Created: 1/28/1964

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Economic Prospects for Communist China




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Th* Centralgency ondtnl*Ssa*m* ofgoiiiottora ofolrmy, in* Novy, Di* AVand NSA.




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CM oi Nrolo-Wr- of It* Nov, A: MI ot Staff,tSAI Ulrwiot of ih* Natrona!Agency


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Economic Prospects for Communist China








a. Agrlculturt




Appraisal of Bccrvonuc lntarrraUoo on Cornrnunlal China MAPS

Figure I. Population and AdminUtraUregure 1 Land uat and Ajrteoitura] Areaa



To assess the problems and performance of Communist China's economy, and Its prospects over the next few years.


Firm Information on Communist China remains so sparse that precise economic analysis is not possible and even broadare subject to error. The Estimate should be read In the light of this general caution.rief description of our information on the Chinese Communist economy.


Chinese economy has recovered somewhat fromlow, but Its prospects are considerably worse thanAny Chinese government would face monumentalproblems resulting from the huge and growingInadequate arable land, and the low level ofproblems of the Chinese Communists are compoundedown past errors, their Ideological compulsions, thethe Soviet Union, and extreme nationalism. l)

1 In tne roJJowlrw dUcuiMon ve ue iw asbese ini fee comparison becauseu she ovc or the Great leap forward, and because the per capita grainIn that yearrrel ot production Out presided tanners and factory workers an Bdseeele diet, made grain Imports unnecessary, and permitted the export ol medest amounts ol grain and other agricultural products.

output3 was no greater thanwere someillion fewer people to feed. Peiping'sand theecline of Soviet supporthurt the industrial sector; total output3


remains far below9ew priority Industries, such as those supporting agriculture and tbe petroleum industry, are operating at close to capacity, but many suffer from unbalanced development, technological deficiencies, and shortages of parts and raw materials. Foreign trade is at the lowest pointhat with the Soviet Union has declined more thanercentnd China hasubstantial Importer of food from the Free World. )

believe that the Chinese Communists will seekadditional credits and technical assistance from thebut Ln relatively modest amounts. We do notdiplomatic recognition by France and other Freewill alter this picture substantially

believe that agricultural production ln the nextis unlikely to grow much faster than the population,Industry will growate well below what wasthe. The Chinese are likely to continue toattention to agriculture ln both their domestic andbut will probably not divert enough resourcesand the arms program to put agriculture on aWe believe that the Chinese win be anxious toa policy favoring industrial development, and will bedo so prematurely. We believe that difficulties willthe economy, within the leadership, and between thethe people. We thus do not believe that China can becomeindustrial state for many years. China's directto the West will remain limited, but Chinaajor force in Asia,rucial menace to itsand to Western Internets In the area. )



Communist Chins's economic problems are similar to those ot many other underdeveloped states butastly larger scale. Chinauge aad rapidly growing population, insufficient arable land,ow level ot technology. Its output barely supports consumption atlevels, and there is little surplus to provide Hie capital resources needed for economic growth. Any Chinese government would have great difficulty in coping with these problems. However, the Communist regime's Insistent ambition rapidly toajor Industrial-military power, to transform Chinese society In tbe Marxist image, and to play an Influential international role has placed staggering burdens on the economy. This has led to the present disorientation of the Chinese economy and to disarray in the regime's policies.

In the first tew years after the civil warhe Chinese economy benefited from the establishmententral government controlling all mainland China, and from the considerable enthusiasmar-weary population yearningnewith Soviet assistancegrowth In the economy was achieved, much of It from making belter use of existing capacity. Then, dissatisfied with tho pace of the Pint Fire-Year, underestimating the importance of Soviet assistance, and carried away by their own theories, the Chinese leaders launched their country Into the disastrous Great Leap Forward-SlmulUsneously, they began the challenge to the policies and leadership of Mcecow which led, among other things, to the withdrawal ofall Soviet technicians from Chinahen the burn pec year8 was followed by poor crop years and hastily conceived and uncoordinated policies produced chaos In Industry, the formula for economic disaster was complete.

