudent cnter-prlw management In China has repeatedly found Its cautkni* poliolea under attack by Mao. In brief. Mao isevolutionary leader than on economic planner

A The Leaptandstarfc example of carrying Mao's Ideas to extreme lengths, Folowtag Mao's orde- that "politics takeassive campaign of Ideological ahorrationaOonwide outpouring of labor enargka. Ahhough this resulted in drama be, but trroporery.roduction, the lack of planning and coordination made th* campaign ultimatelyating. Thus, faced0 with crippling food shortages, cc Merkm of Soviet aid,iscouraged and dupuntlcd population, Peking bad iRtle choice but to pull back.

From mld-ieeO to the endeking followed retreat andpolicial to restore order and stability by curtailing investment, reducing or ending industrial subsidies, returnlag redundant urban labor to the rural areas, reviving private plots, restoring free markets, and decentralizing cornrnunes. Soch laaajnack pohesrs broughtecovery of atdustnsl and agricultural production that Uaed

We do not know whether Mao had to be pressured into these rr-ad}us(nscnti or whether he recognijed the gravity of the situation and willmgty acquiesced. Recent revelation) confirm that there was continuing cisutfciaction among some leaders with Meo'i leadenhip during the lDGOi. It abaiirobable th.it

For hb put. Mao wa* apparently growtag more and more embittered aa he fett himself bring eased aside aad hii policial neglected. Trrea, tba collapse of the Leap Forward and the subsequent attempts at recovery contributed to tbeTtwifiiii that erupted tn the Cultural RooKihon.

& Tha radical politiaa of the Cultural Revolution have octroi an atmoiphero conducive to radical economic initiatives ilmQar to those of tho laup Forward. Thli would not bu Inconsistent with Mao'i general notions; Indoed, tho political enmpnign wai moved Into the factories and the countryside In Ule 1WK1 andowever, thb producod tueh confusion aod dHrupt'orts to produc-tion that the regime moved rapidly to retreat from what Kerned to lorealiadow serious economic dislocations. With economic planrustgtate of suspended animation. It aeema likely tbat major economic uuaatircs will bo poatponrd imrHrevarutkoo of rbe perinealchieved.

my event, tba purge of tbe party and tbe general contusion aboutIn charge have weakened tho direction and control of the ecooomy.Peoples Liberation Army (PLA) hai boon ordered to help relay anddirectives where the party and managerial apparetm has Iwentho inulla have been was lhan aatlifactory. The PLA has Ihemaintain order and discipline but lacki the neoeraory ildlli (oreconomic acttvtties. At the top. Premier Cboo Eo-lei conrtnuei today-to-day cperariooi In tbt governmental and economicoti, three of bbice Prwoen remain hi good potktkal mod toglop level fcooornlc adrnlraitralon, only Cbooa-chuo teem to beacceptable to tba Mocasta. Tho weeJmnlng of the managerialne of the major wounds inflicted on the economy byRevolution.

II. PERFORMANCE

ooorai little doubt that economic performance bas declined tailit bto quaatlfy diecattered taxtaabfins of am economic eSkteocy ere ruoportrd by Red Guard potlera erringthai prcdwrasoa deeihaed la January and Februaiy, and againSei armibaa,o Tvtdewcc rotysOng that on economic crisis

A. Agrfculnjre

hua far, the Cultural Revolution has had little Impact on agriculture. Cram output0 was at about tho level4ltbough grain preduotton has recovered from the low Irveb, It has yet to top the

mm pMkhmtaaaM data mm WD. Who* dronM atoteastalal thak *mm mat ef tharaawal Mftf at aB milatliport aa eaaaataaababeaaamg Am gtmmlol Bw cromomj. Wo* eW mwre-taat af tbaSpiWt. apod itaCMra or* mOtbla. doral uu. mKom mc drawn ha umipk ofkcworqojfc data boar.

