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ttcGLuEGE BUNOY'S OfflCE
AN 19 9
national intelligence estimate
Communist China's Economic Prospects
Svbmtitadby
DIRECTOR Of CENTRAL INTELLIGENCE
Concurred in by UNITED STATES INTELLIGENCE BOARD
As indicated overleaf
6
The following intelligence organizations participated in the preparation of ihis estimate:
The Central Intelligente Agency and ihe intelligence organization* of theot Slate. Defense, ond the NSA
*
Concurring;
Mr. Rkhordeputy Director of Central Intelligence
Mr.ughes, The Director of Intelligence and Research, Department of State
lieutenant General Joseph F. Carroll, USAF, Director, Defense Intelligence Agency lieutenoni Generol Marshall S. Carter, USA, Director of the Notional Security Agency
Abstaining;
Dr. Chatlei H. Rekhardt for the Astiitan! General /Aanager for Adminbtroliori, Atomk Energy Commission ond Mr. William O. Cregcr for the Assistant lo the Director, Federal Bureau of Investigation, the subject being outside of thett jurisdiction.
TABLE OF CONTENTS
Page
THE 1
NOTE 1
CONCLUSIONS 1
DISCUSSION
I. CURRENT PERFORMANCE AND POLICY 3
.
Trade and Aid
Support to North
ROBLEMS 7
Food-Population Problem 7
Support lor Economic Growth .. 9
of the Military Program oo the Economy10
III. THE OUTLOOK JO
communist china's economic prospects
THE PROBLEM
This estimate focuses on the two factors which dominate thescene in Communistuge and rapidly growingliving close to the margin of lore subsistence, and the regime's determination to invest in costly weapons programs.
NOTE
We noted in, "Economic Prospects for Communist, that the information available for an appraisal of the Chinese Communist economy is fragmentary, uneven inand uncertain as to reliability. There has been no significant improvement; although open-source information is currently supplying somewhat more data on production trends, these data are still spotty and consist mainly of percentage increases over an unknownajor intelligence collection effort is focused on this target, andefforts are made to increase its effectiveness.
CONCLUSIONS
China has managed in the past five years toeconomy back from the brink of catastrophe and has madeits programs to acquire modern weapons.
Vietnam conflict has not yet added serious strains toeconomy.ustained increase in the level ofin Vietnam, if accompaniedomparable rise in Chineseas well as significant defensive measures within Chinaadd greatly to China's economic problems.
any event, the Chinese economy faces slow growth, atthe next few years. The primary causes will be laggingproductionurgeoning population, but these problems will
be complicated by tbe ambitious military program and by thebrought on by Peking's ideology, In agriculture, despite somewhat greater support in the last few years, the regime is still not doing enough to achieve the yields necessary for sustained economic growth. Since Peking's birth control program will have little early effect, population pressure on the food supply will increase over the next decade. This narrow food margin makes the economy highly vulnerable to bad crop conditions. Moreover, growing competition for resources in China's sluggish and nonresilient economy seems likely gradually to undermine economic stability.
D. In tie face ofritical food emergency, the present regime would probably make only grudging and piecemeal cuts in its military programs. Although China will continue toangerous andmilitary threat, we believe that some future Chinese leadership will be forcedundamental concentration on China's economic problems.
DISCUSSION
I. CURRENT PERFORMANCE AND POLICY
eking's economic pohOMM have remained largely unaltered sinceretrenchment which followed the collapse of the Leap Forward.shown by the leadership reflect* thef disaster inthe continuing constraints on the depressed economy. Peking's habitintransigent political standi Iu* reduced the possibility of outsideforcing the regime toirtue ofong-rangeabandoned when the Leap forwardlaunchedkis ne*cr
since been undertaken: what little we know about tlie Third Five-Yearuggests thatong way from being adequately formulated
2 Communist China has managed in lhe past five years to pull tbe economy back from the brink of catastrophe and has made progress in its programs to acquire modern weapons- Tin- leadership has clearly not given up its hopes ofodern world power. Nevertheless, Peking's plans arebeing plirased in terms of the- long, hard road to economicVice Premier Chen Yi recently declared (hat it will take Chinaoears to becometrong power.