Agriculture has recovered somewhat from the worst0hen the per capita diet in some months probably fellalories per day. Moreover, Industrial capacity has grown in the last five years, the transportation system Is greatly Improved, and the supply of trained tadustrial workers Is larger. Debts to the Soviet Union have nearly been paid off, and the control system of the Chinese Communist Party remains intact. On the other hand, China hasa net Importer of grain and has possibly someillion more people to feed. Economic collaboration with the Soviet Union has come to an end. no firm economic plans have been formulated, and thesector Is In wide disarray. The regime can no longer countositive response to new programs from the population, or even from the cadres. On balance, the prospects for the Chinese economy are considerably worse4 than they were


Shocked by tbe economic crisis of Ihe yeanhinas leaders have made important retiestt from previous poUctai. They are row giving more attention to agriculture and hare postponed their attemptsapid buildup of Industry. Thar hare backed any from mass conierlpUon of Labor tor large icale construction projects. They have In effect ended thend have even allowed eone private Initiative In the production of food. Theseoupled with large imports of grain, enabled the economy to survive the nearly calamitous rood shortage*1 and to make modest gaimthe last two years,

eaders have not yetoroprehsnalve, long-range economk- plan, but they have drawn up general guidelines for China, ginng higher priority to agriculture. establtthUig more reaUsUcgoals, and emphasizing quality us well as quantity. The regime is seeking more accurate statistical reporting and tighter control ot Industry, while permitting greater decentralization ofoil revealing example of tho leaders' willingness to re-examine and revise their policies Is their recent reinstatementirth control campaign.

t. Political and toetai factors sharply limit both the choices ofpolicy open to China's leaden and the effectiveness of any methodsheU Ideology keeps them committee* to coUectinst principles. Tbey still maintain tbat communes wBl help to solve Chinasthough In fact they are relyingystem of small collectives. They give material Incentives only grudgingly. They continue to divert the time and energy ot tbe writers and the peasants from production to ideological IndoctHriatlon.

Economic advance ts also hindered by the assertive nationalism of Pelplng'i leaden and their ambitions lo makereat world power.f Moscow has robbed China of aWsMMssa1 as-strtancs which, given their xanophoeta. Is Dot likely to be replaced from any other foreign quarter on anything luce the same seala OrsricUosa naUoriarlstlc alms have overridden economic rationality, especially as concerns Pel ping's ambitious advanced weapons program.

The leaders'obilise China's vast human resourcee has been mode difficult by past abuse. They are seeking to overcame public and parly apathy by greater appeals to nationalist and antl-Sovlet sen Omen la. by assigning veteran rural cadres to production units with which they have special ties of locality or Irmshlp, and by beading bock mass campaigns in cerisun Instances when they grossly interfere with work to be done. It ts clear, nonetheless, that Pelping win face growing problems Ln attempting to impose Its willnspiritedand the party rank and file.

fl. The regime must also cope with sharply increasedunderemployment. Industry cutbacks have putorkers out of Jrbs tn the last three years. Theof many o* the surplus workers on 'arms hasproblem or surplus labor in the countryside; the peasantsInflux of urban workers, and many of those sent to theto the cities, despite regime

serious problem for the regime arises from severein high school and college enrollment. This was intendedhigh standards ot Instruction, but the constriction ofcan be expected to have seriousivepeople have been dumped Into the labor market in tbe lastbefore their education could be completed; they not only addalready severe dislocations but advertise the failure of earlierfor education as the key to progress. The regime Is nowconcern for growing cynicism among tbe youth.