SEprSt*

record yeart* Meanwhile, cumulation Km grown byoear. Current report! of reduced rattans and riling food price* la both Mate and freeBy-applies Caloric inr.lt parrocnbly le-newhal km thanut we ate do Irsdicataani of otther icnunu-triucei or serious food ahnrtagea.efcng ha* augmented dornratfe food nrppues by ara avenge net reaport of aanoat five aaiauoa lom ofear.eaprct urportt to conlkaw at about ihat level

B. Industry

he Cultural Revolution hat halted the recovery of Industry. Steady growth over theaised industrial produciionevel above thathough nil) below the Leap Forward peakhis growth resulted mainly from fuller use of existing capacity. Some extra) capacity still cxlsti, particularly In light iivduitrlct. but capacity ii insufficient to other Bv dtutrta- producing priority prciducts such ai finished iteeL The revival of tho construction Induilry Ins uiggested by the fact that, tor iba first Ornethe Leap Forward, all major cement planii In China were tn oprnticn. New eoeatrucnon was onderway at rnilttsry research and produciion facilities, dearie power piusta, tnemtcal plants, peerolenui facjlreka. and at mining fjter. The disrepttoni of the Cultural Revcaubon probably have ledtow decline of industrial output beginning ia the last qu arret

IL lsdurtrio] policy daring the past several years has baca aimed rnare at facreasing tht range of Bnuhedupport of meter program than In expand big basic InduftrhM Priority altention ii being accorded moderntcel finuhlng facdltlai, electronic equipment, petroleum, nnd chemical ftttibrcr. Steel output has recovered to the point where matt neeth far ordinary steel products are probably being met. DeficienciesIn the capacity to produce and fabricate refractory metals, high quality alloy itaek. aadvariety of farmed steel products. China kai been carrying on negotiations with Western Eiiroce and Japan for plant and ecfilprnent to fill these gape. In petroleum, output of erode cal haa doubledS. and Clara at now virtually eetf-eusBcicr-tpetroieuoi products,6 onhjp one percent of the total supply hod to beThfa re-aauung import need, fa) for rhemiral addiOvei to improve the quaJay of domreUcaliy produced aircraft fuels and lubricants.be chemical Icrtlnrer Industry increased fromillion tons2illions tonsurrentn the nantruction of small and medfum-tin- plants, which may addiU-aulllon tons

C. Tromportotion

huiai transport system, which wai overloaded and subject to periodic congestion daring the Great Leap Forward. :iui been able In the last few years to meet basic economic needs without undue delay. The Cultural Revolution has tamed only -poradie disruption) and hocklogging of cargo at major roil (unctions and parti. These difficulties have inconvenienced tlte economy in a

tuaUar to Ibe curmMud Industrialut no ecccemfc rnorti have yet bm identiSed

D. Military Production

ith UM Ugh priority giver, military production. China hu developed

weapon* technology beyond whet It received from the SovleUow making rapid peogrew The Chrrwwploded Ui nuclearHave ia>iotaknt in smbitioo. mb.i> prwpnnv and are ortrmpiln* their own research and de-

en arjdalttoo* mloiile program, nnd ere attempting their own research)ariety of vreaponserns. Work on itrateglcM,C'Wallow-on

may abo be on the way; anally, continued progrrer is beroj made on an early warning radar system and on convantioral naval and land armamcntt.

li China bu carefully exploited the world'i markets to obtain urMo-daln technical date and eouipment for industry. Aa Faartngs ihcpplng listarger proportion of Hems that can be related lo tbe advanced weapons program. COCOM regnaracm haw generally prevented tbe Oanr-m, purchase of military equipment, but the COCOM hai does not rover many typo of mdustriol oqurprrwnt with other direct or indirect rebje to China's military

Ihina hu purehated mom than haB

a billion dolWaaj wajBfc ml iMlaBcd seaenrOefrom Japan aod Wntom Europe, and dapenderxe these aouroa wiD incrrana1 Tbeae imports not only aid tba weapon*ut help relieve tbe pressure on rallied manpower and oqulprnont throughout Industry.

