SNIE 13-61 THE ECONOMIC SITUATION IN COMMUNIST CHINA

Created: 4/4/1961

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NATIONAL INTELLIGENCE ESTIMATE NUMBER

THE ECONOMIC SITUATION IN

l^Ki^OMMUNIST CHINA

DIBECTOR OF CENTRALNCB

- :The following Intelligence organisation* participated in :of this estimate: The Central Intelligence Agency

ana ,h* intelligence organizations ol the Departments ot State, the Army, the Navy, the Air Force, The Joint Staff, and the National Security Agency

^ff'^"- in by'V"-'STATES INTBLLICBNCE BOARD

4 Concurring icere the Director of Intelligence

esearch, Department of State; the Assistant Chieffor intelligence. Department of the Army; the'Chief of Naval Operations UnteUigencei. Department ofJvIftc Asitstonf CAie/ o/ Staff, Intelligence, VSAF; the

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THE ECONOMIC SITUATION IN COMMUNIST CHINA

THE PROBLEM

To assess current Chinese Communist economic difficulties, with special reference to the food situation, and to estimate their economic and political consequences: (a) over the next few years, and (b) in the1 shouldoor crop year.

CONCLUSIONS

The Chinese Communist regime is now facing the most serious economicit has confronted since itits power over mainland China.esult of economic mismanagement, and, especially, of two years ofweather, food production0 was little if any larger than inwhich time there were aboutillion fewer Chinese to feed. Widespread famine does not appear to be at hand, but in some provinces many people are noware subsistence diet and the bitterestlies immediately ahead in the period before the June harvests. Thecaused by the "Leap Forward" and the removal of Soviet technicians have disrupted China's industrializationThese difficulties have sharplythe rate of economic growth0 and haveerious balance of payments problem. Public morale, especially in rural areas, is almostat its lowest point since theassumed power, and there have been some instances of open dissidence.

The Chinese Communist regime has responded by givingigher priority, dropping the "Leap Forward" approach in industry, and relaxingthe economic demands on the people. Perhaps the best indicator of the severity of the food shortage has been Peiping's action in scheduling theof nearly three million tons of food-grainsost of0 million of Communist China'sforeign currency holdings.)

While normal crop weather1 would significantly improve farm output over the levels9t least two years of average or better harvests will be required to overcome the crisis andestoration of the diet tolevels, some rebuilding of domestic stocks, and the resumption of net foodIf Soviet technicians in large numbers do not return to China, indus-

trial production is likely to increase aboutercent annually, as compared with aboutercent9 andercent )

1 is another poor crop year the economic and political effects forChina are likely to be grave. There probably would be no increase in gross national product (ONP)nd growth prospects for later years would also be affected Unless there were substantial food imports, malnutrition and disease would become widespread,onsiderable amount of starvation probably would occur. Publicprobably wouldajorfor the regime, perhaps forcing it toassive campaign of threats and terror. It is unlikely even in these circumstances, however, that publiccould threaten continuedof China by its present leadership.)

We do not believe that Peiping would accept food offers from the US even under conditions of widespread famine.

We do not believe that even famine conditions would, in themselves, cause Peiping to engage in direct military aggression. Such difficulties probably would, however, prompt Peiping to avoid actions which would exacerbate itswith Moscow. )

DISCUSSION

INTRODUCTION

he Chinese Communist regime is nowthe most serious economic difficulties it has encountered.esult of two successive years of poor harvests, the withdrawal of Soviet technicians, and tbecreated by the "Leaphe Chinese leaders have been forced sharply to slow down the pare of the country'sdevelopmenthe most acute of these problems Is the food shortage: the output of grain0 hai dropped to about7 level, when there were an estimatedillion fewer Chinese to feed. Thishas incrensed popular discontent and apathy and weakened party morale.

' Evidence wolcb has come to light on these matters since the publication ofowering of the rates ot growth made in that paper.

II. COMMUNIST CHINA'S ECONOMIC DIFFICULTIES

The Agricultural Crisis

eiping's orthodox Communist program for economic development has been based on the belief that China could be industrializeddespite its technological backwardness and the unfavorable ratio of population to arable land. Consumption was to be held in check and industrial plant was to be built up with technical assistance and large-scale imports of machinery from the USSR.which had the threefold task of: (a)ast-growing population; (b) supplying Increasing quantities of rawto industry; and (c) providing goods for export, was to rely primarily onprojects and programs. Theof agriculture was to wait until Industry developed enough to provide simultaneously the resources for further Industrial growth and for increased investment in agriculture.