A. Agriculture

grain production3 was probablyapproximately the same as2 andhe dietover the preceding year both qualitatively andreflecting the fairly substantial recovery hihat of 1M1 and the continuing Increase In the production ofand other subsidiary foods on private plots.3 theto increase the acreage and yields of cotton, the2 had fallen to about half thatowever, wethat bad weather kept the increase In cotton output to lesspercent, and total output remained far below7 level Asof the3 harvests, consumption levelsmprove.

IS. The regime appears to have concluded that China's agricultural problems cannot be solved by additional labor or expansion of farm land, but will require technical Improvements which will take many years and substantial capital Investment, especially for chemical fertilisers.does not look for large gains from elaborate mechanization and Is stressing rural electrification and the manufacture of animal drawn machinery, hand tools, and water pumps. It recognizes the need for Increased Investment in water conservation, flood control, andand is already devoting corisUerable effort to repairing andIrrigation faculties In areas where potential yield is highest. Plans to improve seeds and land management, though not requiring large amounts of capital, will be effective only In the longer term.

hina's leaders have apparently decided that chemical fertilizer must be Um primary ingredient of any agricultural expansion, and

recognise that It will be expensive. Tbe Chlnete haterogram to Increase the supply ot domes!k: fertiliser; among other things they are conarge number if machine building plant* to support theI lew industry. TJocpasUc production of chemical fertiliserssharply fromillion tons3 to an altUfne high ofillionnillion tons was Imported. These quantities are still small in relation to China's vast needs. The average quantity of chemical ferUllser applied per hectare Is about five percent of that in Taiwan, and some two to three percent of that In Japan. The expanded use of chemical fertiliser wUI require tbe Chinese to Improve their cultivation practices, make better use of arall-able water, and produce more pesticides snd better varieties of seed.

he problem of the food-population balance ts also being atttacked by the retnitltutkmirth control program. The program has been pot into effect slowly and carefully so far, but It may be expanded in the springs an experiment. maternUy benefits and scene child eJtowances have been withdrawnew dues. Though abortion and sterilization are openly advocated, the medical means and qualified specialists forarge-scale program are not now available. Contraceptive methods advocated by the government may hare found some acceptance In the cities, but the difficulties of Indoctrinating the rural population effectively are great Birth control is likely to be of little help toward roeeting China's food-popuUUon problem In the near future.

t wlU te extremely difficult for Peiping to Improve the food population balance, oven If the Chinese population growth does not accelerate over Its present annual rate of about two percent To raise the per capita production of gram to7 levelhe Chinese would bare to increase th/'r output of grain by almost five percent yearly.performance we believe unlikely. Iranthree percent annualwould restore7 level of per capitaeed sustained high Investments and sound programs In support of agriculture,

B. kscWstry

IS. Communist China's Industry has also been hit hard; Industrial production, though somewhatemains far beloweak. Shifting priorities nave reduced the demand for many bask; Industrial commodities, and have left considerable rapacity Idle. In otheroor planntag has caused an uneven development of capacity among various stages of production. Some plants are not In operation or are operating below capacity because of the absence of technical assistance and parts once supplied by the USSR, and others are sufferingack of raw materials.

On the otherew industries are receiving special attention and are on the whole operating at rates much closer to capacity.modem mining, timber, and the industries supporting agriculture fall into this category, The Chinese are working hard to relieve their dependence on outside sources (or petroleum. We estimate that the total production of crude3 wasillion tons and of productsillionhighest levels yet reached in China, Construction at refineries, oil flelos, and storage facilities tends tothe high priority given to this industry. Though no acuteare apparent, the petroleum situation Is light, and China remains dependent upon the Soviet Union for imports of higlily refined petroleum products.

Steel Is an example of an industry which is suffering fromdevelopment. The total production of crude steel3 was approximately the same asillion tons.illion tons of capacity lay idle becauseack ol rolling facilities and reduced demand by consumers of steel, particularly In construction and machine building. Alloy steel, on the other hand, Is receiving high priority, and production is probably at rates close to capacity.