E foreign Trod.

IS. Foreign trade has aotificnxury aected by tbe Cultural Revoh Uon, It grew aboutercentnd it HI bilbon had almost regained tha peak level Although tranjport disruption] delayed rhlppfngInhe Chinese have beeo taking pates to meet their trade

ore*ga trade56 wereult ofgrowth In trade with the Free World, which now account* tor thren-

^SJCJetT

cjuMtin of Orira't node. Japan luppUnted theWru'i main trading5 ud widVnri lb bad8 The hnfiMehr, rsa>, ef Sinoj-punceroaat5 andercent robeen rourhJy metched by that ol Canoer* tradeeRrrn Europe.ong tamiiru China's best totnce ol hard currency. Total camtags from trade wfch Hong Kongnllhonnd In addition,iltion In nontrade earningsrop In temlttatiees lecause ol tho Cultural Revolution.rade with Commuabt ecamtrre*6 continued the decease that began1 Trade wstk the Soviet Ualoa fell to6ecline ef S3 percent

IT. Charai balance of peyraeatu pontine haa Improved notabty over thean. Foreign exchange aad gold headings kiettsaard byillion,evel00 million. China3 million of gold from the Wot in 1MB and M0 millionhtnai indebtedness to the Free World totaleddfaon at the and5 ind waslittle changed6 All thishort-term. Chin* ha* cbontD not to ask (or karax-tonn credits, bat could raubabty obtain thorn If at

la China'said ocmiaaununU te taeatCcnmunlit tenustrirt fall (roan0 million in IBM id3 mlUkm aanuaDy3 andhe ktrgevt commit mcnts6 were creditsnOlkn to Cakillion to Guinea,illion grant to Nepal, Aclual drawings remained well below attentions, averagingear over the hat three years. Ckena ceased ananunclng aid to Cornmuniit countriesut we behove desnerle* Increased In3 and

'to North Vbsfcaesa ,

IBid to North Vietnam ha* grown rteadlly over the past year. China has been supplying amaD anna and ammunition, trucks, industrial raw materials,ood, and other consumer goods. There are also

four antiaircraft divisions and rruny thoimnds of eisgmerrring troops In North Viet rj in. aod some Bgbter aircraft tnay have been ruppbect China hn*tha shipmentroad range ef items lo replace bombing losses, Schsdrog rash, ceassOacooq matirlali, spare parts, and drag* and snedicane. Qonese Cesraaaanirtor pwtfcaaig rhaae mntatlali and raaapriau he eacaed en.nrrsatrnent* made so far. Thb ali togather with Soviet aid trarrstt. ing Chase, ha* toensased the burden on the nail net, but it still preempt*ennll fraction of Chinese rod capacity. To the best of our InowUdge, tlie Bow of aid ha* bran maintained with only minor trstenuistsoos In spite of Chews asternal pclltkol tarmoil

Pakaag be* aim aaad* rocaraasthal tQiaHsaait fes detenteco-ssoction in Southern China. Thawhscfa is parteneral program oJ strcnsrtbenaag detVaaes along the periphery, is concentrated on new Birfteidi and rnajn hne railroads. Yunnan Proviico has now been nuked to Ihe main rail net of Chtnn, thus permitting direct shipments betacen the two

etour through North Viotnum The new construction also provides on additional routs for supplies to North Vietnam.