S FJfK E

programeliberate gamble that the thin margin belween the production ol food and the minimum needs of thecould be maintained. There areindications that Chinese leaders nowthaL this gamble has not succeeded.

5 All figures on Brain production are in metric ions of unhusked wain, and Include Uie groin equivalent oi tubers.

statistics used in this SNIE (or agricultural and industrial production sire only approximations. The Chinese Communists have made it difficult for foreign observer* to use official data inlear understanding of Ihe workings of theAt the present time, moreover, there is much less official information than would ordinarily be available0 performance and1 plan Official statements about economic trends0 andowever, tacitly support the general conclusions of this SNIE Official statements have hinted that production of basic food crops was close to the level ot production in mi Withew industrialndustrialss admitted to have fallen short of0 target*.

Thc population figures used In thta esUmate are based on the official census figures3 together with scattered official data on birth rates and death rates, and with romparUon* with similar Asian cultures.

Although the scarcity of datarecludes making precise estimates of population, production of food crope, and production ol many important Industrial commodities, the data are believedto support the year-by-year trends andconclusions of this SNIE.

gricultural production, which had barely kept ahead of population growth until the past two years, has now dropped behind. The situation has become especially acute asfoodgrains. which makeof the Chinese diet. Although foedgrain production increased by anillion metricduring China's First Flve-Year, this was more than offset byercent population Increase, andlightly more rapid growth of other foods mademall improvement in the people'she situation waseasedumper crophen foodgraln production reached anillion tons. Duringowever, the regime allowed food to be consumed through free supply In theate that it could not sustain. By9 food reserves were already low and local shortages had appeared In many areas of the country.

8 the problem has been greatly intensified by two consecutive poor crop years Foodgraln production9 declined to anillion tons, ands estimated to have beenillion tons. Moreover, the quality of the Chinese diet has declined: consumption of foods rich In nutrients, such as meat,oils, and soybean products, has fallen.ery low per capita caloric intake has been sustained foe nearly two years despite the heavy labor demands on the Chinese people.

Widespread famine does not appear to be at hand, but in some provinces many people are noware subsistence diet and the bitterest suffering lies Immediately ahead in the period before June, when the1 crops will be harvested. Serious diseases of malnutrition, such as beri-beri and nutritional edema, are widespread in the worst hit areas of the country. In addition, the lack of food has increased the Incidence of other types of diseases, such as tuberculosis and liverMany workers apparently are soby lack of food that normal workloads cannot be performed.

Although firm Information is lacking,crops alsooor yearhe important cotton crop is estimated to have been less thanemporarily halting growth in the textile Industry and bringing on an even stricter rationing ofcloth. Production of oil-seeds0 probably was no higher than9 and may have been somewhat lower.

The recent failures of Chinese agriculture have been due principally to adverse weather conditions. It is clear90 were years of severe natural disasters In Chinaost of the major wheat growing areas In North China were affected by severe and extended drought. In riceareas of the Yangtze Valley and South China weather was averagend rice

SEORET

production was about the same aaowever, some areas in the south wereto typhoons and fliwds which caused severe local rice shortages.

Bad as the weather was9he regime appears to have been deliberately exaggerating the scope ol weather difficulties in order to shift blame from itself Some ol the agricultural difficulties of the past two years have resulted from excesses andattending the "Leap Forward" and the commune programs' the disruptive effects of commune reorganizations,policies with respect to private plots and private livestock holdings, the drive to grow more on less land, and agriculturalthat ignored practical experience and could not be quickly assimilated underlocal conditions.

Peasant fatigue and apathy have alsoart. The people have beenfor three years, their lives regimented, and they have been forced to do much work which they have felt was wasted Finally, there have been no material rewards tofor the extra demands placed on them by the regime.

Sino-Soviet Economic Relations

The deterioration of polilical relationsCommunist China and theurther compounded Pciplng'sdifficulties. In July-August the USSR abruptly withdrew all or nearly all ofoviet industrial technicians in Communist China. The removal of these technicians has retarded the schedules for the installation of equipment and the opening of some new plants, and probably has caused the temporary cancellation of other projects.

The withdrawal of technicians has been the major economic sanction applied byduring the period of China's opento Soviet authority in the Bloc China's short-term indebtedness to the USSR0 increased by0 million, one of several Indications that the USSR did notits economic pressure to the point ofthe general flow of commodities to China. Nevertheless, the withdrawal of the technicians and the cooling of politicalprobabiv caused some disruption in Smo-Sovtet trade.

he explanation for the shortages ofproducts in0 is unclear. These shortages have affected aircraft and military activities, truck distribution of food, and passenger transport in major cities. In previous years the USSR acted quickly to make supplementary deliveries of petroleum products when the shipments provided for in the annual trade agreement were notto last through the year. Nosupplies were forthcominglthough current deliveries arc apparently normal. The shortage in0 may have been due to Chinese reluctance to request supplementary suppliesime of political tension and trade difficulties, or the Chinese may have sought additional supplies but were turned down by the USSR.

