Created: 7/27/1961

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"There has also| in discipline and dodicatijci scene, cadres and local officials, and there have been scatteredof public defiance of local authority.

3- However, the available evidence indicates that the pro-Tailing public mood is ono of despair and resignation. IheChinese are new here near the point of revolt or of widespread defiance of the ragiro. There is no evidence of widespread famine oondlticns, such as China has experienced periodically throughout Its history. Ihe mid-auronar crops new being harvested, will alleviate, temporarily, the food situation. Tho regime has prudently eased its psychologioal pressures and physical demands on the public. Hoot Importantly, ws have seen no evidonca that Communist China's difficulties hnvo weakened seriously tho loyalty cr the capabilities of the regime's control apparatusthe armed forcos and the party. It is highly unlikely that there would bepublic rallyinghinese Nationalist liberaticn effort.

h. The short-torn prospeots are nevertheless bleak. Natural calamities have again been present1 and this year's harvests may yet fallhird poor crop year. Should this occur, by next spring there would be Increasing disregard of authority and sporadic outbreaks of ootlve resistance 1 la

a normal orop year considerable pressure will be taken off the Internal situation. However, at least two consecutive years of overage or better harvests would be required to overcome the present agricultural crisis, resume industrial expansion, and give the Communistreater security against internalthan it ia likely to ir tho cotduj year.


5. The Food Crlais. Commurdot China's agricultural product, which had barely kept abreast of the population growth, dropped sharply9 andas the result of adverse weatherof severe dislocation resulting from tho effort tocompletely rural China into vast communes, and of mismanagement of labor and resources. Durine8 the regime laidajor food crisis when,urst of new confidence ro suiting from that year's bomber crop, it allowed food to be con-oucod through freo supply in commune moashallsate it eculd not sustain, Even before the poor crop years9 andfood reserves were low and local shortages had appeared in many parts of the country*

5. 9f foodhich Makeercent of the Chlneee diet, wasa drop ofillion tons from the previous year. 0 harvest was aboutdllion tons. The greatest loss was from drought In the wheat growing areas of north China, although typhoons and floods caused severe local rice shortages in ports of south Chins. The first wheat harvwat ofas been below ncnnalj the early rice harvest has been about average. Sinceboutillion people have been added to the population.

7* Despite widespread food shortages, the Chinese Communist regimeet export of graino pay for tho imports necessary for its industrialiaation program, I, however. Communist China has already scheduled the import of five million tons of groin, mostly wheat purchased from Australia and Canada. These purchases have sharply rodoced China's limited foreign exchange holdings. Althourh the scheduled rrain imports are small innnual needsillion tons, thuy will enable the regime to relieve suffering at certain hard-hit localities andt the needs of the military and other key croups.

quality of out;>ut, maintenance of eculpmont, and morale, hove begun to give out. Tho situation was complicated inhen the USSR, probably for reasons as sedated with tho Sino-Soviet dispute, suddenly withdrew all uf the two to three thousand Soviet engineers, designers, production specialists, and other technicians who ware helping to build and put into operation modern Industrial plants In Communist China. The developing food shortage further aggravated the situation, causing worker production to fall aff and curtailing Chinese Communist ability to export foodgrslns to finance industrial Imports, The result has been an accumulationroblems* rapid wearing out and breakdownchlnoryj growing labor, raw material and spare part shortages) disruption of planning and prograsr-dng for Industry* ovor production of many materials and items which cannot be uowdjharp reduction in now industrialand imports of machinery.

9. The regime released oclyfragmentary data on economic performance0 and has maintained an official silence on the

subjectho outlook is for total1 to fall below thatith light industry particularly hard hit* The regime probably isajor reappraisal of its entire economic program, taking stock of its problems in agriculture and industry, aid 3oeking to adjust to its changed economic relationship with the USSR.

10* The Chinese Communist regime has in the past demonstrated gre-it flexibility in readjusting its programs and meeting its Its longer run prospectsix or seven percent rate of growth in lndnstry are good, if it manages to surmount present economie difficulties and restore order to the present chaotic situation* Thereigh rate of investmentroportion of GXP (at present abouthe numbers of trained managers, scientists, and technicians are increasing; and the regime has the determination and tho cmtrol to cxwentrato all availableon forced-draft economic development, ^riculturalhowever, will continue to present major problems, and tho regime will find it difficult to sustain increases in output cimensurato with the rate of population growth*

U. Economic gelations with the USSR. The USSR hasheavily to Communist China's industrial progress. However,

the Soviet have not furnished major long-tern economic credits or grants; China has paid for Soviet industrial goods on an essentially pay-as-you-go basis through the export of agricultural products and raw materials. Under agreecents which were to run7 the USSR had undertaken tondustrial plants to China; at tho time of the withdrawal of the Soviot technicians about half of that number had been completed.