A. Agriculture
ur difficulties in estimating the tiia of China's grain harvest are apparently shared by the Chinese, who (old Kdgar Snow in4 that they would be satisfied If (heir estimates were accurate withinercent. We believe that grain output5 showed little i( any improvement over the mediocre harvests3fficial statement* make only modest claims lor total agricultural production and ignore the original targetive percent increase. Whatever the precise level of5 harvests, it seems clear that there has been no abatement of the Malthu*Un pressure oo food supplies nor any significant increase in the ability of agriculture lo contributendustrial growth.
he firmest indication of agricultural difficulties remains tbe import of Western grain, which has averagedillion tons annuallyost of0ear. Some of the imported wheatrice ejrported by the regime, and some may be used to build up reserves. Nevertheless. Peking would not continue the net expendinire of scarce foreign exchange atigh rate if tlie grain wereital, current need-available on food consumption wllhui China also tends to support our estimate thai grain production is nuw about what it wasiets have improved over tbe low point, lint this improvement is due mainly to increased production of non-grain foods, primarily from tlie private plots restored to the peasants following (he food emergency. This contribution, together with scheduled grrtln imports, should prevent any serious deterioration in the food supply over (lie winter.
leadership has been careful nor to imperil food supplies bycutback in the limited freedoms and incentives granted thethere has been no tendency tourther expansion ofOn the contrary, Peking is showing considerable concern overcapitalism' in the rural areas, and unless threatened by anotheris unlikely to make further retreats from collectivization. Nor docsthat Peking's well publicized priority for agriculture is backed upincreased quantities of scarce resources. "Self-reliance" isas the key to agriculture's problems, and despite obvious officialthe lag wc see no evidence of investment in fertilizer plants andtechniques on the scale required for substantial increases in crop yields.
b industry
Industry continues to recover slowly from the collapse of the Leap Forward. From fragmentary data, it appears that output in heavy industry3 may haveevel somewhat higher than thatut still below the peak. Light industry, due to the lack of raw materials caused by the prolonged slump in agriculture, may be producing7 levels. The steel, cement) and other building-material industries still have some idleHowever, the unbalanced development and the chaotic allocationthat characterized the Leap Forward have been steadily rectified. Current production processes are therefore better coordinated and less likely to suffer stoppages due to conflicting directives and raw material shortages.
Such improvement has been general, but production has increased sharply inew high priority areas, particularly petroleum and chemical fertilizers. Production of crude oil increased at an annual rate of overercent2ecause of tight controls, consumption of petroleumat an annual rate of about five percent, allowing the regime to reduce its dependence on imports. At present. China is almost self-sufficient in petroleum products. Military aircraft, which are predominantly jet are being supplied with domestically produced jet fuel at levels adequate for peacetime needs, thus largely eliminating the earlier dependence on the Soviet Union. China still needs to import some high quality lubricants and aviation gasoline, hut this dependence is minor, since non-jet aircraftmall and declining part of China's aircraft inventory.
roduction of chemical fertilizer increased45 by aboutercent annually. However, much of this increase comes from new plants that have just come into production after protracted periods of construction, and few major new fertilizer plants are now being built Recent emphasis appears to be on small- and medium-size plants, incapable of turning out many of the more productive types of fertiliser.
C. Military Production
ith few exceptions, the major military items produced by China are of Soviet design and are made in factories supplied in whole or in part by the
JfjCatff
USSR priorespite the high priority given the work, the Chinese arc still strivinget production startedumber of weapons which were part of theackage of SovietMHBM and SAM systems and, possibly, jet bombers. There hasubstantial increase ofn lhe Chinese inventory over the past yearalf.
uinias most spectacular success hasConstruction of Soviet-designed sub-
the explosion ol (wo ni
marines,wo-year hiatus, was resumed2
The modern weapons program is not onlyarge number of scarce scientific/ technical personnel, but is also using industrial resources that are crucial for the gradual modernization of the Chinese economy. China has met some of its needs for high quality material by imports and by improvising with domestic materials. The military* electronics program, for instance, has done quite well despite heavy import requirements for raw materials such as mica, quartz, and high-purity copper. One of the most serious deficiencies is China's limited ability toroad range of alloy and special steels. Another deficiency is in such nonferrous refractory metals as molybdenum, tungsten, columbium, and beryllium.