Demise of the "leap Forward"

0 It became increasinglythat the "Leap Forward" was in fact ending and that Peiping recognized it could nol continue the breakneck Industrialization tempo.8 men andhad been driven at an exhausting pace with only secondary concern for cost, quality, and variety of output, maintenance ofor morale of workers and party cadres. Trying to go too fast with too little, thehad been unable to maintain balance in the economy. Machines were built without spare parts and factories were constructed without adequate transportation facilities The size and scope of many constructionwere extended at local initiative without coordination with national plans. Bybnormal numbers of machines were breaking down, many Irrigation projects were ineffective, mventories of products of litUe economic use were mounting, and Ihe people were becoming unable to maintain the Irantir pace of the previous two years.

Economic and Political Effects of These

The combined effect of two poor harvests, the withdrawal of Soviet technicians, and the failures of the "Leap Forward" has been sharply to reduce Communist China's rate of economic growth. Gross notional producthich Increased by aboutercent8 andercentstimated to have increased byercent inapproximately the average rate of increase during the First Ftve-Ycarutput of erode steel, coal, and electric power apparently reached planned levels However, industrial production increased by anlanned increase of aboutercent, and light industry registered little If any advance Industriesigh level of technical skill, such as militaryaircraft, shipbuilding, and atomic energy, probably encountered difficultiesesult of the withdrawal of Soviet technicians. Total investment is estimated to haveat about9 level, butin the industrial sector may have

During the past three years Communist China has also encountered growing balance of payments problems. Thesewhich arose out of the increased imports needed io support the attempted "Leapindustrialisation program and out of the necessity to cut back foodtheir heaviest impactheshortages probably caused total exports in the last half0 to decline substantially. By the endommunist China hada short-term indebtedness to other Bloc countries amounting tover half of which had been Incurred0 In addition, reserves of gold and convertible currencies were reduced by0 million0

1 Prices ol capitalfastest growingof theChina, where capital Is scarce in comparison to labor, lire high compared to prices ol capital goods in the US. If they were valued In terms of the US price structure, the rate of growth of GNP would be slightly lower.

Less tangible but equally important have been the political repercussions of China's economic difficulties. Despite three years of tremendous effort, the Chinese people face greater personal hardships today than when the "Leap Forward" with its grandiosebegan. Traditionally tlie Chinese have accepted hardship with considerable stoicism, and many older people, recalling massin the past, may credit the regime with preventing the situation from as yetthat far. However, under thesystem the Chinese state, rather than the family, lias assumed the responsibility for providing food, and most Chineseplace on the state the onus offor their present plight.

Moreover, the present food difficulties come atop vast social changes, exhausting labor pressures, policy vacillations, andpromises. Present evidencethat large sections of the populace are disillusioned and apathetic and thatin the regime's policies has been badly shaken. Public morale, particularly in rural areas, is almost certainly at Its lowest point since the Communists assumed power. Disaffection has in at least some instances taken the form of open dlssldenoe, such as the appearance of antiregime wail posters, attacks on cadres, food riots, and various forms of sabotage of production.we do not believe that widespread orefforts at rebellion or open rejection of the regime's authority are likely in the near future.

There is no indication that China'shave caused the development of either severe factionalism within the leadership

grouphallenge to Mao, although there almost certainly have been serious policywithin the party. There Isevidence that morale within the party has been shaken. The cadres have had to cope with the conflicting pressures of party orders, papular attitudes, and the oftenimpossibilities of the given situation. Their task has been complicated by the

problem of interpreting and implementing shifting policies without Incurring subsequent

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condemnation for "rightist" or "leftist"The cadres probably are particularly resentful of the leadership's attempt to blame lis failures on them. While the party almost certainly continues to be generally effective in maintaining order and discipline, we believe that its responses to the leadership arc more sluggish and ill-coordinated.

is known about the attitudes ofmilitary and public securityhave probably experienced somealong with the populace, evenstill receive preferentialhave been reports of activeand there among the security forces,have no basis for interpreting thesetypical of the attitude of the securitygeneral, much less that of the regularforces.