12* Since the technicians were withdrawn, Soviet exports of capital equipment to Communist China have dropped sharply. 1 such exports will probably be no more thanercent of9 level. The explanation for this drop isombination of Chinese Communist inability toigher level of capital equipment, Chinese Communist inability to meet the payments,oviet desire to put pressure on tho Chinese Communists in hopes of bringing them into line in the Sino-Soviet dispute.

13. A, new economic and technical agreement between the USSR and Communist China has recently been concluded after prolonged (February to June) negotiations in Moscow. Wo have no information as to its details, but tho extended period of negotiation and the low-key maimer in which both parties announced its conclusion, strongly suggest that thereontinuing coolness in

relations and that tho USSR is not likely to bail Communist China out of its present difficulties unless the situation becomes much worso.

U*. Political Effects of the Economic Situation. hree-year period of high exaltation during which the regime claimed achievements unprecedented in economic history has been followed by two years of hardship and hunger among the peasant andmasses and of confusion and chaos in the economic program. This reversal has undoubtedly created profound political and psychological effects. Privation and suffering has increased disaffection with the regime among the peasants and workers whose mood at present is one of apathy and dospolr, or as put by the Chinese Communist press, thereloss of activism on the part of the masses." The population generally has become bolder in voicing ita grievances, and this boldness has resulted in several local anti-regime displays. However, the peasant and proletarian masses in China cannot transmute diasntisf.icticns into offeetive revolt without at least the passive support of tho regime's key instruments of controlthe party and the army.

15. Intelligence on tho attitudes of party cadres and army personnel is sketchy. Tho evidence does suggest growing

disillusionmenteneral erosion of discipline and morale, particularly among lower level party cadres who are suffering some of the deprivations of the masses. Moreover, the lower level cadres are serving as scapegoats for failures resulting fron decisions made at higher party echelons. The armed forces have received cuts in food rations, but they stall enjoy amargin over civilian allowances. The emerging plcturo among the rank and file of the military la one of growing sympathy with the problems of the civilians. However, at present the evidence does notinding that party cadres, even thcee at the lower level, would load or Join tho masses in opposltico to the regime. The armed forces continue loyal to the regime.

16. The authorities have been suffioluntly sobered by thoir problems toood deal of thinking and rothlnking and also to take some remedial action. The purchaseillion tons of grain abroad fur delivery this year, for example, is testlm-vy toppreciation of its seriwis straits. The authorities are alsoumber of stepsin tho farmelaxation of radical pressuresto alleviate tho situation. Par example, the proportion of tho national product allocatod to investment is decreasing, to the benefit of personal conoumpUonj agriculture

and lirht Industry are raced vine higher priorities in relation to heavy Industry; acne of the forced-draftii.duatrialf -satlon are being dropped; and work pressure is being reduced. Savornl reoent articles in the aainland tress indicate that Peiping Is deeply concerned over the need to incroaso peasant Incentive and there is evidence that at least in sane areas peasants arc being allowed to cultivate private gardens.

17* Pelplng has also retreated on the Ideological front. The official word to the parly no longer bears down on Kao Tae-tung'a principle that man can create his own ecvlrecDfuit. Today's emphasis is rather upon the need to study tho objoctive

before setting goals and programs. Promlar Liu Shao-ch'l has publicly admitted the regime's "mistakes" In planning. Theundred Flowers Bloom" campaign forfreer dissuasion has been officially rosurreoted. although eonflned to technical and artistic subject, it is obviously on of fort to oliclt greater support for tho regimo and itsrom among mainland China's intellectuals and tochnlalans. ore moderate pace of Communist pressures has boon set.

ho Contingency of Poor Wcathorvents so far have not bewi auspicious for this year's crops. oor crop year



he third. conBecotivc such year, would raise extremely grave problems for the rogimej the structure and direction of its long-range economic planning would probably have to be radically recast, unless there wero substantial food imports, malnutrition and disease would become widespreadonsiderable amount of starvation would probably result. Party cohesion, effectiveness, and morale would drop. Public disaffection would probablyajor problem for the regime, and active resistance probably would occur. If open resistance becomo widespread, the lander-ship would almost certainlyassive campaign of While the responaiveness end effectiveness of its control apparatus would probably decline still further, it Is unlikely that public disaffection would threaten the rcpjjc'a control of China. Hunger and wide scale passive resistance, however, would constitute acute economic and political problems for the Chinese Communist Party and China's development programo.

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