The production ot equipment for military use was hard hit by the withdrawal of Soviet technicians1 It has the highest priority, but the manufacture of the more sophisticated military Items Is being held backack of technical competence and by shortages of key imported components. Electronics production is expanding, with the major share going to the military. There has probably been some Increase ln production of land weapons and ammunition over the low levels. The prcductkWassembry of combat aircraft and large naval vessels has stopped. Construction for the advancedprogram, which was virtually stalled after the Soviet withdrawal, has picked up

Total production In light industry3 was less thanargely because of shortages of raw materials. This was most striking tn the Industries using agricultural raw materials; for example, two-thirds of cotton textile capacity is Idle. Production of consumer goods from Industrial raw materials has suffered less from such shortages and stands aboutercent shore7 level; these products, however, comprise onlyhird of the total output of light industry.

Si, The shifting pattern of demand and priorities hasarticular impact on cement, electric power, and machine building. At leastercent of cement capacity Is probably Idle, because of the low level ofhina. There waslight increase in electiic power production2ut power plants are. on the aver-

'Annhina's military wiaDIishment la oheduled lor

ige, operating at only aboutercent of normal raise because otdemand. Production In the raachma-buUding sector has aufTe.ack ot spare parts and the absence ot Sonet technical support, and Is far below peak levels

he regime seems to recognize thai any attempt lo resume and sustain productionider front must rest upon an improvement In technology. China probably has moretesonably wen trained engineers,holly inadequate number of scientists and engineers capable of designing or adapting Industrial plants- Without foreign training and assistance, It will lake the Chinese many years to remedy this deficiency. The Chinese are permitting many more of their scientist! and technicians to attend MternaUonal scientificbutew hundred Chinese students are still studying abroad, almost all ln the Soviet Union.

C. Foreign Trade

ommunisl Chinas economic difficulties are clearly reflected In lis foreign trade, which now stands at the lowest level* The composition of China's trade has also shifted radically. Since lMt China has changedet exporter of foodubstantial net Importer, and2 machinery Imports had dwindled from one-half of total imports to only one-tenth. Trade with the Soviet Bloc bas fallen by more thanercent

China will almost certainly wish to Increase Its imports ofequipment, and raw materials over the next few years It Is unlikely to seek or obtain substantial Imports from the USSR. Some may come from other mesnbers of the Bloc- But into Import these Items in quantity China will bars to look to the Free World. The Chinese have sharply Increased their efforts to obtain technical data and market Information in the West, and have exhibited conslrlsrah'e Interest in expanded Imports of capital goods In recent months, they have bought equipment on rwdliim-term credits, particularly chemicalil refining equipment.

Chinas ability to Increase Imports from the Free World Is sharply limited by Its foreign exchange position. Reserves of Free Worldat the end of the year were probably0 million. China's gold holdings are about the same stsc China will nod It ctlffkrult to Increase its foreign earnings The foodstuffs for which It could most readily find foreign markets are In general those which will be least available for export. Its textile and mineral exports, though more plentiful, will not be easy to sell in highly competitive world markets.

A number of Free World countries now appear eager to selland equipment to Communist China on credit China owes



itfi mllUori lo Western suppliers lor pail grain purchasca. This debt is not large In relation to China's exports, and Its record ofhas been good. The Soviet debt has been sharply reduced, and Is scheduled to be folly repaidnless there are some good bar-vests tr the next few years, however, China may be forced to continue substantial food Imports. This could Impose some Units on Western or Chlr.eae wilhngneaa lo undertake capital equipment tran-aeUona on credit

ST. W*hat tbe Chinese Corcrr.urJUi will seek and obtain additional credits and technical assistance from Western Europe and Japan, but In relatively modest amount* China's weak foreignposition and its low earning capacity reduce its attractivenessredit customer. For Its part, China would be reluctant to go heavily into debt lo the Free World, to receive many foreign technicians, or, more generally, to open up Its economy lo Western influencearge scale. Diplomatic recognition by France and other Westernwill laclllUts commercial dealings with China, bul we do notIt will alter Uikt picture substantially.