III. PROBLEMS AND PROSPECIS

A. Tho Short-Term Ourloot

ver tbe pottears, tbe regime's medt Impressive achievement bai

been its use of the partyolitical and economic apparatus to i. mess the vast energy of China's enormous popu'-Mion. Now, with tbe party In disorder and tbe governmarrt rjtrreeucracy under attack, this control has been enfeebled. Under these cccidloona, ft will be difficult to keep agriculture and Industry functioningoordinated whole. It is already evident that economichu declined- Planning and manegenul control are likely to bo even further weakened If the purges rontmue, and the military lac* tlie adaptability to bake over tha furs ebons of the disabled party.

hus, any esturuuc of tho general outlook for the Chinese economy must of necessity be eortcanoned by Ibe polilical outlook. During the neat year or two,ontinuation of the present level of political turmoil, the

economy Menu likely to deteriorate somewhat, though probably not lo the point ofharp dedloe In Lndnstriil production, widespreador acute load okaatafia The weepii pop am could bobeugh sora* stretch out in particalai iteans aught be aeocssaay. Ualaa* poaRt-eal omloprmmts upset Ibe Mreign trade patterus which have beau davriepmsj. foreign tnsde will rnobabfy grow. Choices an alloeallon ofspecially among military uses, export programs, and Industrial and agricultural Investment will be nuda more difficult because of general political chaos and tho decline of caned authority.

t as puorible tbat the preaaat tnlttraliHi pobocoJ satuasaca wtl be ended by Moo's early raoseabaahsiMut of suaecbM control to embark on an eeeasooue phase af tbe Cultural Rcvotaiion. Should ho succeed, wo wooM eipect thli to be similar lo the Croat Leap Forward,edaction In material tnoentivaf and put stress on esuusctation. If unrestrained by tbaao would be Musly to abolish tbe nrlvito plots and free markets. Bat lhal would almost inevitably lead to sewer* food probkmi and thence to apathyedbr la raorala and eafclaocy

htkj wa certaauy cannot nam oat such an evcoutta of ibeuJuallon.hank It antlieiy. We do not believe that Moo willlear-out reeotiiooo of the politicalndeed, ft is possible that bo UKhe itruggle to drag cm. Even if he thought that the time had come to move tbe involutionew pbaae, any step in tlte direction of radical economics would almost certainly gronate new opposition frora those, such as Chou En-la| and perhaps much of tbe PLA kaadeasaap, who her* supported Mao thus far.

ven when Moo disappears from tbepoliticalnlikely and economic rsrogrees wiH be aether rapid nor on There couldong

jecpjiT"

period of confused contesting; for power, ot Ihe very least titere will beew leadership Is consolidated.oherent leadership emerged, ii might adopt less grandiose national goali, mate more concraslorvs to social demands, and attempt to restore unite tort of administrative order. It might toextent scale down and shetch out China'. rnfUtary programi. But It would probably atill give rsricrty to advanced weapons, and Cruru'i hostility towards the US would be likely to persist.

Economic Conitdorotioni for Ihe longer Term

3ft The problems characteristication seeking industrialisation and modernization are present in China, but are often sharply exaggerated by China's ambitions. Never beforeation so irrdsatrially backward and with so

(CNP) ii tonaldmbly smaller than that of Japan or France^ Id its per capita CNP and tha portion of CNP contributed by industrial output, China'i economy resemble* thai of India, hi purniit c* its goali over the postears, China has uttarrd over on*-qo*rto- of as GNP for investment and military eapeodi-turei, end hai cut corners to increase the impact of thii effort. Agriculture has beenandIt dacproporuMtely oriented toward military rsrorlucasoo- Striking rnogrea* be* been made hnced weapon* devrsVsp-nanat bat tha) ajpr.au ha* *tr*ined Chsea'i leaourcea and talent and ho* led to new cans tor shortcuts* tba setting that Cessna'* deep ceonorrucmust be ursderstood.

IT. Fcod-FopuiaHm Ratio. China at best faces only slow pecan-eta Inpopulation grenrth. Scene success has been achieved ai reuutiiig tbe birth rate in the dttea, but It wilong time toignificantamong the peasantry, who constitute over SO percent of th* population. Moreover,ighly successful rural birtli control program would secureimited reduction in fertility, and this would tend to be offset by Uieteas-ing Hfe ruroectanclea. Thuiaeeins little likelihood of any notable change In tho rate of population growth over at least the neat decade.