III. THE REGIME'S REMEDIAL EFFORTS

The concern of Chinese Communistover the food situation has been reflected in the emergency measures they have taken. Their major effort has been the adoptionore rigorous rationing program both to equalize consumption throughout the country and to make sure that the limited foodIs not consumed before1ut in foodgrain rations averaging aboutercent has been decreed to stretch available food supplies until the June harvests. Leaves have been ordered stripped from trees to be fed to animals so that food normally eaten by animals can be consumed by humans. The peasants have been permitted to have private plots once again, free markets have beenin at least some areas, and further modifications of the commune system have taken place. Regulations restricting food parcels from Hong Kong have been eased.

In addition to its efforts to stretchsupplies, the regime has taken steps to reduce the effects of the shortages. Medical

'While It is difficult for the regime to transfer grain from the rlce-eatlng soulh u> the wheat-eating north, ll does have some room for maneuverability since rice can be substituted for wheat In central China, where bolh types of grain are consumed.

survey teams have been organized lo check on malnutrition, and extra rations have been provided for the worst cases. In addition, Peiping has ordered the mobilization of all medical forces to fight an increase indiseases expected this spring. Thehas also introduced measures tothe energies of the population, such as the elimination of many political meetings, the provision of extra rest days, and aof organized sports. Extensive as these measures are, they appear to reflect grim determination rather than desperation on the part of the regime.

he most dramatic step taken by theperhaps the best indicator of the severity of the foodPeiping'sto import several million tons of food-grains. Under contracts already completed, imports of grain into China1 will be nearly three million tons, most of which is scheduled for shipment in the first half of the year. The Chinese Communists arenegotiating for additional quantities of Australian and Canadianup to two millionfor Argentineseveral hundred thousandlo be supplied in the second halfhese imports are in sharp contrast to Communist China's normal trade pattern of net exports of over one million tons of grain. Thetable illustrates this shift:

Metric Tons

(Contracts'

MAJOR GRAIN IMPORTS (all from non-Bloc countries) Wheal (from Australia

and Canada)

Barley (from Australia

ond Canada)

Rice (from Burma) (from Malaya) .. Imports of

Grain

ESTIMATED GRAIN EXPORTS:

To Bloc countries

To non-Bloc countries

Total Exports of

Grain

Estimated Net

or Net imports

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Agricultural exports have been thechief means of paying for the imports necessary for its industrialization program. Imports of Ihe amounts contracted for toare to be paid for Incost Peiping0 million, and ifnow underway for additional grain are successful, total foodgraln1 will cost0 million Whether or not the USSR has provided assistance tofor these purchases Is unknown In any event. Peiping has increased Its sales of silver bullion and has secured limited short-term credits from Hong Kong banks. In addition, it isix-month credit from Australia to cover future purchases. These measures will providemall |xrrt of the foreign exchange needed, however, and the major part will have to comeutback ofimportseduction of foreignreserves, which. Including gold, were estimated at0 million at the end0

is also reorienting itspolicies in an attempt todislocations caused by the demise ofForward" and the withdrawal ofAlthough no details concerningeconomic plan have been madeon industrial policy Indicaterates of growth have beenThe main effort in industrialfor the next two or three yearsto be directed towardalready begun. Quality andoutput in Industry Is Io receivethan In the "Leap Forward"rate of investment In heavy industrybe reduced so that agriculture, lightmining, and transportation canIf this policy la carried out, Industrialmay decline

IV. FUTURE TRENDS

progress in overcoming it*difficult lea will be primarilyby the vagaries of weather andIn Sino-Sovietor not Soviet technicians returnwe believe that the bitterness of the

Sino-Soviet dispute has caused the Chinese leaders to place increased importance on achieving self-sufficiency. Once havingthe disruption causedudden withdrawal of Soviet technicians, Peiping is unlikely to allow itself to become so dependent on them in the future. Recent overtures to Italian and other Western European firms to send technical specialists to Communist China suggest that the Chinese are becoming more flexible in their willingness to use Western technicians.

China and the USSR are presentlyin negotiations concerning future trade and economic relationships. We are not yet able to judge the likely outcome of these lalks, but we believe that economicwill not be as full as previously. Even if Soviet technicians return to China, the scope of their activities probably will be less than they were prior ton the absence of Soviet technicians the Chinese probably will concentrate on fillinggaps as best they can in fields already partlyas metallurgy,and machinethe expense of more advanced Industries.