SB Over the past decade. China's foreign aid expenditures haveroughly HOC million annually. Ninety percent of Uil* amount goes to Bice countries, principally Albania, North Ko:ca and North Vietnam This level Is not likely to decline significantly In view offoreign Bid ccromltmenta It could mcreeee as the result ofChines* competition wtth the GSSR far mBuenee in underdeveloped countries.


ince the collapse of the Great Leap Forward, the economy has operated on annual plans aimed at redressing past excesses andtbe economy lo an even keel. We doubt that the Chinesewill long remain content with operatingear to year basis. As soon as they consider that the worst Is over and conditions are appropriate, we believe that they will come upew plan covering several yean and providing for greater Investments.nd again, the regime Indicated that condition* were not ripe forlan. We have no clear evidence as toong-range plan will emerge and no assurance as to tbe economic policies It will reflect

SO. Conceivably, the Chinese Communist regime might adopt far harsher techniques of austerity and pressure In an effort to squeeze out more quickly the re-sources needed for ecorximlc growth. Themust recognise, however, tha: there Is very Uttle more which can be extracted from the Chinese population by measures short of those which would cause millions to starve. The regime would bo concerned

thatourse might arouse sufficient dJssktcnce to threaten Its control at home. Its position ln the Communist world, and Its Image abroad.

e areir certain that the present Chinese leaders will cot adopt the kind of policies which we believe would give China the lest chance roe sustained economic growth. One of these would be an allocation of resources which subordinated all other programs to the development of agriculturereater extent than has been done over the past three years. Another would be the adoption of furtherto maximise Incentives and productivity, such as furtherof private plots, the expansion of private trade, and restoration of private small-scale enterprise. Thr Chinese would also have to adopt foreign policies which would maximise Chinas ability to Importand technical assistance from abroad. We do not believe that the policies described above wilt be adopted, because of the intensely nationalistic and Marxist outlook of the Chinese leaders and the dangers ihey would see ln permitting the degree of relaxation required.

The importation of chemical fertilizer and fertiliser plants.igorous domestic program to boost agriculture and with prudent administrative policies, would help agriculture recover and In due course contribute once again to industrial growth. The Chinese Communists could probably secure, and And politically acceptable, the relatively rnodest foreign credits and the relatively few foreignrequired. This relatively modest program for giving priority to agriculture would nonetheless require that the Chinese postpone any major modernisation of industry, since most ofwn resources, as well us Ihe limited foreign assistance probably available, would have to be concentrated In the agricultural sector. Moreover, It wouldtake two or three years forrogram to show results, and barring unexpected good tuck, at least as many more before China could7 per capita levels of agricultural output.

If, by contrast, primary emphasis were put on Industry, tha Chinese would need extensive help In technology, capital equipment, and raw materials from abroad. For the first year or two, Ihe principal requirement wouldubstantial improvement in the supply ofand of Industrial and agricultural raw materials; subsequently, after idle capacity had been put back to work, there wouldeed for new investment in capital equipment. The required imports would probably be too costly for China, and Peiping would be roost reluctant to accept the large number of foreign technicians needed. Moreover, the neglect of agriculture would require the import of gram in amounts beyond China's ability to finance, and there wouldreat risk ot food shortages more serious than those.

he above considerations suggest that the Chinese Communists have little room for maneuver in their economic policy, In part becauseaucity of means, bat also because of their own political and Ideological compulsions. Many of their difficulties would be cased by an end to the Sino-Soviet conflict, orroad expansion of economicwith the Free World. Neither of these can be wholly excluded, but both seem unlikely.