2ft The Chinese Intend to raise agricultural output over the nest decade milnty by peater um of chamical fertilizer. Peking has alrindy iherply in-creased Um roispfy of ehrrmcul frrtiFUer, both from imports and domestic sources- In cedar to Increase agricultural production corrunensurategrowth, China needs an annual toeanent of roughly two mAon ton* of chemical fsatihJer. Chase is not currently buCdiag Urge eheratcal fertiJm phots, md aniens new plant ere qnsdrJy put Into ef art. much of theR tarn to be met from inrportv Moreover, Osta* wfllyare aWpty hiii eased rsroanisrnjeats for farm lirveatment to use that fertiliser, iischsdtog addttonal Bigaaon. improved transport and diwibution, and more Intemlvr tcchnicnl n* asures. China may face trouble Ifot prepared to divert the ncoetsary resource* to uralepwrite thme Investments and to sponsor nil able changci In the organization of farm production.

emmnle CooU of the Military Progmn. The success of tlie weapons programm at the cost of withhold dig resource) from the tfviliaa toctordelaying tha growtheneral todaatrtst bare for the broadW need* of the eoorjotny. Then will be some benefit! lo dvHtan iooWrtci bom Ihr tptn-eB of RAD in the weapon* field, asn the iiimukltort of Industries in ancflbcy fields. But these benefits are greatly outweighed by the lean in genera! ccooornte devebptnent that li an Inevitable comoriuenco of the high prtorHy given to the weaponi program. In any event, the cost* of the military progrnm ore now aroundortent of China's CNP. Overnll costs will snbil an daily grow as advanced weapons systems move Into production and dcj>leryTn)ontoats wfH knereese as the Chinese move farther beyond designs furnished by the Soviets. Production costs wii be high bemuse Chine will have to create the tadustrial backupbrndy available to meal indus-(TSaltted oa lions. Moreover. China's limited supply of sciential] and technicians has been coocentratod on raiKUry HAD. and general Hbcsilificutfer-tog aa scarce ocswstmc talent ts applied to solving urgent practical problems of

Sbortag* oj Edacalai Manpower. Pekmc, has vastly earanded schoolnd enroUasents in China and for tba hrst tame has provided iu young ayuaamtsoa wtb an education. But at tho same date ft has aotortared wftfa edocaUop by recurrent pcJiDcai csunpaign* The raost rooeast and eatjume eaample it the dosing of Qanai uroveesfUrs end the propooed overhaul of the curriculum throughout the school system to concentrate on Moo's weeks.tba system of higher education ii handicapped by the itpr^cattngrofeurional personnel for high priority military programs, and Ihe balance among various types of professional and technical training Is not consistent witheeds. These weakneaiei win necessarily slow the achievement of economiche economy attempts to advance to levees where both professional competence and techrucal sUb are required

Tbeae probsama the unfavorable focd-popuhtion ratio, tho ccoaoroie costs and tmba ktnees incserent In tha mOftary program, aad thef the educnr'-onal system teem likefy to persist for at leastdecade. Any regime which comes to rule China will have to cope, not only with tbe damage which Is being done by the Cortical Revolution, but with these almost buracUble facts of economic life.ragmatic regime could probably mobilise China's re-

Inay as to keep (he economy movingnoderate rate of

development and provide some modest increases in tbe low standard of living now prevailing.

ul any regime will Inherit some of tbeoals ashe economic probtonM of Its predeccasor. It wfj likely try to cosotbta* tha raataary program, contpete wfch the USSR forhe Ccarsraimtrt world, and retain its anngorrtsm to tbe US. Tbeae wiH jtiuuglj affect the allocation of resources,he expense of ksying foundations for self-sustaining economic growth.

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