COMMUNIST CHINA: ECONOMIC PERFORMANCE IN 1962

Created: 12/4/1962

OCR scan of the original document, errors are possible

MEMORANDUM FOR: Mr. Paul H. Nitze

. ' Assistant Secretary of Defense for International Security Affairs Department of Defense

China: Economic

Performance2

Attached is an analysis of Communistperformance in Althoughome slight improvements in theand in certain (primarily light) industries, clear that China is still far from pulling outeconomic depression. Prospects forbe made even more remote if the Free an imbargoesult of the

conflict, for example) and remoter still should the USSR and the European satellites break off economic relations with Peiping.

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Current Support Brief

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communist china: economic performance in2

CENTRAL INTELLIGENCE AGENCY Office of Research and Reports

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COMMUNIST CHINA: ECONOMIC PERFORMANCE IN 2

To judge from recent statements from Peiping, the Chineseleaders believe that, as the resultlight improvement in2 harvest and some limited achievements in industry, the regime has passed the point of most serious economic difficulties and that the road ahead, although difficult, should bring continued improvement.

Information, either officially released or independently acquired, continues to be extremely sparse. Official claims, however, note advances in some priority areas of production; |

| reports indicate slight improvements in the supply of some foods and other "consumer goods; and weather data suggest slightly better growing conditions during the year for the countryhole. These bits and pieces, together with Peiping's more optimistic outlook since September, indicate moderate improvement in an extremely difficult situation.Even with limited improvementerious problems still remain in every major sector of an economy that may be little more productive than itears ago.

Continued Moderate Policies

With the Chinese Communist agricultural and industrial failures of the past few years, to which the Sino-Soviet dispute has contributed, Peiping's hopes to achieve world power status in this decade have vanished. The traditional Communist approach of all-out emphasis on expansion of heavy industry ran counter to the realities of the domestic situation and had to be set aside, at least temporarily. Faced with basic problems of overpopulation, backwardness in agriculture,ow level ofin industry, the Chinese Communist leaders were forced1 to shift priority emphasis to stimulating production in agriculture,supporting agriculture, and light industry.

The public rationale offered by the regime for the moderate policies adopted1 was that these policies were expedient responses Co natural disasters. ears, it was asserted. Communist China would again "leapate1 the tone of discussion changed. some elements of expediency persisted, Peiping began to assert that moderate policies would be validong period of time. Economic matters not usually questioned openly in China, such as the role of profit incentives and criteria for making investment decisions, were debated in newspapers following the National Peoples Congress inne article went so far as to justify the policy of downgrading heavyby arguing that investment was not an end in itself and that in any case there was no point in producing investment goods for industries that had insufficient raw materials and technology to expand production.

The communique issued pertaining toh Plenum of the 8th Party Congress, which met secretly in Peipingew, more disciplined phase in economic policies. The Party appears to haveo retain the concepts "leap forward" and "communes" at least as slogans if not as operative guides too permit no further retreat in collectivization of agriculture, and,o restrict: private "capitalist" tendencies ino retain recent emphasis on more conservative management policies for industry, policies which are similar to those that prevailed

The future trend in economic policies is obscure and represents an important element in the uncertainty of future economic developments. There are strong radical as well as moderate elements in the Party leadership, and although both factions seem agreed that "leap forward" methods were wasteful, they can be expected to disagree on other matters. The radicals probably would like to revert to Maoist hardline policies, once agricultural conditions permit. The moderates, however, have indicated that they would like torendermissive, market type of socialism that would be to the right of current Soviet practice.

Slight Increase in Agricultural Production and in Food Supply

The preliminary assessment of the agricultural situation inChina2 islight increase in production of grain above

eoihr

Che abnormally low levels0 Production of grain2 may be no higher thanillion metric tons (mt) harvestedear in which the populationercent smaller. Estimates ofare based primarily on weather data, although the probability oflarger acreage of fall grain crops and slightly increased supplies of chemical fertilizer also have been taken into consideration. The level of grain imports by China inonsumption year {July-June) will provide an additional indication of the actual size of the harvesthus far, contracts have been signed for deliverymaller quantity of grain inonsumption year than in the previous consumption year, but additional contracts probably will be signed in theonths for delivery before

The further decentralization of authority within the collective farm system2he production team of aboutouseholds is now the basic unit for carrying on agricultural activitiesrobably had Uttle effect on the output of rice, wheat, and miscellaneous grains. by the regime of work on private plots and of trade in open markets, however, is believed to have resultedubstantial increase in theof vegetables, fruits, and sweet potatoes in rural and urban areas.