The principal impact of support for the military program has been on the machine-building industry; many plants have shifted to custom production for the specialized equipment needed at such facilities as aircraft plants, nuclear reactors, and oil refineries. Compounding the problem has been the need for China to obtain from non-Soviet sources, or to produce itself, thecontrols, and other components that earlier were largely obtained from the Soviets. There have been growing purchases of precision and specialized types of machine took from the West. Although COCOM regulations have resulted in denials of some strategic machine tools to China, the embargo list of production equipment has been narrowed to coverew types of machine tools explicitly designed for military use.
The Chinese chemical industry appears better able to support an advanced weapons program than the metallurgical and machine-building industries. China either produces or is able to import most of the chemicals needed for its fissionable material and nuclear weapons programs, [
China also
lias tlie capaoiiity to produce aoimie-oaseo: so ltd propeiiants, liquid propellants such as liquid oxygen, and high-strength nitric acid in moderate quantities. Cnina produces adequate amounts of such liquid fuels as alcohol and kerosene, but only smalt amounts of such efficient fuels as hydrazine and the amines.
D. Foreign Trade and Aid
hina's foreign trade continuesecover from the slump that followed the Leap Forward and the split with the Soviets. Although over-all foreign trade is still below9 peak3 billion, it grew byercent during
nd probably grew al about thj raterade with the USSB fellercent4evel0 million but may have risen somewhatino-Japanese trade doubled4 and prohahly increased by someercentapan now rivals the USSR as Chinas principal trade partner. China's trade with the Free Worldecord highccounting for about two-thirds of China's total trade. Despite this growth. China's trade with the Free World continues to be hindered by Peking's limited export capabilities and reserves of foreign exchange.ong Kong Supplied China with0 million in foreign exchange, about one-half of total Chinese earnings of Free World currencies. Although the Chinese have engaged in extensive shopping tours in Western Europe and Japan, actual orders for industrial plants and machinery have thus far amounted toraction of earlier purchases from the Soviets.
Grain continues to dominate China's imports, amounting to about one-third of tlie total. Machinery imports have climbed5 million30 millionut are still far below the nearlyillionontracts for imports of chemical fertilizer0 millionpillionn order to pay for its imports, China isising volume of commodities. Textiles remain the single most important item, with exports0 millionxports of machinery and light industrial products, excluding textiles, were aboutercent higher4 thanineral exports, which couldood earner on the favorable international market, continue to lag.
Peking has continued its foreign aid program despite its economicCredits extended to underdeveloped countries of the Free World0 millionhough actual drawings wereillion. However, drawings on the Chinese aid program customarily lag. This is partly because aid extensions are announced for propaganda purposes long before there is any intention of implementing them, partly because the underdeveloped recipient coiuitries lack the capacity to absorb aid, partly because the Chinese material and equipment available for aid programs is not particularly desirable. Hence, Peking's aid program for the non-Communist countries remains relatively modest in terms of actual outlay, and as yet constitutesmall drain on the economy. Communist countries have been tlie main recipients of Chinese aid. with the largest shares going to North Vietnam, North Korea, and Albania.
