Created: 7/26/1962

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SUBJECT: Comnunlst China's Economic Situation

1. Polping's long neglsct of agriculture in favor of efforts toapid breakthrough to anwith unfavorable weather in the past 3created an acuta food crisis. This together with ill-conceived policies and poor management in tho field of industry has oaused iheprogram to bog down and Industry is nowevere slump. Having starved agriculture offunds, the leadership now must shift investment priorities away from industry or faco the consequences of population growth persistently outstripping increases in agricultural output. While the regime has apparentlythe inevitabilityrolonged delay in realizing its industrialization plans, there is Indecision over methods for arresting the economic decline. Withproducing barely enough to keep the population from starvation even with imports added, tho choice ot incentives for raising productivity of recalcitrant and hungry workors is severely United. Although Paiping has abandoned the "leap forward" approach it adoptedt has yet to replace itomprehensive plan for recovery and resumption of economic growth. Two years of drift have only complicated this task and indicate confusion and lack of direction among economic planners.

2. The regime continues to stress the reed for diverting more of the national effort to agriculture and has moved to appease the peasantry by easingcontrols and offering incentives in the form of private plots and free markets, esults is scanty and imprecise, but there are as yet no signs that any upturn in agriculture is materializing

3. Heather data, press reports, and first hand observations indlcato that2 crop year ls not offromising start. The major earlywinter wheat and earlyaccount for up toercent of total annual grain production, areno better than the below-normal harvests of this time last year. Crop conditions in the northern wheat areas, though better than last year, have not been especially good. Yields are probably up duo tosoil moisture lost fall and winter,ossible reduction In sown acreage and frost darage during the apring probably offset these galna to some extent. Diplomatic observers reported in May and June that the crop looked "thin and stunted" and "clearly not outstanding" ovor much of the wheat area. There is not sufficient data to quantify even roughly actual wheat production, but theercent of total wheatprobably only slightly better than the unusually1 crop. Wheat normally accounts forercent of total caloric intake, and rice forercent.

4. The early rice crop was probably less than Weather and growing conditions were not good over much of Central, East and South China through the spring, although rain in June and early July brought relief to most of the drought areas. Official press reporting has been generally consistent with the picture from independent weather data. Complaints of drought in areas of North, East, Central and Southwest China and of sporadic dryness and flooding in Central, South and Southeast China have been numerous. Some exaggeration of the effects of drought and flooding ls evident, but the implications regarding crop output arc believed generally accurals. Thetone of Peiping's comments probably reflects factors other thanof seeds, tools, draft animals, and fertilizer and continued problems with peasant 'health and morals.

5. Mediocre early harvests will prolong if not further aggravate the already critical food situationhe Data on rations from interrogations of mainland refugses indicate that for the periodural Kwangtung wasalories per capita-per day and urbanay. An estimated


pre-war average per capita intakecalories. This level was approached, droppedalories, andalories. The few reports from areas other thanNortheast, North, Central and Southwestextremely fragmentary, are notwith tho more comprehensive dataSouth China. Arrival of the early harvest on tbe market in June and July has alleviated the more serious spring shortages, but rations will probably continue inadequate at least through early fall. Chinese grain purchases from abroad so far this year amount to attons snd may be as highillion tons. purchases before tbe end of the year are likely. Last year total Chinese grain purchases for domsstlc consumption amountedillion tons.

6. Peiping's policy on farm organization ia at present ambivalent. On tho one ssusdj it continues to endorse the communeornerstone of its economic policy, and on tbe other hand lt has modified tbesystem so that in practice it no logger exists. Control of basic farm tasks and distribution of farm income has passed to the production teass (aboutnits smaller than theooperatives, and Pelplng seems to have wlthdrana from directin everyday farm work decisions.

7. In industry, reports of factory closures,of production, release of workers, and shortages of Industrial raw materials continued through the first halfndicating.further downward drifting In industrial output and an inability to halt the decline on the part of the regime. Diplomatic observers who toured Industrial facilities in Ceatral and South China In mid-April reported that idle or deserted factories abounded outside tbe larger towns and tbat tbe more modern sectors of Industry were "working at naif oapaclty or less." Furthermore, plants still operating appeared plagued by shortages of raw materials and capital, by primitive methods and by lack of organization. At the Wuhan Steelworks, only one blast furnace out of tbree and only two open-hearths out of six were operating; at the Wuhan Lathe Factory, none of the smelting furnances were operating and workers were- "standing

aboutndump factory In Changsha, all shops were operating except the neatshop for initial casting of components.

8. Although the low levels of industrial activity observed in old-April stay have reflected production stoppages and curtailments which occurredreports trace the industrial declineritish contacts in Shanghai spoke of "steady declines in output" in the spring. Someategories of light industry were reported to have closed down in Canton in May,etter front Shanghaieported the closing of the Wuching Thermal Powerplant becauseack of fuel. The first evidence that the slump in industry ls going beyond any retrenchment planned in Pelping has come from interrogations of former workers in the Canton area which show that even the2 targets aro not being met. According to those workers, of ten factories for which planned and actual production figures were known, nine had failed to moot monthly production targets to varying degrees. There are indications that production in heavy indVistry is also lagging. Chairman cf the Stateo wrote in the July issue of Red flag that production in the extractive Industries ia erratic and belowspecifically cited coal, nonferroua metals andwas affecting production in the metallurgical, chemical and electric power

9. The Pelping regime haaea thrown on the defenalve by the sluggish performance in agriculture, protracted food shortages which have undermined the health and morale of the population, the withdrawal of Soviet technical assistance, and by sharp declines in industrial production. Recovery measures instituted moreear ago have not so far seemed effective In stemming the slump. Much will depend on the size of the coming fall harvests, but it will take several years of good harvestshorough reworking of iad<astrial programs before economic growth can be resumed.


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