The assessment of the harvest2 implies that for the fourth consecutive year the food situation will be stringent. The average diet2 probably increased slightly above thatargely as the result of increased production on private plots. The food situationwill remain critical throughout the winter, althoughavailability of such subsidiary foods as vegetables and sweet potatoes may make malnutrition less serious than it was in the previous year.

Problems of Population and Unemployment

Previous estimates of the population of Communist China for the years8 recently have been replaced by the following figures:

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o

Estimated Midyear Population (Millions)

2

By comparison the previously estimated figure2illion. The new estimates were made on the assumption that the death ratesharply8 because of nutritional disorders, weakening resistance to disease,oss of energy resulting from acute shortages of food.

In spiteower rate of population growthboutercent per yeareiping is still faced with the problems of food supply and The inability of the state to maintain full employment was tacitly acknowledged In both city and country, unemployed and underemployed persons were encouraged to work private garden plots, produce handicraft articles, and trade their private produce in rural and urban markets. The resurgence of Chinese Communist propaganda on birth control since2 suggests Peiping's open recognition of the need to control the growth of population.

Reshaping of Industry

2 the Chinese Communists seem to be having limited success in carrying out their policy of reshaping industry. Ino, Vice Premier and Chairman of the State Economic Commission, set forth the following major industrial goals for the year, goals that were reaffirmed at the National Peoples Congress in2 and discussed more fully in various newspaper and periodical articles throughout the year:ncreased production of chemical fertilizer and farm machinery, especially medium and small farmof production of light industry and handicrafts, especially

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production of those goods using industrial products as raw mateontinued improvement in and additions to productive capacity in the mining and timber industries and increased production in theseevelopment of short-distancein the operational efficiency of industrial plants throughof targets for quality improvement, cost reduction, andin output per worker and through further improvement in management and in the care and repair of equipment;urther reduction in the scope of capital construction. Apparently the Chinese have achieved limited success in carrying out this policy: it is believed that there have been increases in output of priority goods such as chemical fertilizer, some farm implements, and many types of light industrial and handicraft products; that production of heavy industrial products forpurposes has declined; that output per employed worker hassomewhat (in large part, simply by laying off excess labor and thereby adding to the problem ofhat technical and managerial personnel have been accorded greater prestige andand that problems of quality, cost, and maintenance of equipment have been eased (but still persist as obstacles to industrial efforts).

The limited evidence available suggests that the level of totalproduction2 may be no higher than that7 but that the composition of output has changed substantially. Production ofchemicals, some farm equipment and tools, and light industrial products made of industrial raw materials is considerably above the levelut production of the machine building, paper, and textilehas dropped below that Production of steel and electric power may be at roughly the level

A major economic objective2 was to raise the level oftechnology in order toase capable of supporting theof military industries and agricultural chemical industries. It is not known what technological progress was made2 in the type of industries needed to support an advanced weapons program, but increases .in output of chemical fertilizer and insecticides suggest improved domestic technical ability to operate plants in the chemical industry.

CIA/RRUL

Unused industrial capacity now exists in several key industries in Communist China, including the steel, electric power, machine building, and textile industries, as plants either have reduced the number of hours of operation or have closed down completely. In industries supporting agriculture, however, especially chemicals, additions to plant capacity and to the managerial and technical force of the plants are sorely needed.

Petroleum Supply Situation

It is estimated that the total of petroleum products available inChina2 is somewhat lower than the total availablehe last year for which data were published, but supplies apparently have been adequate to meet the essential needs of both the civilian and military consumers. It is believed that domestic production of petroleum products2 was at roughly the same level as There are no known technical or other special difficulties to which the domestic industry might have been subjectnd the eight major refineries, which usesimple processes, are believed to haveigh level of operation throughout the year. The major sources of crude oil continue to be the oilfields at Yu-men, Karamai, and the Tsaidam Basin and the shale oil plants at Fushun.