E. Chinese Support to North Vietnam
military and economic aid to North Vietnam rose sharply inJuly, Cluna authorized additional grants of "equipment, whole sets ofand supplies in the national defense and economicnd asigned in mid-December will increase the aid figure further, byas yet unspecified. The increase in aid shipments, together withshipped through China, caused some congestion and delay on certainof China's rail system. North Vietnam's military production is quite
insignificant and practically all weapons and ammunition must be imported. We believe that Communist China furnishes most of the small arms and small arms ammunition and many of the trucks, while the USSR is supplying most of the other combat material. Wc believe that China has increased its shipments of construction materials, rails, trucks, and spare parts to replace losses suffered in air attacks against North Vietnam. In addition, China has sent additional technicians and construction engineers to aid the North Vietnamese.
increased tempo of the Vietnamese fighting has also resulted ineffort on the part of the Chinese lo enhance their own militarycapabilities in southern China. Construction of five new airfieldsof two others has been carried out under obviouslyailroad construction has focused on the effort to connectChina with the main Chinese rail net, thus eliminating the need tovia North Vietnam. This is the only major main line constructionin China's rail system. Despite difficult terrain necessitatingit is likely that Yunnan Province will be directly linked to thenetoad construction in Yunnan and Tibet has continued atpuce since. The Vietnam conflict has not yet addedto the Chinese economy.ustained increase in the level ofVietnam, if accompaniedomparable rise in Chinese assistance assignificant defensive measures within China itself, would add greatly toproblems,
II. PROBLEMS
A. The Food-Population Problem
The crisishowed China's leaders that the pressure ofon food supplies can shake the stability of the country and even threaten the regimes control. Despite subsequent improvement in food supplies, grain output over the past three years has averaged no better thanillion tons producedhen there wereillion fewer people to feed. If the population continues to grow at the estimated rate of about 2Vi percent ft year, grain output would have to be boosted overercent5 to regain the per capita level of grain available
The regime is no longer confident that the increasing demand can be met by increased production. It has swallowed its Marxist scruples and committed itselfrogram of birth control. Thus far the government has stressed indoctrination- also experimented with various economic and soiiul sanctions against large families. It has encouraged tale marriage, the spacing of births through the use of contraceptives or abortion, and sterilization after the birth of three children. Peking has shown strong interest In newsuch as oral contraceptives and intra-uterine devices and is clearly seeking an inexpensive, convenient technique that will depend as little as possible on individual motivation.
This present program is not likely to have any near-term effect on the birth rate. Traditional attitudes are changing in urban areas among the younger generation, butittle evidence of progress in the rural areas, which include aboutercent of tbe population. The peasants are conservative in family matters,ecade or two will probably elapse before tlie campaign has any significant effect On tbe growth of the rural population. Even if the berth control program achieves some success over the neat decade or two. further declines in mortality wiD exert an upward pressure on die rate of population growth. Even the new contraceptive techniques offer no solution unless Peking can at the same time reorient individualrocess that in all other countries has depended on the remolding forces of urbanization andstill remote prospects for China. Outright coercion also seems unlikely; the practical difficulties ofrogram would he enormous, and Peking seems to have amcludcd that there are limits to how far it can safely push the poopla
We believe ihnt prospects for sharp improvements in food production arc remote. There arc unlikely to be further substantial increases in thoof subsidiary foods from the private plots, because tho regime shows no inteotiors ol shifting additional collective land into private cultivation The food necessary to keep pace with population growth will therefore have to be obtained from increasing the output of grain on collective land Having already acknowledged that growth in food production will beptndent on increased yields and not on expansion of acreage, Peking now faces the hard and rxpensive task of boosting yields through rrradernization of agricultural techniques.
Although the Cbinese sec the need for technological Innovations Init is doubtful that they fully appreciate the tremendoui outlays of materials and capital that will be requiredorssi<lerahle period of time. Slight Increases in yields can be obtained from better management, improved seed varieties, and reestablishment of crop rotation practices. Peking hasextensive water conservancy and irrigationut significantof these programs is becoming increasingly costly for the returns involved. Hence, further major Increases in output svill require Increased application of chemical fcrtili/.erv. Thb is probably the mostUse mostrequired for sustained increase in grain output. In spite of the priority given fertilizer production, the program remains grossly inadequate to support the large expansion in grain yields lhat will lieethat0 million tons of chemical fertilizer would be required to regain tlie per capita level of grain availableven assuming considerable success In the berth control program This projected requirement for fertilizer faimes current production and would require large diversions from other
" Use of chemical brrulum at QuBa, as compared te Taiwan and Japan, to shown by the foflnwmr, fixoret (kOofrim* per planted htetare);
w
Tawan
programs. We see no iivdication that China's leaders mean to embarkrogram of this magnitude.