believe that China's leaders will not commit themselves ourse which goes all out for either industry or agriculture. They

will probably try to give agriculture and the Industries supportingenough resources toepetition ot the food exists, but will stop short ol concentrating resources to the extent we believe necessary to put agricultureound footing. Commercial relations with the Free World will probably be expanded considerably, but they will not be Intimate orarge scale. Peiping will almost certainly not relinquish Its armaments program and will probablyto spend considerable effort and money in trying to overcome industrial imbalances and technological shortcomings. We believe that the Chinese will be anxious to revertolicy favoring industrial development and will be prone to do so prematurely.

hina's economic prospects over the next few years areIf the regime pursues sensible economic policies, progress willif only because of the lead times required to mount majoror industrial programs. The weather will be more importantnext few years than anything the Chinese can do. Two orof good harvests would ease the situation somewhat,to use its excess capacity in light Industry, and freeingfor the purchase of capital eqiupment. We believe,agricultural production Is unlikely to grow much faster thanand that Industry will growate well below thebefore tbe Great Leap Forward. We think that theremain sluggish, and that this will entail accumulatingand psychological problems.

over the rate and method of economic advance has haproduced substantial differences within the Chineseradicals, who launched the Leap Forward and thend maintained the programs against major oppositionhave not appeared tooss of influence or positionabandoned these policiesifferences over economicstill exist, although the identities of both issues andare obscure. Such differences may sharpen as theto formulate comprehensive development policies to meeteconomic problems, and as Urns takes Its toll of thebut aging Chinese leadership.

We ere unable to astesa China's long-term economic pros pec is withondition we almost certainly share with Communistleaders thernselves. Under favorable circtunstances, China could realise modest recovery and economic growth, li circumstances are not favorable, we foresee an increasingly Meat: future. China's problems are unprecedented ln character and magnitude. The nearestIs the experience of theeneration ago, yet China's starting point Is poorer and its dlfucultles greater. We rjelleve that, In strictly economic terms, mainland China bas the potential foreccTwraic growth, but the political and social pre-dispoaltlons of the Chinese Communist leadership are such that this potential la unlikely to develop lor the foreeeeable future.

There Isirect relationship, however, between China'sfate and its position in the world. Realisation of its latentwould magnify its Importance. The more likely darker future means that China will notodern Industrial state for many years. It also means that China's direct military threat to the West will be limited, and that China's Image and example will not be an attractive one. This does not mean, however, that China's afloance win not grow in the world, or that its overshadowing pretence will notrucial menace to Its Asian neighbors and to Western Interests ln



he Information available for art appraisal of Iha Chineseeconomy La fragmentary, uneven in coverage, and uncertain as to reliability.

e have reasonably reliable mlormaUon on: (a) the location, status, and, in somehe rate of operation of many large and rnedlurc-slse Industrial installations; <b) Chinese trade wtth both the Bloc and the West, based on statistics of the countries which hat exports and Imports by country and type of product; (c) the general course of economic plans and policies as revealed In announcements by the Chinese Cornmunlst leadership; and (d) the general history of Soviet support to the iconomic development of China based on reports coo-cerrang the Sino-Soviet dispute.

he following Information Is uncertain and spotty; <a| current levels of production and consumption of grain and other major agricultural commodities, (b> current capacity and rates ofajor Industrie; (c) current levels of operation of the transTOrtation system and the condition of Its equiranent; and (d) the site and rat* of growth

ardly any reliable informatioo Is available on: (a) the statistical dau avails, to the leadership and the specific nurrsertcel targets for the economy; (b) major alternative eeoaanle policies as seen by tbe leadership group, and divisions within the leadership as to the wisdom of these policies; (c) reserve stocks of grain, petroleum, and othercommodities; and (d> the specific magnitude of the economic resources devoted to Investment and to defense.




I.ocumonlby the Centralce Agency.<epy i' lor tht information ond vie ol tht fpeiptont and ol ponom under his fjrndlciiond to know boi'n. Additional eiientiol dincminolion evoy be ovthomed by thoofficial) within their reipodivo departmcnti;

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