Imports of petroleum products are estimated to have declined fromillion mt1 toillion mtith the sharpesttaking place in imports of motor gasolineillion mt1 toillion mt The brunt of the decline in imports of motor gasoline is believed to have been absorbed by the civilian motor transport industry rather than by the military, whose requirementslate2 because of military operations in Tibet. Imports of aviation fuels and high-quality lubricants2 continued at the level Communist China is totally dependent on imports for theseandigh priority to sustaining the supply of the products.

Importance of Foreign ^rade

Toe economic and political difficulties with which Communist China now finds itself confronted havearked effect on its foreign trade.

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During the past few years, the reduction in agricultural productsfor export, the deterioration in Sino-Soviet relations, and thepolicy in industry have combined to lower the total volume of trade and to alter sharply its direction and composition. Total trade (imports plus exports)1 amounted toillionomparedillion9illion0nd the figure2 may beercent lower than that Facedungry populationtumbling economy, the regime is nowimport priorities on foodstuffs and raw materials, whereasof Bloc-supplied investment goods have been drastically reduced.mports from the Soviet Bloc have represented less than one-half of the totalituation that would have been almosta few years earlier. This changing import picture isin Tablend the extent to which certain major importednow contribute to the economy is shown in Table 2.

Although Communist China is less dependent now than it was0 on imports from abroad of machinery, equipment, and technical assistance, there are some vulnerable spots in the Chinese economy that would .give .the.regime considerable difficulty if it should be denied access to foreign markets. It has been suggested, for example, that the world reaction to the Sino-Indian conflict could result in some form of Free World embargo against China. It also has been suggested that thedeterioration in Sino-Soviet relations could resultreak orurther reduction in economic relations between China and the Soviet Bloc. If economic sanctions of various kinds should be imposed against China by the Free World and/or the Soviet Blocime when the Chinese are still faced with major problems in starting an economic recovery or when the Chinese might be engaged in further conflict on the Indianthe effects on the Chinese economy could be relatively serious. The following tentative estimates are made of the effects on China ifsanctions were to be imposed.

1. If an embargo on strategic goods, similar to the UN embargo against China during the Korean War, were imposed against China by all non-Bloc countries, the effect on the Chinese economy would be relatively small. With the exception of rubber, none of the major items China now

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Communist China: Dependence on Imports of Selected Items

Thousand Metric Tons

Met Imports

Availability

Production

Bloc

on Imports (Percent)

grains aj

b/

products

grains Include tubers on the basisons of tubers equiva-lenton of grain.

b. Available for human consumption after an estimated deduction ofercentross outputillion tons. This deduction accounts for losses resulting from the milling of grain, handling, and transportation and storage losses and for such nonfood uses asfor seed, feed, and industrial requirements.

West have averagedillion mt annually during theears, and, given the unfavorable results of the harvestimilar quantity of grain probably will have to be imported3 in order to maintain the already low level of per capita supplies. Failure toillion mt of grain3 might reduceercent the total caloric availability, thereby diminishing labor productivity, which is already low, and causing increased rural dissatisfaction if farmis tightened. Per capita food supplies would fall back toward the extremely low level experienced in the winter. before imports of .grain became available for distributionarge scale. Theeffects of prolonged malnutrition and widespread dissatisfactioncould leadevel of unrest that would tax the police powers of the regime.

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II the USSR and the European Satellites were to break off economic relations with Communist China and if, at the same time, non-Bloc countries were totrategic embargo against China, there wouldubstantial reduction in the military capabilities of the Communist regime. The Chinese Air Force would be immobilizedack of aviation fuels, and ground transport capability would be reduced by shortages of spare parts, motor gasoline, lubricants, and possibly rubber. Moreover, recovery of the Chinese economyhole would be retarded by at least several years because of theof making or purchasing from the Free World replacements and parts for Soviet-built machinery.

If the USSR and the European Satellites were to break off economic relations with Communist China and if all non-Bloc countries were toomplete embargo against China, economic recovery would be postponed even further. Without outside sources of grain and fertilizer, the food and agricultural situation in China would become even less tenable, and efforts toward rational industrial recovery would be delayed by the overriding need to stimulate farm output. In this event the Chinese economy might continue in the doldrums or recover .slowlyong period of time. But even with the outlook for its economy dim, China would continue toilitary threat to its weaker Asian neighbors. Although its air force would be grounded and although shortages of fuels, rubber, and replacement parts would curtail its transport capability, China could stillround force morethan any combination of the present forces of its southern neighbors.

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