While normal crop weather1 would significantly Improve farm output over the levels9t least two years of average or better harvests will be required to overcome the crisis andestoration of the diet to tolerable levels, some rebuilding of domestic stocks, and the resumption of net food exports. Over the longer term, thewill be confronted with China's basic limitations on agricultural production, and will find it difficult to achieve increases incommensurate with the rate ofgrowth. The regime appears tothis fact and to be reshaping itsprogram to provide some additionalfor agricultural development.the regime will probably be able to secure the minimum essential growth in farm output, the margin over requirements will remain small owing to the basic aim ofindustrial expansion. In view of the vagaries of weather and the likelihood that the regime's predilection for "crash" programs

willteady and orderly agricultural development, agricultural crises probably will recur Irom time to time.

Communist Chine's current economic problems will also affect the amount andof its foreign trade. Total exports0 declined by aboutoercent below the high level9 and may decline still furtherhina probably will be forced to request Blocthedefer the payments obligations it has incurred during recent years. Despite the strained relations between China and the USSR, we believe that Moscow will at least partially accede toequest.in view of China's reduced exportand the large foodgraln imports from the West scheduledmports ofandfrom thedecline by as much asercent compared9nd trade with the Free World may makeignificantly larger proportion of China's total trade.

Under these circumstances in industry, agriculture, and Sino-Sovlct economicGNP probably will increase byercent annually during thebout the rate of increase during the First Five-Year. On the assumption that Soviet technicians In large numbers do not return to China, industrial production Is likely to Increasennually, as compared with9 andercentnly limited progress Is likely In the more complex branches of industry, which will have aeffect on China's ability toodern military establishment

The economic difficulties confronting Communist China arc unlikely toarked effect on Peiplng's foreign pohcy. We believe that domestic difficulties will not, in themselves, either prompt Peiping toa foreign adventure In order to divert domestic discontent or to refrain from such an adventure. Nor will present economic troubles significantly affect Communist China's aid commitments to Free Worldsince these Involveinute part of Communist China's tola! output.

recent failures, particularlyto solve the food problem, willhave some limiting effect onand attraction of CommunistAsia. Fear of and respect forwill continue to be ma]or factorspolitics. However, there is likely toleast for the next fewview of Communist China'sthan has prevailed inespecially since other Asianas Japan and India, have madeeconomic progress during recent years.

V. IHE CONTINGENCY OF POOR WEATHER1

Events so far have not been auspicious for this year's crops.0 fall sowing was affected by drought, late harvest ofcrops, peasant apathy, and inadequate planning.esult there apparently haseduction in winter crop acreage and generally late plantings. Below normalduring the winter months in the North Chinamajor wheathas not provided favorable growing conditions for an area already short of soil moisture. However, if rainfall is adequate during the critical months of April andood wheat crop could still result. To date, precipitation and growing conditions in the rice producing areas of China have been about average.

A poor crop yearhe thirdsuch year, would probably prevent any increase in GNP. China would be forced to reduce future Industrial imports even more drastically than now appears necessary In order to continue or expand food imports. If industrial crops such as cotton and other fibers failed to recover, industry, chiefly light industry, would suffernd the regime would have an extremely difficult timeeven the reduced pace of economic expansion It now appears to envisage.

Another poor crop would probably raise extremely grave problems for the regime in China. Unless there were substantial food Imports, malnutrition and disease wouldwidespreadonsiderable amount

of starvation would probably result. Parly cohesion, effectiveness, and morale would drop. Public disaffection would probablyajor problem for the regime, and activeprobably would occur, at leastocal level. If open resistance becamethe leadership would almost certainlyassive campaign of threats and terror. While the responsiveness andof its control apparatus woulddecline still further, il is unlikely that public disaffection would threaten thecontrol of China. Hunger and wide-scale passive resistance, however, wouldacute economic and political problems for the Chinese Communist Party and China's development programs. We do not believe that even these difficulties would, in themselves, cause Peiping to engage in direct military

hese circumstances probably would,prompt Peiping to avoid actions which would exacerbate its relations with Moscow. While China would be extremely reluctant to admit Its Inability to feed its people, theprobably would feel it could accept offers ol food or other aid from another Communist country without toooss of face. Unless thereurther deterioration in Sino-Soviet relations, we believe that the Soviets would provide some assistance inime of crisis.

he regime has already made it clear that it will not accept food offers from the US in the present situation, and we believe that it will continue to take this position even if1 crops are poor. The Chinese leaders probably will continue to take the line that China can overcome the present temporary difflcuIUes by its own resources, that there is no famine, and that Westerners have, formotives, deliberately exaggerated the seriousness of the situation. Their principal consideration Is. ofense of national pride: acceptanceood offer would be an admission that their own program had failed in an Important respect, and, equallyan acknowledgement that the West is genuinely interested in the welfare of the Chinese people.

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