Moreover, tlw experience of such countries as japan and Taiwanthat fertilizer by itself will notanacea for China's agricultural problems. If increased supplies of chemical fertilizers are to yield maximum results, new varieties of fertilizer-responsive seed must be used, together with more pesticides; better use must be made of available water supplies; andagricultural practices must improve. Japan and Taiwan needed over SO years to build up the scientific foundation for their present high productivity in agrlculhire. Although the Chinese have recognized the need to modernize their practices, the long, tedious agricultural extension work necessary for encouraging scientific fanning is often shunted aside by the regime in its obsession with quick, inexpensive palliatives.
Military conquest for the primary purpose of acquiring nearby gramlands docs not offer an attractive alternative. The only area on China's peripheryegular surplus is the Southeast Asian peninsula; in recent years this surplus has been less than five million tons, whichmaller amount than China now buys abroad.
Even unusually good weather would bring no long-term benefit on yields. If the weatlier were comparable to that, however, Ihe regime would be exposedepetition of the extensive malnutrition that occurred at that time. As in this earlier food crisis, Peking wouldemoralized population whose energies were inadequate for normal work requirements and whose discipline would be eroded by the threat of starvation. As the Chinesecaptured in Tibet showed so clearly,ven the military could not be shielded from Ihe general unrest. Although outbreaks of violence during this period were not widespread, they were sufficiently serious to lead Peking to make unprecedented concessions to private initiative.
B. Agricultural Support for Economic Growth
current lag in agriculture has other equally serious implicationsgrowth. The depressed agricultural sector currently offersfunds for domestic investment nor sufficient export earnings toImports of capital equipment. The loss in export earnings isin the foodstuffs trade, in which China0 milliony contrast,4 it had towing of overillion, Thisajor factor in the fallof machinery and equipment from aboutillion9ith only limited foreignillion at the end ofimports of industrialmust be paid for by current exports. Credits from the Free Worldthis problem but are not likely to be available in large amounts or
C. Impact of the Military Program on the Economy
s the Chinese move into quantity production and deployment of modern weapons, they will find that direct economic costs will increase sharply, even though they can avoid some expense by relying on research and development work done by others. Moreover, they will find that many of the weapons which the Soviet-supplied plants were designed to produce have become outdated. As they move further away from the time wlten they received Soviet support and must depend more on original research and development, progress will be slower and more expensive. The Chinese will also discover what far wealthier and more highly developed countries have learned: that progress in modem weaponry almost invariably isteeply rising cost curve and requires ever-broader scientific and industrial bases.
he main adverse impact of the military programs on the economy is that tltey use high-quality manpower, equipment, and materials that might otherwise foster economic growth. While Chinas resources of technical manpower arc sufficient for progress toward relatively narrow objectives, the assignmentarge proportion of these resources to military research and development luis almost certainly retarded the introduction of new technology in industry.the regime probably will remain willing toigh price for military research and production unless and until forced by such pressing problems as food production to direct more of its economic energies elsewhere.
III. THE OUTLOOK
In short, the intensifying food/population problem will he increasingly complicated by the diversion of talent and resources, notahly to military programs. This circumstance will confront Pekingcries of progressively morechoices. The present Chinese leaders show little mebnation to scale down their ambitions for modern military power or to make significant doctrinalin favor of material Incentives and economic efficiency. Theof this competition for resources in China's sluggish and non-resilientseems likely gradually to undermine economic stability and could eventually bring Chinaondition of crisis.
We do not mean to imply that China will not continue toangerous and growing military threat. In the face ofritical food ernergency, the present Chinese leaders would probably make only grudging and piecemeal cuts in their military program. Wc believe, however, that some future Chinese leadership will be forced by the persistent Malfhusian pressures to aconcentration on China's economic problems.
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